Auditing not to pick fraud

Mike Hamilton

WHERE were the auditors when various companies and institutions were being mismanaged, acting illegally or defrauding customers or shareholders?



ial, Helvetica, sans-serif”>This is a question that has been asked repeatedly in the wake of the well-publicised collapse or threatened collapse of a number of institutions and companies and the arrest of various individuals on charges of fraud.

The truth is that in many cases, where small companies have been involved, auditors may never have been anywhere near them. Private companies are not required to appoint an auditor if they have no more than 10 shareholders, 90% of whom agree that an auditor should not be appointed.

Where companies that do require an audit are concerned, the auditor may not visit the company until about nine months into the financial year. He or she will be unaware of any improper activities between one audit and the next until the audit date arrives. Even then such activities are unlikely to be picked up if there is no documentary evidence that would arouse the auditor’s suspicions.

It is particularly difficult to detect fraud where there is collusion, which is often the case, according to Institute of Chartered Accountants of Zimbabwe chief executive, Daryl Benecke, who cited an instance where truckloads of goods were diverted with the involvement of an entire department, including the security guard.

“Detecting fraud is not the primary purpose of an audit. Audit procedures are therefore not designed specifically to pick up fraud,” he said.

“The only way you can check the physical movement of goods is if you are there. Generally the auditor will not be there. He or she will rely on a paper trail. If all the internal controls have been followed and the requisite signatures been provided for transactions and receipt of money or goods, nothing adverse will be picked up by the auditor.

“With corporate fraud there is nearly always collusion between two or more people. This makes fraud difficult to detect. If everything that should have been done in terms of procedures and internal controls appears to have been done, then the auditor is unlikely to detect anything amiss.

“If the internal controls seem inadequate or to be leaving loopholes for theft or fraudulent activities, then the auditing firm will offer a company’s management advice on how to improve such controls,” he said.

The primary purpose of an audit, Benecke stressed, is to establish whether, in the auditor’s opinion, the financial statements are a true and fair reflection of a company’s financial position.

The auditor carries out this function in terms of the Companies Act, or other legislation governing particular organisations, in accordance with the legislative requirements and with International Accounting Standards and International Standards on Auditing.

The auditor is engaged by the company whose books are to be audited and reports to the company itself, Benecke pointed out. The auditor’s duty is to report to shareholders, which is normally done by certifying that the financial statements are, in the auditor’s opinion, a true and fair reflection of the company’s financial position or by declining to certify them as such.

If an auditor detects fraudulent transactions, he or she would in terms of the institute’s ethics be expected to report this to the company’s management or audit committee.

Should the company have engaged in illegal activity, the auditor or auditing firm would normally, Benecke said, point out to the managing director or audit committee that such activities contravened particular legislation.

“For instance, the auditor might go to the managing director or audit committee and say: ‘I note that certain foreign currency transactions were done using the parallel market rate. Do you realise that these transactions were done outside the Exchange Control Act?’

“However, the auditor’s responsibilities in regard to such matters end there. A record would be kept in the auditor’s working papers but these are confidential documents,” Benecke said. Client confidentiality is an important part of auditing and accounting ethics.

It is possible, therefore, that some instances of fraud or illegal activity were picked up by auditors and pointed out to the company concerned. However, it would not be possible to confirm this in specific cases because of client confidentiality.

Where the auditing of banks’ books are concerned, Benecke said, this is done in terms of the Banking Act, which does require auditors to report specific things, issues relating to liquidity and asset ratios for instance, to the Reserve Bank of Zimbabwe.

Benecke said the ICAZ upholds the highest professional standards and ethics.

Every chartered accountant in Zimbabwe is required to comply with these standards and ethics and those of the International Federation of Accountants and International Accounting Standards Board, both of which ICAZ belongs to.

“The high professional standards and ethics that our members are bound by is one of the reasons why it is in a company’s best interests to employ a qualified chartered accountant,” Benecke said.

He said the institute took seriously any complaint of unprofessional or unethical behaviour made against any of its members. Where a complaint was made an inquiry was instituted. If the complaint was found to be justified then disciplinary action was taken.

Such action could range from a warning to loss of membership and of the chartered accountant qualification. The institute also has the power to order the payment of restitution and to fine a member, Benecke said.

“I think a good deal of the generalised criticism of auditors in relation to recent cases of fraud and mismanagement arises from a failure to understand the limited role of auditors and the manner in which audits are conducted,” he said.

“Where criticism has been levelled against accountants, it is important to note that not everyone who calls himself an accountant is a qualified accountant and registered in terms of the Public Accountants and Auditors Board Act.”

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