THE recent collapse of CFX Bank and the holding company after a due diligence had been carried out has brought the role of auditing firms under scrutiny.
Their ability to effectively carry out their duties as curators and financial managers has been questioned. With this in mind, the Zimbabwe Independent sent questions to the current president of the Institute of Chartered Accountants of Zimbabwe, Eric Bloch, on the role played by auditors in the collapse of some financial institutions. The following are the questions presented to him and his answers on the issue.
Q: What role have auditing firms played in the collapse of financial institutions in the light that they have found nothing sinister in the audited accounts of banks, and are such firms competent enough to handle audits of large financial companies?
A: Chartered accountants are very extensively trained in all facets of auditing and all audit personnel of firms undertaking audits receive extensive training. The conduct of audits is invariably subject to comprehensive monitoring and review by qualified audit partners and audit managers.
No evidence has been forthcoming to indicate, at this time, that any of the troubled financial institutions had been subject to defective audits, or that auditors had played any role in the collapse of such institutions. However, as explained above, it is not practically and realistically possible for audits to expose financial mismanagement, abuse and frauds in instances where collusion between personnel of the financial institutions override normally effective internal control systems, or in instances of sophisticated and exceptionally well concealed frauds (and especially so when such frauds are found upon highly skilled forgery of documentation of a nature which must be perceived to be prima facie genuine).
The institute has no reason to doubt the competence of Zimbabwe’s firms of chartered accountants to handle financial institution audits, but has taken and will take appropriate action in any instance where it is established that such competence does not exist.
Q: What is the cause of the failure to detect abnormalities in the financial statements of the collapsed financial institutions?
A: The failure to detect abnormalities in financial statements of collapsed
financial institutions has, in so far as we know to date, been occasioned by such institutions having had necessary internal control procedures in place to an extent required to satisfy auditors, but collusion between personnel of such institutions and/or highly skilled forgeries and computer engineered frauds cannot always be detected or that it becomes evident that the internal control procedures have effectively been over-ridden.
Q: Auditing firms have been accused of rubberstamping accounts of failed institutions. What is your comment?
A: No evidence has been forthcoming to corroborate the allegation, and the institute has no reason to consider that there is any substance or validity to the allegation.
It appears that, to all intents and purpose, auditors are being made “scapegoats” when, in reality, the fiscal mismanagement and abuses, and diverse frauds were pursued in ways as successfully circumvented the apparently good and sound international procedures of the institutions, and the auditors’ evaluations of such procedures and systems, primarily by recourse to advanced and high-level collusion and forgeries within the institutions.
Q: Will auditing firms as curators be able to turn around the fortunes of failed financial institutions, having failed to detect frauds and financial irregularities?
A: Many chartered accountants have developed extensive business and managerial skills and therefore are very suited to fulfil posts as curators, judicial managers and the like. In doing so, they have to determine whether the relevant entity has sufficient inherent substance and purpose as necessary to recover from its troubled financial circumstances, after determining the extent of the institution’s negative circumstances and based thereon to identify alternative opportunities and measures to achieve such recovery.
Their expertise is such that whilst not all financial institutions can be effectively salvaged due to the extent of damage sustained, others can be restructured effectively and restored to viable and secure operations by recourse to that expertise.