Grant Thornton chief: Auditors aren't 'looking for fraud'

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Grant Thornton’s new chief exec has told MPs that current audit procedures are not structured to spot fraud, merely to say whether company accounts are “reasonable”.

David Dunckley’s questioning saw the BEIS committee’s future of audit enquiry finally sputter into life after a fairly innocuous opening. The new GT chief, who replaced Sacha Romanovitch in murky circumstances, clashed with MPs over the role of audit.

“We are not doing what the market thinks,” Dunckley told the committee. “We are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.”

Dunckley also admitted to an “expectation gap” between what the public expect from auditors and what they do in practice.

It’s been a hard time for Grant Thornton. After widely publicised internal power struggles, the firm has suffered reputational damage for its role in the collapse of Patisserie Valerie. GT greenlit the cafe chain’s accounts despite “very significant manipulation of the balance sheet and profit and loss accounts” and “thousands of false entries into the company's ledgers”.

The testimony drew the ire of MPs, with Labour MP Peter Kyle asking “What is the point of audit in the first place?” He added, “If I was chair of a company, why would I hire you? It’s like being principal of a school and not being able to trust Ofsted when it comes and does an inspection.”

In a hearing today, the FRC’s outgoing chief, Stephen Haddrill, directly contradicted Dunckley’s statement. Auditors are “clearly responsible” for spotting fraud, Haddrill said.

Prem Sikka, an accounting academic and vocal critic of the UK’s audit sector, agreed with Haddrill’s prognosis.

Unlike the duties of a director, the auditor’s duties aren’t codified in law. But, Sikka said, there’s clear legal precedent that it is within the auditor’s remit to sniff out fraud. In particular, Sikka points to the case of Fomento (Sterling Area) Ltd. v Selsdon Fountain Pen Co Ltd [1958].

The judge in that case concluded that an auditor’s “vital task is to take care to see that errors are not made, be they errors of computation, or errors of omission or commission, or downright untruths”.

The FRC’s audit standard also states that the auditor “is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error”.

“Grant Thornton doesn’t have a leg to stand on,” Sikka said. He added, “There’s a difference between ingenious fraud and fraud that’s rather basic. And most fraud, even Bernie Madoff’s, is rudimentary in nature. The audit should pick it up.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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06th Feb 2019 11:52

Well that would explain a lot!

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By DJKL
06th Feb 2019 16:54

Watchdog not bloodhound, but it is useful if it still has a bark.

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07th Feb 2019 10:01

As a company Director I have always considered an audit a complete waste of money. They send in the juniors to do a tick box exercise and then get the Company Directors to sign that the auditors are blameless in any circumstances. The only reason we do it is that it keeps suppliers and customers "happy".
Definition of auditors "folk that go round after the battle bayoneting the wounded". Maybe Tusks comments should appy to them?

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By ChrisKH
to richards1
07th Feb 2019 10:41

As an ex-auditor, I would have to agree with you but not for the same reasons. Companies have statutory audits because they're obliged to do so and auditors plan their jobs to do the best they can given the level of fee and potential for legal action if they get it materially wrong. So yes, the auditor will have a reasonable expectation of discovering fraud, but I have come across some ingenious frauds in my time, executed by fairly ordinary people which you are not necessarily going to discover in a statutory audit. Discovery would mean testing an enormous number of transactions from many different angles which it's just not possible to do in the time available.

My own view is that companies would see a better return from devising better systems of control in the first place, rather than wasting money on a procedure carried out by a junior who may change the sample to suit and possibly even fix the results, to go home at 5.00 pm. I've had them. And don't even start me on audit partners....

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to ChrisKH
07th Feb 2019 11:58

ChrisKH - Absolutely right! "...companies would see a better return from devising better systems of control in the first place, rather than wasting money on a procedure carried out by a junior"

It still astonishes me that in the age when we have real time access, 24 hours a day from anywhere in the world, to accurate and fully auditable data, that we still have to wait until the end of an accounting period and then send a bunch of juniors into hunt through filing cabinets for bits of paper - to report on stuff that may (or mat not have happened) more than 12 months ago. Eh?

Put in the right systems, with robust approvals and full audit trial and any authorised individual (eg business owners, management, lenders, investors, banks, auditors, HMRC, insurers, etc) get everything they need to monitor business performance and prevent fraud such as Patisserie Valerie.

If the Directors are liable (rightly) why aren't the auditors?

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to James Samuels
09th Feb 2019 21:10

Actually in many instances the auditors are penalised more than the directors (other than any director who happens to be an accountant or actuary). The FRC has powers over audit firms and directors who belong to those two professions and none over any of the other directors.

If specifically however we are talking about fraud carried out by the directors on the company, which seems to be the case in the instance of Pat Val, then it is pretty obvious why, in those cases, the directors are more liable than the auditors.

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07th Feb 2019 10:59

All is eclair now.

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07th Feb 2019 11:08

'Grant Thornton’s new chief exec has told MPs that current audit procedures are not structured to spot fraud, merely to say whether company accounts are “reasonable”.'

Merely to say if Company accounts are Reasonable ...mmmmmmm. RBS, Patisserie Valerie, Corrlian, Toys are Us, Tesco........ and on it goes.
I dont think some of the Accounts prepared by GT and other Auditors tick the reasonable box, never mind giving a true and fair view.

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By Dib
to AndrewV12
07th Feb 2019 13:36

I would hope that no auditor would audit accounts they had prepared!

