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 .
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
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