The Role of Auditors

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smiley

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In the wake of the financial shenanigans at Anglo Irish i thought id investigate the exact role an external auditor plays in a company.

Question: How much reliance can one put on an auditors report??

Answer: NONE.

According to Robert Leach (FCCA FIPPM AcertCM)

"An auditors report is an opinion on part of another accountant's opinion, and nothing more.
The auditors report PROVIDES NO GUARANTEE THAT THE ACCOUNTS ARE CORRECT, that the business is trading legally or indeed at all, or THAT THERE IS NO MASSIVE FRAUD GOING ON.

The auditors report is really a curiosity. In fact anybody can prepare company accounts.
The directors can appoint the village idiot if they wish, but the auditors must be professionally qualified accountants.

An auditor states that the accounts are correct and fair and they comply with the Companies act and that is all. If the company is involved in crooked dealings and has been ripped off, it will still get a clean audit report, provided those dealings and rip-offs are properly accounted for!

Warren Buffett has always said one should take audit reports with a big pinch of salt.

""He also complained that many other companies were overstating earnings, and he expressed puzzlement that their auditors let them get away with it.""

Moral of story: Dont take the audit report seriously!
 
smiley said:
An auditor states that the accounts are correct and fair and they comply with the Companies act and that is all. If the company is involved in crooked dealings and has been ripped off, it will still get a clean audit report, provided those dealings and rip-offs are properly accounted for!
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This will only change when the accounting profession is no longer permitted to regulate itself, and fines are put in place for negligence. How were they signing off on the property values in the December 2007 accounts - no way they gave a true or fair view of the banks position.

When people are hauled off to Mountjoy for white collar crime there might be a reduction in it - not much hope of this happening here though.
 
webtax said:
This will only change when the accounting profession is no longer permitted to regulate itself, and fines are put in place for negligence.
When people are hauled off to Mountjoy for white collar crime there might be a reduction in it - not much hope of this happening here though.
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I agree entirely. Any industry that regulates itself one has to be highly skeptical of it.

The chances of any of these people going to prison is slim. Money talks.
 
The role of an auditor is to see if the financial statements give a true and fair view of the business and are free from material misstatement. The are not a 100% sign off on every tiny detail of a company's activities because that would simply take too long and cost too much. Similarly, in a large company what may for the gutter press seem like a big deal may actually be immaterial.
 
It's wrong to say that an auditor's report is worthless, but it's also wrong to say it's any form of guarantee. It's confirmation that accounting and disclosure rules have been followed, that the company is a going concern, and that there is nothing materially wrong in the accounts.

Of course, the view of what is material gets very blurred when emotions are running high. Take Anglo, loans of €87m seem like a very significant amount to an individual but that's less than a tenth of 1 per cent of their total loans. And I'd be prepared to bet there were lots of smaller loans making up the €87m. So they would not necessarily be easily spotted.

I was an auditor many years ago and if one or more people in senior management decide to cover something up it can be a matter of luck as much as skill when (or if) you find it.

In this case, the rule that says you have to report directors' loans in place at the end of the year but not report on loans taken out and repaid during the year seems plain wrong. Hindsight is great but one or more dodgy directors were always likely to exploit it.

And if Irish Nationwide helped make this happen I wonder if they were up to the same thing? Nothing surprises me any more...
 
Any half decent auditor goes straight to the minutes of the directors meetings. Its a quick way to find out whats going on in a company. Surely loans to directors would have been signed off at this level and noted in the minutes?

If they were sanctioned at that level and not minuted, we got a bigger problem.
 
You're right about reviewing minutes, in my experience. We always reviewed all board minutes.

I have no idea what controls and sanctions operate in banks for loans to directors though.

Not the right ones, it seems...
 
Well as the loans were to the head of risk and the chairman then I would expect the board to sign off.
I mean, what type of bank would allow directors to effectively write their own cheque....ah!!!
 
Window dressing is the technical term used to describe dressing up the published financial statements. One also looks at cut off issues to see what has been redeemed or paid and if it has been reversed after the year end.

The Labour party's idea of sending in an Inspector is a good one. Someone also needs to safeguard the working papers on which an opinion was based and any representations made by the individuals to the auditors to make sure there not doctored. Remember Arthur Andersen and Enron and the shredder in Chicago?
 
