How much can companies rely on their auditors if even those from the Big Four firms can give unsatisfactory work?
All businesses must have their accounts audited at the end of every financial year. The audited accounts are then named as audited financial statements, or fondly known as AFS.
To enable the audit, a company would hire a book-keeper to keep its accounts for the year, which will then be audited by an independent auditing firm. The auditor’s role, then, is to ensure that those accounts are indeed true, fair and representative of the business at that point in time.
In general, there are different categories of auditing profession, but the swingers at the top are known as The Big Four.
In a world of increasing transparency and stepped-up obligations to comply with rules, auditors complement company boards in being the checks and balances on a company’s activities. This, of course, is the primary function of audit firms to make sure that the numbers presented in a company’s accounts are in fact true and a fair representation of the business.
Recently, however, one company showed us a series of mistakes made by auditors from one of The Big Four companies.
Keep in mind that it is the company that prepares and presents its accounts for auditing. So, imagine our surprise when we found that the auditors (from one of Big 4s) of this company in question had actually made changes to its prepared accounts. Among the auditors’ slip-ups were:
Stating that a full director was only an alternate director;
Stating that the company’s “risk management department” had managed its risks. This was untrue because the company had no such department but instead had a legal and compliance department to manage risks;
Stating that there remained, on average, 365 days and 95 days respectively for their 2011 and 2012 deposits to mature. The correct maturity periods on deposits were actually 125 days for 2011 and 124 days for 2012;
Stating wrongly the fees payable to, not one, but three service providers. In the first instance, the auditors stated the amount as RM17,771,750 when it should in fact have been RM18,600,947; in the second case, the value of the company’s transactions with a second service provider was stated as RM20,655,200 when in fact it should have been RM70,458,196; and last, but not least, the total value of the company’s transactions with a third service provider was stated as RM120,300,150 when the actual amount was RM170,650,200; and
Stating wrongly the company’s Financial Assets at Fair Value. The auditors actually amended the company’s accounts to show that the quantity of units at fair value were 10 times more than the actual number of units.
Perhaps the most disturbing upshot of their sloppiness is the duplication of items in the company’s taxable and non-taxable income. This means that the auditors gave incorrect numbers for taxation, post-taxation profit and loss, realised amounts, tax recoverable, total assets and retained earnings.
The auditors even managed to get the financial year of assessment wrong.
Corporate Malaysia has to ask itself how much it can rely on its auditors, if even those from a Big Four firms can provide such unsatisfactory work.
And to what extent should investors rely on the audited accounts if such is the current standard of auditing in this country? Do companies have someone to oversee the work of auditors and ensure that there are few, if any, mistakes in the AFS?
What happens if there isn’t this sort of due diligence done internally that is needed to oversee the auditors’ work?
All too often, a company’s audit committee will take the word of its auditors at face value before signing off on the AFS. In doing so, the company is entirely responsible for all that is stated in the AFS, even if it contains mistakes made by the auditors.
So what redress does a company have if its AFS is poorly audited? Would the company’s only recourse be to appoint another auditing firm to replace the shoddy one?
The thing is, investors usually frown on companies that keep changing their auditors because that suggests that the companies might be trying to cover something up.
But what do you do when, as in the above case, the partners of the sloppy Big Four firm did not even bother to reply to the company, after it wrote in about the many mistakes made? It seems sometimes creative accounting is often overlooked by auditors preoccupied with the desire to preserve lucrative auditing and consulting contracts.
To top it all, I can assure you that auditing firms have no qualms about raising their audit fees to cover their own rising costs, as and when it suits them.
So it is high time companies here make auditors more accountable for their actions, which can otherwise seriously disrupt a business’ current and future prospects.
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014