What happens if the auditors and directors disagree on the accounts?

[trajan]

A largish financial services entity publishes their annual report.
In the opening chairman's statement, there is a reference to the fact that the company auditors and the company could not agree on the tax treatment of a particular item in the accounts.


At the a.g.m. we were told that the old auditors would no longer be handling the company's future financial records and a new firm had been appointed.

A rep from the old auditors was there but said nothing much on the matter, apart from accepting profuse thanks for her services over the years and so on.

 

[Brendan Burgess]

Ok, I assume that this is a Credit Union and not a publicly quoted company.

As it's a matter of public record, why not tell us the name of the Credit Union?

It is not the role of the Directors to appoint the auditors. They are appointed at the AGM by the members.

Did the old firm sign off the Annual Report with an unqualified opinion? Or did they qualify their opinion e.g. "I don't believe that these accounts reflect a true and fair view because [of the calculation of deferred tax]."

The Central Bank presumably regulates this institution so they will have been aware of the issue.


Brendan

 

[trajan]

The nature of the company is immaterial. (How can you even think of asking me to put a name on it ? )

Shareholders at an a.g.m. do appoint auditors -- but only in the sense that they vote through those auditors proposed by the board of directors. Auditors proposed by a member would not necessarily be acceptable to the board even if they were by a majority of members.

The bit I don't get is why the company didn't either :

1. Fall into line with the old auditors to avoid re-audit fees;
or
2. Dump the old auditors summarily with their fees paid, hire new ones sharing the company view on tax treatment of this one item, pay them to re-audit everything and then present an agreed front in the final report.

 

[Brendan Burgess]

Did you ask this question at the AGM?

Did anyone else ask?

You might have missed my question:

Did the old firm sign off the Annual Report with an unqualified opinion? Or did they qualify their opinion e.g. "I don't believe that these accounts reflect a true and fair view because [of the calculation of deferred tax]."

 

[trajan]

I beg your pardon. To your question.
The old auditors signed off with a qualified opinion and a detailed paragraph explaining their standpoint on the issue in dispute.
The chairman's report says that the company actually had sufficient information on the charge plus its year of application but "unfortunately" did not apply it upon the 2016 accounts. Accounts in 2017 were thus adjusted so that a charge actually made in early 2017 is transferred to the 2016 accounts.
The auditors say that since hard information from the relevant government authority on both the amount due and its proper period of payment was only received in 10 Jan 2017, by which time 2016 accounts had already been prepared and signed off, it was not appropriate to apply it for the 2016 year and it should be applied upon 2017 accounts. They conclude:

Therefore, the prior year adjustment as presented in these financial statements, should
not have been made and the charge should have been reflected in the income and expenditure
account for 2017. Accordingly, the comparative total expenditure for 2016 is overstated and the
surplus for 2016 is understated by €30,742.
Total expenditure for 2017 is understated and the surplus for 2017 is overstated by €30,742.
As at 30 September 2016, accruals have been overstated and realised reserves understated by
€30,742.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our qualified opinion.

The annual report was prepared some time ahead of the a.g.m. and it was only at the latter event that we were told that new auditors were appointed. I was late for the meeting so I missed out on the first few items on the agenda, including discussion of the matter above. Appointment of auditors was done while I was there and though suspicious I saw no point in raising my concerns on that front. I did raise concerns on other issues and was not impressed with the responses given to these.

 

[Brendan Burgess]

When you say "2016", I presume you mean 30 September 2016?
So the Annual Report had been submitted to the members by 10 January 2017. Otherwise, they should have amended the 2016 accounts before publishing them.

As a director, I would want to see the 2016 accounts corrected, assuming that €30k is a material amount in the context of a "largish financial company". I don't know what the Accounting Standards say.

I would push the auditor that my way of thinking was right. If they refused, then I would go along with the auditors and then seek to replace them and I would explain the reason why.

 

[Brendan Burgess]

the company auditors and the company could not agree on the tax treatment of a particular item in the accounts.

Again, I presume you mean the accounting treatment of a tax item. Your initial post could be read that there was some tax skullduggery going on.

Brendan

 

[trajan]

Yes, they do accounts to 30 September for some reason.
And whatever the reason is, the company seemed determined to assign back to 2016 a charge they actually paid in 2017.
The directors' statement in the annual report says that a company

must recognise a provision when:
(a) the company has an obligation at the year-end as a result of a past event;
(b) it is probable (i.e. more likely than not) that the company will be required to make a payment in settlement; and
(c) the amount of the obligation can be estimated reliably.

and the chairman's statement claimed that they had taken independent expert technical accounting advice in relation to the matter. (Sounds more like a tax barrister than another auditor)
That being so, it should imply that they knowingly neglected to make a due provision in 2016. I don't know if fines apply in this eventuality but for a sum of €30k it should raise questions in the eyes of the state auditors.
The old auditor does not agree that adequate information on the amount due and time due for this charge was available in 2016 and cites company documents and letters to support this. Hence the disagreement.