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By tedbuck
07th Feb 2019 11:31

I have to say I am not a great fan of Auditing which is pretty much a tick-box exercise.
Over the years as an auditor one has stumbled over a few frauds but the 'stumbled' word is pertinent. One has to assume that the fraudster is fairly smart and generally, unless they helpfully make a mistake themselves, the checks may well not find the problem.
It is perhaps difficult to see how the Pat Val hole was missed but if the miscreants were clever at covering their tracks one could see that it might be missed.
The problem is that the world has moved on from the old days of tick and blot but the audit approach is still much the same.
I think that there is need for a radical rethink of the audit process even to the point of having a resident auditor in large Companies whose task is to be a bloodhound as well as a watchdog. Such a person probably wouldn't be the most popular in the world but might achieve more. Certainly the impression one gets is that Board Rooms are not full of the utmost integrity all the time and an outsider might improve the general demeanour. They would, of course, need to be rotated often to prevent catching some unwanted plague.
Quis custodiet ipsos custodes?

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By J355
07th Feb 2019 11:32

A fake bank account is reasonable?

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to J355
07th Feb 2019 12:26

My understanding is that the bank accounts were real, but they were not set up with due process. Auditors used to ask for board minutes to go through, but don't bother to do that any longer. Any bank account has to be authorised by the board and by going through minutes in number order (remember that?) auditors could easily check whether any bank account or overdraft had a mandate.

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to dmmarler
10th Feb 2019 19:48

Auditors do continue to ask for board minutes. They certainly always have when auditing the companies I've been with. However if board minutes aren't given to them or they are given minutes which miss out that particular item, how are they to tell that a particular bank account was ever approved to be opened? Come to that, whilst the bank will ask for a copy of a board minute, the bank doesn't (and can't) easily confirm that the board meeting actually took place.

This is not pass any form of judgment on the Pat Val audit until all the facts are known, but to point out that fraudsters have ways of making frauds difficult to detect and what looks like a simple answer to detection may simply be too simplistic.

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to dmmarler
10th Feb 2019 19:48

Auditors do continue to ask for board minutes. They certainly always have when auditing the companies I've been with. However if board minutes aren't given to them or they are given minutes which miss out that particular item, how are they to tell that a particular bank account was ever approved to be opened? Come to that, whilst the bank will ask for a copy of a board minute, the bank doesn't (and can't) easily confirm that the board meeting actually took place.

This is not pass any form of judgment on the Pat Val audit until all the facts are known, but to point out that fraudsters have ways of making frauds difficult to detect and what looks like a simple answer to detection may simply be too simplistic.

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to mgbacchus
12th Feb 2019 10:00

Auditors may ask for board minutes - but are they given a set of minutes in date order consecutively numbered? And do they check they have them all? I have come across unauthorised bank accounts and borrowings/overdrafts before, and in each case the event occurred because someone completed the bank's own form(s) and did not go through due process. They were not noticed by the auditors (very large firms, as it happens) and the unauthorised borrowing in one subsidiary brought down a group of companies. (The perpetrator had already left, and neither the group nor the bank took further action. )

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07th Feb 2019 13:36

It's the same old story over and over again. Forget about ethics and what you learnt in the process of getting qualified as an accountant, auditors are paid for by the companies that they audit. So in reality, their duty of care is not to the shareholders of the company, but to the directors who gave them the business. If they find too many faults after an audit, the directors will simply replace them the next year, for more "docile" auditors.

The fees they charge (talking about large audits now) are so excessive that they border on the ridiculous. They have to charge such high fees to maintain their posh offices and pretend they do such fantastic jobs.

The same goes for the associations that they belong to, it is all a money making scheme so you won't find too much harsh action being taken by any association whose member failed to audit correctly - for to do so would bring the profession into disrepute. It is a bit of a vicious cycle, with everyone covering for each other at the expense of the shareholders.

One would only wonder how on earth GT can hope to retain its client base in light of these revelations by its new chief.

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07th Feb 2019 18:14

Is this GT's "Ratners" moment?

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07th Feb 2019 18:41

Auditors do have legal responsiblities in many EU countries. If Brexit occurs, expect an increased flow of dodgy European businesses to reincorporate in the UK and join the money launderers already in place.

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By ShayaG
to royprice
08th Feb 2019 13:58

They are already here, Brexit or no. Companies House refuses to carry out AML checks.

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09th Feb 2019 21:26

Polarised comments such as Hadrill's and Dunckley's don't help. The auditors duty is set out in the Companies Acts - it is, with certain add-ons, to report on whether the company's accounts show a true and fair view of the results and period end position of the company. It has been thus since the statutory audit was introduced and parliament has not changed it.

If there is a fraud and the company's records are thereby materially wrong, there is something to report. If the company's records are correct and the accounts and annual report correctly reflect any fraudulent activity or if the fraudulent activity is incorrectly reflected but not material, it is difficult to see what, if anything, the auditors should report upon as things stand.

Pat Val is a very specific case which does beg questions over whether sufficient work was done (or even, if it could have been done) to identify what was clearly a material fraud and error in the financial statements. It does not change the overall position as to whether an audit should be designed to detect all fraud (if that is even possible). Given the cost of that additional work, I suspect any such change would have to be imposed by a change in the law. This is, of course, one of the things that the Brydon Enquiry will be looking at.

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