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One association body is calling for a royal commission into the auditing profession, citing lack of independence and expertise leading to a string of revelations of poor corporate behaviour.
‘Royal commission into audit’ floated by accounting body
30 August 2018
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4 minute read
The Institute of Certified Management Accountants (ICMA) chief executive Professor Janek Ratnatunga believes the current corporate audit controls are inadequate to reign in bad behaviour.
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“The failure of the audit profession is illustrated by the recent revelations by Mr Rod Sims, chair of the Australian Competition and Consumer Commission (ACCC) of corporate misbehaviour, of companies found guilty of concealing faulty products, safety issues, price-fixing, criminal cartels, false, misleading and deceptive advertising, and false product claims,” said Professor Ratnatunga.
“The external audit is supposed to operate as a trust mechanism to persuade the public that capitalist corporations and management are not corrupt and that companies and their directors are held accountable.
“Perhaps it's best to have a royal commission on the auditing profession to evaluate if auditors have been short-changing their clients, who are the shareholders and not the directors and management.”
Further, Professor Ratnatunga believes penalties should be 10 to 20 times higher than they are today.
“It is important for government legislation to significantly increase the cost of bad behaviour. Currently, penalties are often easily absorbed by the sheer volume of revenue generated by such unethical actions,” said Professor Ratnatunga
“Alongside such hefty fines, a statutory strategic audit and strong whistleblower protection will increase the chance of bad behaviour being exposed and fined, and their executives sent to jail,” he urges.
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- I think its fair to say "Anonymous" that you have never worked as an auditor or do not understand the industry. Audit standards (black letter audit standards) have never been higher (could be higher if you/society will pay for it). As someone who has worked in the industry as an auditor, presently and for the past 35 years I can tell you that the good professor is almost entirely clueless on the matter.
The prof reckons that auditors are responsible for and I quote .....“The failure of the audit profession is illustrated by the recent revelations by Mr Rod Sims, chair of the Australian Competition and Consumer Commission (ACCC) of corporate misbehaviour, of companies found guilty of concealing faulty products, safety issues, price-fixing, criminal cartels, false, misleading and deceptive advertising, and false product claims,” ...... So now I have to investigate occupational health/criminal matters/product design/product marketing....seriously ??
In Auditing 101 you are taught about about a perpetual phenomenon called the "audit expectation gap". This is the difference between what an audit actually is (what is/can be achieved) and what others want (ranging from the possible to the pie in the sky) The professor (and others) is a particularly bad example of the former. Auditors perform a financial audit. Until you understand the nature and scope of this work of an asx audit you simply cannot grasp the magnitude of the absurdity of what is being said above.
The above diatribe is an ill-informed grandstanding rant by someone who should, but obviously does not, know better.
0- Hi Gerard, the anonymous posting was by me, unfortunately I posted thinking my name went up automatically. But always prepared to put my own name to comments so my apologies for that.
I hear what you are saying in relation to the expectation gap, and I am well aware of that but that perhaps illustrates the problem, and I don't want to keep harping back to the SEC's endeavours to close this gap in the late 1990's but I think that is a great illustration of the issue. I think the academics of just a few years ago at Sydney Uni (Frank Clarke etc, I guess from the 'Ray Chambers' school) were approaching this from the angle of the true and fair view being a great term but it needed professional grunt to give it the full meaning so that readers of financial reports could rely upon it to be a 'true and fair view'. Thats a very rough translation. But I think what it illustrates, and this is not just an audit problem but an accounting one as auditors are just auditing what is put before them pretty much (again a rough translation).
If the financial reports don't show what investors and other users want (and to be fair that is a pretty strong criticism these days -think The End of Accounting by Lev and Gu) and that is what the auditors give their affirmation on, then there is a problem. After all if what auditors actually do doesn't meet the needs to the users of financial reports (provide a true and fair view of the financial condition and state of a company) then what is the point. It is not just the auditors problem but the professions.
So, if, by way of example, and let me use one involving Deloitte recently with CPA Australia, we forced CPAA to provide a s.202B statement disclosing directors remuneration. A pretty simple (but clearly opposed by the powers that be at CPAA) request. Well CPAA prepared the statement, Deloitte audited it and said it was okay with what it disclosed, but they did not check to make sure that statement covered all the possible directors. And it was wrong. We forced them to redo it. So its a simple example but the point is the auditor could say we checked the statement provided by CPAA and it was correct, but in reality we were expecting that they would check the actual data at CPAA to make sure it included all the directors. We wanted a true and fair statement listing all the directors remuneration to comply with s.202B paid by CPAA. The auditors said quite genuinely I presume that they checked what CPAA prepared and it was fine. But lo and behold it would seem they didn't check to make sure CPAA hadn't left anyone out. Which clearly they had.
A bit long I'm sorry Gerard, but I think this somehow illustrates this expectation gap, and I don't think it is unreasonable for us to assume that the auditor should have done the check to make sure nothing missing. A bit simplistic, but that is the guts of the complaint of the UK gov't with the massive failure of Carillion.