The old auditor worked for a global top 10 auditing firm and is known to be expert in the industry that the company operates in. The old auditor is also at partner level in the auditing firm after < 12 years post qualification employment there. To me, this implies that this auditor's expertise brings in a substantial volume of business to the that auditing firm from this sector alone. The decision to openly disagree with a client is not one that a major auditing firm would take lightly. Other clients in the same sector might also withdraw their custom. On the other hand, their treatment of this type of accounting item has to be the same for all clients in that sector: they can't allow one to adjust a charge to the previous year and advise others against doing so.

 

[T McGibney]

On the other hand, their treatment of this type of accounting item has to be the same for all clients in that sector: they can't allow one to adjust a charge to the previous year and advise others against doing so.

Their job as auditors isn't to prepare the accounts though, but to report on them.

 

[jpd]

Other than moving income from one year to another, are there any other effects of this matter? Is the company in danger of becoming insolvent because of this?

Accounts are always open to differences of opinion on whether a charge should or should not be included. Companies manage their annual profits in all sorts of ways and the accounting rules and regulations try to standardise this but they are still open to different interpretations.

 

[T McGibney]

are there any other effects of this matter? Is the company in danger of becoming insolvent because of this?

If any "largish financial services entity" is in danger of becoming insolvent over the treatment of a charge amounting to €30,742, they have bigger worries than this.

Accounts are always open to differences of opinion on whether a charge should or should not be included. Companies manage their annual profits in all sorts of ways and the accounting rules and regulations try to standardise this but they are still open to different interpretations.

Nail on head.

 

[RedOnion]

2. Dump the old auditors summarily with their fees paid, hire new ones sharing the company view on tax treatment of this one item, pay them to re-audit everything and then present an agreed front in the final report.

The companies act prevents them from doing that. Disagreement over accounting treatment is not a reason to dismiss auditors.

 

[Sunny]

So the auditor gave a qualified opinion? That in itself is no big deal. It's good that auditors can disagree with management. The question I would be asking is that has the qualified opinion led to a breakdown in the relationship between the company and original auditors? A company changing auditors on the back of what sounds like a pretty average difference of opinion over the timing of a charge is extreme. It is also poor governance if not illegal if it was company who decided to change auditors on the back of the audit finding.

 

[Brendan Burgess]

The companies act prevents them from doing that. Disagreement over accounting treatment is not a reason to dismiss auditors.

Hi Red

With a September year end and one firm having a lot of business in this sector, the firm is most likely a Credit Union.

Does the Companies Act apply or are they subject to some other legislation?

Brendan

 

[T McGibney]

Hi Red

With a September year end and one firm having a lot of business in this sector, the firm is most likely a Credit Union.

Does the Companies Act apply or are they subject to some other legislation?

Brendan

https://www.centralbank.ie/regulation/industry-market-sectors/credit-unions

There is an extensive legal and regulatory framework in place for the Irish credit union sector. The following are the main items of legislation and regulations relevant to the regulation and supervision of credit unions:

• Central Bank Act, 1942;
• Credit Union Act, 1997;
• Central Bank Reform Act, 2010;
• Central Bank and Credit Institutions (Resolution) Act, 2011;
• Credit Union and Co-operation with Overseas Regulators Act, 2012;
• Central Bank (Supervision and Enforcement) Act, 2013; and
• Credit Union Act 1997 (Regulatory Requirements) Regulations 2016.

 

[Brendan Burgess]

Thanks Tommy

So they are not companies, but co-operatives and not subject to the Companies Act.

 

[trajan]

The companies act prevents them from doing that. Disagreement over accounting treatment is not a reason to dismiss auditors.

Okay, that and the later amendment posted for CUs explains why they were not released until the next a.g.m. which is a big part of my original question. And the matter wasn't serious enough to merit the auditors resigning.

The question I would be asking is that has the qualified opinion led to a breakdown in the relationship between the company and original auditors?

I think it's clear that it has.
And I'm not surprised if a company claims it has documents to support its view and the auditors say that all documentation supports theirs.

Getting only qualified approval of a multimillion euro asset company accounts is not like two people having different opinions. Nor would public shareholders or a taxman be likely to view it so. I don't know how often you people have seen this sort of thing in annual reports but it's unique to me, admittedly a layman who reads these only when considering investing.

Their job as auditors isn't to prepare the accounts though, but to report on them.

That may be so but it's going to be hard to prevent an auditor (who is paid by the company) from alerting a company's financial officer to items in doubt as well as informing (unofficially) on what would be acceptable.

 

[RedOnion]

Hi Red

With a September year end and one firm having a lot of business in this sector, the firm is most likely a Credit Union.

Does the Companies Act apply or are they subject to some other legislation?

Brendan

If it's a CU, there are additional rules.

Minimum 28 data notice to both CBI and members, and a general meeting. Removal of auditors without this is invalid.