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Poor auditing not just the Big Four's domain

22nd Aug 2019
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Philip Fisher examines the latest Institute disciplinary reports and asks: why do firms bother with audit?

It may not always seem like it but this columnist hates to kick an auditor when they're is down.

Annually, the FRC issues reports confirming that the Big Four firms carry out their audits in a manner that does few favours for the reputation of the profession.

The underlying reasons aren’t always clear, although it is usually suggested that this relates to too close a relationship between auditor and client.

Others may suspect that the reason for a consistently slapdash approach is a desire to cut costs to meet unrealistic fee quotes as a result of lowballing to secure audit and also other work from clients.

Having said all of that, it still comes as a major surprise to discover that a highly respectable and long-established firm of accountants has been hauled over the coals by the Institute’s Investigation Committee for what sounds like drastic audit failure.

To make matters worse, top 100 firm Creaseys has been fined £125,000 plus costs (in total not far short of 2.5% of its annual turnover) for repeated inability to get even the basics right on the same client three years in a row.

According to the report, the £5m turnover firm signed off on an audit for a company that was not in compliance with client money rules. It failed to ensure that shortfalls and internal reconciliations were paid into client bank accounts on a timely basis and did not report the failure to the FSA.

The firm also apparently incorrectly issued unqualified audit reports, and did not adequately confirm that a client company was still a going concern or give an appropriate view on whether cash, bank and client money figures were correctly stated.

Without knowing all the facts, the man in the street might reasonably argue that a firm which is unable to meet a series of standard retirements over a three-year period should withdraw from the field as grossly inadequate.

It is worth repeating that the writer has been a tax specialist since qualification and therefore has no detailed hands-on experience about carrying out audits. However, those involved with disciplinary matters at the ICAEW certainly do and the big fine and severe reprimand speak for themselves.

Enough about Creaseys. It is hard to believe that they are the only practitioners who have screwed up audits in recent years.

Many firms have literally decided that auditing is more bother than it is worth and if the upshot of trying to do your clients a favour is a hefty fine plus costs, you can understand why.

The thing that readers should take away from this column is the need for an even greater sense of caution than we prudent bean counters usually apply.

If you are going to stay in the field of audit, then take all necessary care, even if this means reducing profits on the job (or quite possibly increasing losses).

The failure to do a job properly could be disastrous for your bank balance but, much more significantly, it can take years to repair a reputation that has been damaged by an adverse judgment, whether fully deserved or not.

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By Justin Bryant
28th Aug 2019 12:28

All business transactions ultimately convert to cash at bank and accounts/audits merely attempt to smooth that transition with intermediate +s & -s to reflect the delay there.

What I'd like to know is why, when there's an accounts/audit failure, it's invariably a case of understating liabilities/expenses or overstating assets/income and not vice versa. Why is that when all else being equal in the above exercise you'd expect there to be more or less equal errors appearing in the opposite direction?

It must be coz of basic human incentives to try make themselves look better than they actually are.

Thus, audits should really start with checking if FDs etc. are psychos etc. and check for such errors accordingly.

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Hallerud at Easter
By DJKL
22nd Aug 2019 16:56

Justin, to a degree it is a self selecting sample of the audit failures.

While institutes may pick up some at random most headline audit failures come to light from a business failure and business failures tend not to occur when assets are understated or liabilities overstated.

Of course with owner managed business entities one used to often look at the books the other way as clients had a tendency to want to understate profits for tax and hence understate assets, but with universal audits now long gone these, I suspect , are not as common. (I have done no audit work for twenty years come the end of this month)

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By Justin Bryant
28th Aug 2019 12:34

Although I take your point with small businesses (whose incentives are of course different as you say), I entirely disagree. Show me a single news headline that says: "company's share price rockets on massive turnover underestimate audit/accounting failure", or the like.

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By Busypractitioner
23rd Aug 2019 12:20

Philip Fisher asks whether Creaseys should withdraw from the field. It has been a frustration of smaller firms for years that an error in a sole practitioner or audit firm with one Statutory Auditor causes a closure of that firm's practice (or audit service offering), whilst a larger firm merely undertakes to improve internal audit review or, at worst, moves in a new Audit Partner to replace the one who has failed. Major failings should impact the firm in its entirety, then more care might be taken.

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By paddy55
23rd Aug 2019 12:56

I would suggest another reason why auditors fail to audit properly. Would it be that they are afraid of losing the audit if they audit as they should? Clients don't like being "hauled over the coals" and are likely to hit back if they are.

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By Myshkin
24th Aug 2019 10:34

When with one of the big 4 we were trained to look at figures analytically rather than actually verify them. So if the figures looked right (on trend, agreement with budgets, competitors ratios etc) then they were right.
I protested in vain that if the figures looked right it was because someone was fiddling them that way.

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Hallerud at Easter
By DJKL
28th Aug 2019 10:51

I also noticed analytical review coming to the fore in the late 1990s as what appeared to be the audit time saver of choice, certainly by early 00s when the audits were run through audit programmes on laptops where the accounts were punched in and the machines did the thinking- by this time I was on the receiving end of the audit rather than performing it and our auditors by then(next level down from big four) seemed to do little in the way of transaction testing.

I suspect the days of update audit notes in the permanent files, set materiality, walk through tests, compliance tests, substantive tests on transactions, balance sheet work (the old debtors circ plus supplier statement rec checking etc) and most physical checking of assets is long gone (being sent into a yard with a clipboard during a blizzard in Dumbarton to see if one could spot certain vehicles on the fixed asset register)

One could argue that looking at the big picture one is more likely to spot the major risks, however there is something about really getting deep into how the accounts departments actually functions re control issues that adds insight- even more contact with accounts staff during the audit process rather than being hidden in the room set aside for the auditors may help in gauging how well the business is actually run, the culture etc, which ought to have a bearing on risk evaluation- whilst FDs may keep their secrets well hidden their staff are often far less discrete re dropping little bits of information to the auditors, so getting into the trenches would likely improve the audit evidence gathering process.

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