It is not 'pie in the sky' to expect that audited financial statements present a true and fair view of a company. Methinks the UK gov't with Carillion, as we at CPAA with s.202B statement, are not unreasonable to expect the auditor to pick up on these things.
I think it is a failure of accounting, as I can tell you that the CPAA Annual Reports glistened with claims of integrated reporting and consolidated accounts and complying with accounting standards when in reality they hid a massive farce. Somehow I reckon (my thoughts only mind you) the only way to correct this is for something like a Royal Commission/legislative action because all the complaining to ASIC etc is just a waste of breath and we will all die before they get moving. I'm a professional accountant and am not trying to bad mouth my profession or auditors but crikey we are failing somewhere here. I work very hard at what I do, and I'm sure you do also in auditing and I daresay do a great job, but I recognise the failings in a lot of the financial reporting and accounting standards we have. No easy solution I am sure but I have had it up to my ears with the crap fed to me from CPA Australia Head Office and the way they have misreported and misled, and then have a clear audit and a beautiful integrated annual report which they boast about.
Woops, that is very long. Hope you catch the drift Gerard. Cheers Brett
0- I cannot comment on your 202B specifics above except to say that auditing 101 dictates that audited information should first be complete (all there) so I don't know what Deloitte were up to there.
We can wax lyrical about the inherent limitations and actual failures of auditors til the cows come home but here are some immutable absolutes.
1) a royal commission will undoubtedly be a feeding frenzy for the lawyers from which will will come a raft of unrealistic requirements some of which no professional auditor would touch with a barge pole or actually be capable of complying with (see required grand inquisitor status comments below). Lawyers are inherently incapable of pragmatic prescriptive action on issues such as these. They are financially clueless.
2) Following from on from 1) above. If the resultant wish lists ever hit the auditing and accounting standards fan then you will see this maxim come to the fore .... If you have the $$$money$$$ Brett then someone will have the time ..... bottom line ... be careful what you wish for because it will cost an absolute fortune to deliver if you can find someone brave enough to deliver it.
0
- Too many academics, who have never run a business, are unfortunately dictating to the profession.0
- Really Brett. The expansion of scope required to address the stupendous statements above would mean making the average auditor of an asx entity into the equivalent of a grand inquisitor (read spansih inquisition). Then it would have to be paid for. Even after all of that there would still be the unassuaged victims out there with their victim mentality crying its someone else fault. I think the good professor above needs a practical real world sabbatical away from the surreal world of academia before he completely looses all relevance.0
- I think it is fair to say Gerard that audit standards have dropped badly, and that the difference between what the public presumes and what the auditor delivers is considerable. The catalyst for the current UK review into the Big Four in the Uk was the almost farcical assurance and work done on Carillion by the Big Four (in various capacities with one as the auditor) is only matched by the phenomenal loss of money by the British gov't (taxpayer). The legitimate question being asked (given that these are a common enough occurrence to suggest the word scandal does not quite cut it anymore) is how to lift or change the standards of auditing. Clearly professional self regulation does not work (just read Arthur Levitts account of the opposition from the Big Four to mooted changes by the SEC to toughen up auditing in the USA in the late 1990's, which they successfully opposed) to see the impotence of self regulation. The payback came a few years later with Enron etc.
A Royal Commission will do what say HIH and Centro did to sharpen up directors in corporate governance, and what the Banking Royal Commission is doing to regulators and the banks and finance industry. Methinks a similar exercise would do wonders to sharpen up the audit profession, and I think that is what Janek quite rightly is getting at.
0- This is a considered contribution, not without merit and I respect that. However it is flawed at so many levels that I have neither the time nor the space to deconstruct the underling premises. However I will make this point. Auditors are leaving the profession in droves because of the ever increasing risk profile associated with the increasingly unrealistic expectation gap (as promulgated in this article) plus its associated litigation risk. Enron was more a failure in morale character (Arthur Andersen the auditors were actually caught shredding key damning documents) than an auditing standards one.0
- Perhaps a Royal Commission also needs to be held into why the ATO doesn't pay interest on quarterly PAYG payments ...0
- I completely agree with Janek's call.
One just has to read the new book 'Bean Counters' to appreciate the failure of the audit function currently, especially with the Big Four dominating the field. Unfortunately the people who end up 'paying' for these failures are not accountants and auditors but usually the retail investors and other stakeholders in the companies (staff, gov't, communities).
This problem was not resolved back in the early 2000's after the Enron era failure of the audit profession, and the Big Four fought 'tooth and nail' to ensure that fraud detection was excluded from audit work (replaced with greater focus on risk control esp. internal audit), and you hardly need to catalogue the litany of failures since then (with 2017 being a bumper year of auditing scandals) to show how that has been a disaster.
So, good on you Janek for making the call. My gut feel is that the primary terms of reference for such a Royal Commission should be to look at the Big Four as a cartel needing to be broken up for the integrity of the marketplace to be upheld.0 - Guess who didnt take their meds today ...... Or is it April the 1st ...... seriously Accountants Daily is there anything you wont publish ??0
- They are simply highlighting the madness of said body0
- Learned Professor has an axe to grind being form unrecognised accounting body !0
