External Auditor’s opinion play a very important role in the global capital markets system. A third party opinion on the representations made in a company’s financial statements serves as assurance of precision and lucidity, builds investor confidence, helps to pour extra finances from banks & financial institutions.
However, when investors learn of financial statement misrepresentations, subsequent litigation often concentrates on the quality and adequacy of the information the auditors obtained, and how they processed that information in reaching audit conclusions.
It is not whole and sole auditor’s responsibility to identify all fraudulent activities. Professional standards require the auditors to opine on their client’s compliance with generally accepted accounting principles (GAAP). The auditors are required to plan and perform the audit to obtain reasonable assurance that the financial statements are free from material mis-statements whether those mis-statements are due to error or a fraud. While the fraud, that is substance to the financial statements should be uncovered during the performance of typical audit procedures but the auditors are required to be diligent and not negligent. Some times the auditors compromise the concept of third party independence while expressing the opinions.
Riskpro, in this aspect, has its practice developed in the area of Auditor Intelligence and has pointed out typical trends of auditor malfunctioning.
Some of the trends observed in Auditor Integrity cases are:
- Violation of Listing agreements governed by the Exchange acts like SEC in USA or SEBI in India auditing standards in connection with the issuance of audit reports;
- Violation of anti-fraud provisions by falsely stating in audit opinions that the audits had been conducted in accordance with Generally Accepted Accounting Standards;
- Failing to plan and sufficiently perform work on critical aspects of audits; failing to include procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;
- Auditor directly and substantially contributing to these violations;
- Failing to exercise due professional care and professional skepticism for issuers;
- Violation of independence standards as auditor served as lead audit partner on the audits of issuer for more than three or five consecutive years.
- Firm failing to have a required engagement quality review performed on audits and failing to comply with Auditors quality control standards.
- Auditors lacking the technical education which is required for the engagement and still is entrusted with the tasks and review of the audit engagement;
- Auditor failing to supervise the work of the assistants and especially assistants in different country due to language barrier and relying on their poor quality work.
- No pre-approval taken for engagements for non-audit services.
All the above trends show the integrity of the auditor gets easily compromised and he becomes an important player in misrepresented financial statements life cycle.
Auditor Independence check is a diverse practice which gathers background of the audit firm and the Audit Partner. Globally, Riskpro is the leader in the Auditor Independence checks and services. This service is helpful to the investors, stakeholders, financial and non financial institutions to understand the integrity of the financial statements presented to them.
Management as well as the auditors are responsible for the financial statements. Auditors are engaged to opine on the financial statements. They are not the authors of the financial statements, and in fact are strictly prohibited from performing certain tasks such as bookkeeping services and making management decisions; for fear that their independence becomes prejudiced. However, it is a fact that management often relies heavily on the knowledge of their auditors to help resolve technical accounting issues. Auditors are seen to be negligent about the financials of the company sometimes for the interest of the promoters/management, sometimes for his/her own good. While performing the audit engagement the auditor must consider the “inherent risk” of fraud at the individual account and transaction level but in the competitive world auditors tend to turn a deaf ear towards the risk assessment.
PCAOB- Public Company Accounting Oversight Board – which is a non profit corporation established by USA Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports, has 11 successful enforcement in 2014 against audit firms & 13 auditors.
Gone are the days when the opinions of the auditors used to be absolutely accurate but one now the stakeholders have to check the red flags appearing in even audited financial statements. Accounting and audit practices are and will remain the subject of severe public and regulatory scrutiny and lawsuits. The onus and pressure on the directors, outside auditors, bankers, lawyers can not be ignored due to the questions & their accurate responses from public, share holders, investors and the Government. Riskpro team’s accounting and auditing knowledge and investigative approach brings clarity and conception to the complex Auditor Independence Matters and issues in dispute