Spondulicks said:
Remember Arthur Andersen and Enron and the shredder in Chicago?
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The conviction that was later unanimously overturned by the Supreme Court?

Provided a very convenient scapegoat for the authorities though, and by the time the decision was reversed Andersen was gone.

Great media headlines though, but not a cent for those that lost money...

;)
 
Let us see if the regulatory body for accountants has a backbone or not - have we now got a new oversight body down in Naas?
 
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"...True and fair view and free from material misstatement."

The directors' loans in Anglo were clearly NOT material given the size of the business and its loan book, so their omission from the financial statements is irrelevant from an accounting point of view.
 
John Rambo said:
"...True and fair view and free from material misstatement."

The directors' loans in Anglo were clearly NOT material given the size of the business and its loan book, so their omission from the financial statements is irrelevant from an accounting point of view.
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But missing a director taking a loan of over €100m out while providing little or no secutiry is a material mistatement. It shows a culture of avarice and disregard for shareholders funds that would have led to investors asking serious questions about how their money was being used.

There is a reason why directors provide letters of representation & their loans are supposed to be reviewed properly by the auditors.
 
That is not correct. There's a difference between the directors' loan account and a commercial loan taken out by one of the directors.

Having said that, I'm surprised it wasn't picked up. It's basic Prof 3/Cap II stuff to check a month either side of the year end for unusual transactions. It would seem to me that the Sarbanes Oxley US stuff needs to be implemented in full on this side of the Atlantic - different audit partners supervising jobs etc etc.

The €100M loan would not have been material...it represents less than 0.16% of the total loan book.
 
John Rambo said:
There's a difference between the directors' loan account and a commercial loan taken out by one of the directors.
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But in light of what we know to date the distinction between the two is likely to have been very blurred in Anglo. I doubt that the loans were given to 'Seanie' on anything resembling a commercial basis.
 
[broken link removed] in fridays irish times from the Chief Executive of the Institute of CharteredAccountants in Ireland.
 
Auditing for alot of the big firms is the least profitable of their business streams.
Companies want the cheapest price they can get for an audit. The same firms KPMG,Ernst & Young,PWC etc earn much more lucrative fees from the firms they audit providing tax advice ,corporate finance advice etc
There is a conflict of interests going on in some cases

The bulk of audit work is done by trainee accountants and the audit partner will review the audit file and sign off .
In the case of small businesses you can be sure every transaction and balance will be verified but in the case of the AIBs and Bank of irelands ,an audit is a pretty toothless exercise.
 
capall said:
Auditing for alot of the big firms is the least profitable of their business streams.
Companies want the cheapest price they can get for an audit. The same firms KPMG,Ernst & Young,PWC etc earn much more lucrative fees from the firms they audit providing tax advice ,corporate finance advice etc
There is a conflict of interests going on in some cases

The bulk of audit work is done by trainee accountants and the audit partner will review the audit file and sign off .
In the case of small businesses you can be sure every transaction and balance will be verified but in the case of the AIBs and Bank of irelands ,an audit is a pretty toothless exercise.
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Some of that is true...

However, you don't seem to understand materiality or the audit process. You seem to be ignoring the other staff involved - seniors and managers. Yes, more transactions will be ignored in the bigger companies but that is because the level of materiality is much higher.

Yes, you are right about other areas within the accountancy firm providing greater revenue but to suggest there's anything untoward going on isn't particularly fair.

Also, suggesting companies go for the cheapest audit is not accurate either. Were that the case, the Big 4 would go out of business as they charge significantly higher fees. Usually people use Big 4 for the credibility their name provides, and their international presence.
 
I believe the current set up with audit firms also providing other services to their audit clients is a problem. It affects their willingness to push hard on audit issues for fear of losing the real money spinning work they have with their audit clients.

Transactional auditing is of limited value regardless of what level you set materiality at. The auditing firms always fall back on the mantra that they must rely on management assurances, in that case what is the real value of an audit ? Not much as far as I am concerned

During company scandals a hue and cry is always raised about where were the auditors,people seem to be under the mistaken impression that an audit opinion is actually of some value and gives some assurance as to the soundness and solidity of the business when in fact it doesn't

Having said all that the auditors in the case of Anglo Irish I believe did not comply even with the basic duties of auditors as outlined by the CEO of the Institute of Chartered accountants in fridays IT letter
 
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