Flattering Annual Reports vs. those Forensic Audit Reports…THE WORRYING DISPARITIES

Jun 19, 2016 News

---

By Kiana Wilburg

I am no financial expert. But I don’t believe that you or I need to be one in order to see the obvious and worrying disparities between those damning forensic audit reports and the annual reports and/or financial statements that have been prepared over the years by other auditors for certain statutory bodies.
Take for example, the forensic audit report on the National Industrial and Commercial Investments Limited (NICIL). It was prepared by Chartered Accountant, Anand Goolsarran.
For years, APNU and the AFC have jointly and separately, bashed this company for being involved in corruption. And though at the time, they couldn’t point to a litany of cases to cement their arguments, they had enough evidence to justify their suspicions that there indeed existed more than a whiff of corruption associated this entity.
But the former administration denounced any and every such allegation made by APNU and the AFC. In fact, their favourite line suddenly became, “What on earth could you be speaking of? This is a company that has received a clean bill of health for several years from the Auditor General.”
Years later, Goolsarran would provide the nation with a forensic audit report which exposed just how deep corruption ran within the veins of this company.
Immediately, it makes me wonder, just what was our Auditor General looking at when this company was given such an opinion? How could there be such a vast or significant difference in the opinions expressed. This even led me to question how can I or the citizenry for that matter, have confidence that this office, (an office that is intended to protect the nation against the excesses of the Government of the day and bring accountability for the public’s money), will do its job fairly and truthfully in the future.
And if it occurred in this case, then how many times has the Auditor General given the “good health” stamp to other state agencies with financial irregularities of all sorts? It is a worrying and challenging position to be in as a tax payer.
This is a subject matter I had the privilege of discussing with two chartered accountants in Guyana – Mr. Christopher Ram and Mr. Goolsarran.
In speaking with Ram, he shared with me that it is important to recognize the difference between a Financial Statements audit and a Forensic Audit.
The Chartered Accountant explained that the purpose of a financial statements audit (FSA) is to enable the auditor to state whether in his opinion, the financial statements present fairly, in all material respects, an entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
Ram said that for more than a century, auditors relied on an 1896 English case in which Lord Slopes famously said that the auditor is a “watchdog not a bloodhound”. The Chartered Accountant said that it took several decades before another judge, Lord Denning, stated that, in order to perform his task properly, the auditor must come to his task with an enquiring mind – not suspicious of dishonesty – but suspecting that someone may have made a mistake somewhere.
Even so, Ram said that the audit profession has remained reluctant to accept a higher responsibility for fraud detection. He expressed that it took the cataclysmic events that saw the collapse of the then leading audit firm, Arthur Andersen, to usher in some changes and new auditing standards which require a greater focus on fraud detection.
Ram said that that does not alter the reality that an audit comes after the fact and that management has the primary responsibility of preventing and detecting any fraud by setting up proper systems, including a system of internal audits.
Moreover, he said that with the increasing incidence of fraud, “forensic audit” or more correctly, “forensic accounting”, is becoming more prevalent, even as it performs functions different from the auditors of financial statements.
He commented that forensic audits are more investigative in nature, and the forensic auditor is more like a bloodhound, sniffing out fraud and criminal transactions from the financial records.
Ram said that external auditors rely on certain representations made by management and on the work of the internal auditors. The forensic auditor, he stated, starts by being suspicious of everyone
He added that the audit report of an external auditor does not represent a clean bill of health since the external auditor also issues after each audit, a management letter pointing out the weaknesses and the non-material matters found during the course of the audit. He said that that is not open to shareholders or to the public, leading to the conclusion that the auditor has given the entity a clean bill of health.
The Chartered Accountant stressed, however, that responsibility has to be shared among the external auditors, the internal auditors, if any, (and there should be in any proper organization), regulators of the accounting and auditing profession, the directors and operations management.
Ram stressed that the external auditor has to be stronger in his recommendations on the prevention of fraud, and should be willing to resign from the audit if the management is unwilling or unable to strengthen the system to prevent and detect fraud.
He remarked as well that the accounting profession has to stand up and accept responsibility for the failures of its members and of itself. He said that self-regulation has failed the profession and the public.
Goolsarran shared similar sentiments to Ram. The former Auditor General in sharing his views explained that in addressing such a topic, one must bear in mind that the external auditors are appointed to examine and express an opinion on the fair presentation of the financial statements of an entity.
In doing so, he said, they carry out whatever tests they consider necessary to express that opinion.
“If they uncover fraud and other irregularities they are required to probe them and quantify the extent to which they have occurred; and assess the implications for the organization. It is not the external auditor’s primary objective to search for fraud, though they are required to design their tests to uncover material misstatements, whether due to fraud or error,” Goolsarran noted.
On the other hand, the Chartered Accountant said that the primary objective of the forensic audit is to uncover fraud, mismanagement and other irregularities. Having said that, he explained that the results of the two types of audits ought not to be significantly at variance with each other.
He noted however, the forensic audit will be far more comprehensive and weighted more in favour of disclosure of mismanagement, fraud and other irregularities.
Goolsarran remarked that some external auditors tend to view their role in a very narrow way and carry out minimal tests to verify the accuracy of the amounts shown in the financial statements. He said that this perhaps explains the mismatch.
Goolsarran said, “Public sector organizations are generally service-oriented. Their primary objective is not about profits. External auditors of these organizations therefore need to do more in order to provide the necessary assurance that all is well with the organization financially, since in most cases taxpayers’ funds are involved. Indeed, the taxpaying public looks to the external auditors to protect their interest.”
On the other hand, he opined that the private sector is profit-oriented. Should mismanagement, fraud or other irregularities occur, profits will decline. And when this happens, Goolsarran said, the shareholders of such organizations know what to do. He stressed that the slightest adverse comment from the external auditor is likely to see a shake-up of the management.
Goolsarran noted that annual reports are prepared and approved by the Board of Directors. Because the Board provides oversight of the organization, and in many ways, are accountable for its performance, Goolsarran said that there is always the tendency to highlight the good things of the organization and its achievements.
He believes that the directors cannot be faulted for doing so. He said that it is mainly for this reason that external auditors are appointed to give an independent view, albeit somewhat restricted to financial management issues.
He concluded that perhaps Government should ensure that Internal Audit Departments pursue value-for-money audits, while Ram recommended that those departments should ensure that they pay more attention to fraud detection.

---

---