The Audit Profession must evolve, else it will be left behind

Many years ago when I undertook my Bachelor’s Degree course, I chose a rather interesting topic for my project. I can’t quite remember the exact wording but it centered around the role of Audit and the responsibilities bestowed upon an auditor. In it, I sought to argue that if the role of an auditor remained to only “express an opinion” without responsibility, then the opinion was as good as useless. Well, those were not the exact words but this subject never saw the light of day. My would-be supervisor would hear none of it and told me in no uncertain terms to drop it. I changed topics and the new one was not within his purview. So, he ended up not supervising me but I got the message.

?It is very well documented that the role of an auditor is “to express an opinion” whether the financial statements are free from any misstatements and have been prepared in line with the International Accounting Standards and International Financial Reporting Standards and/or any other regulatory standards governing the industry/region (GAAP). This statement appears in ALL Audited Financial Statements. The wordings may vary but Auditors are expected to state this on the sign-off page. In other documents such as the engagement letter, an auditor is always keen to state that their work does not entail uncovering fraud and financial misdeeds.

?As an Accountant, I can attest to the fact that it is extremely hard for an “external” person to detect fraud. Companies process tons of transactions on a daily, weekly and monthly basis. To be presented with 12 months’ worth of such humongous transactions makes it nearly impossible to pick out elements of fraud, especially if you consider that most audits take a month to two, on average. Furthermore, the nature of fraud is such that it is done knowingly, meaning that the perpetrators are keen to conceal their activities. And fraudsters are not dumb; they’re very experienced accountants, most likely even more than the auditor.

?But what is the use of giving an opinion when you cannot take responsibility for that opinion? We are told that the auditor does not owe a responsibility to external parties for the audit opinion. But we cannot pretend that these external parties do not rely on the audit opinion in making decisions about an organization. Which tenders for example can you be prequalified for without providing (3 years’) audited accounts? Try and present unaudited accounts and see if you’ll even go past the first stage of evaluation. And how better to raise your profile than showing that you have been audited by the “Big 4” firms? How many would invest in a company where the audit opinion was a qualified one?

?It’d be unfair to criticize auditors for failing to detect fraud; that role would be for investigators or the forensic audits. However, the public space is awash with companies that have collapsed even after continuously being given a clean bill of health by very reputable audit firms. I am certain there are several companies who’ve had similar cases, only that they’re not big enough to attract public attention. The truth is that there were certain issues in the company that pointed to some financial misdeeds, and these issues were glaring. However, for one reason or another, the auditor chose to not look deeper. Gone are the days when audit was about verifying whether there are receipts to support expenditure, etc. Nowadays, companies don’t need to be prompted to keep receipts (the fright of KRA is adequate). Reviewing the existence of company policies and procedures without looking into whether or not they’re being practiced is archaic and has been overtaken by time. Audit firms have even invested in systems (portals) where the client uploads documents during audits. While this is certainly commendable, the only thing these systems do is help “tick the box” that xyz documents have been provided by the client. From my experience with auditors, I have serious doubts whether they actually review all these documents to the detail. And I wouldn’t blame them. We are a generation that are keen on writing good policies but practicing none.

?The world has evolved a great deal and very few things are happening the way they were several years ago. Unfortunately, it feels as if the audit profession has not. If the auditors would interact a little closer with their clients, perhaps they’d understand the client operations better which would then make it easier to pick out malpractices, if any. And this wouldn’t compromise independence. On the contrary, it will enhance it. Because of the over-reliance on the audit procedures and systems, auditors have become very rigid, which has denied them the ability to look beyond what is presented before them. In the end, they give a clean bill of health to an organization that clearly needs surgery. In an age where companies are engaged in cut-throat competition for business space, only the auditors can save the public from glaring financial malpractices. Unfortunately, we have lagged behind and are playing catch-up!

?A quick quiz to the accountants reading this article (and anyone who’d be interested): What would you make of the numbers below?

Turnover ??????????????????????????????????????????????????????????Ksh. 100,000,000

Provision for Doubtful Debts???????????????????????Ksh. 50,000,000

Borrowings??????????????????????????????????????????????????????Ksh. 70,000,000