Creative Auditing?

We had heard about ‘creative accounting’, a device used to conceal irregularities in accounting reports of sundry organizations, usually the larger ones. Now it seems that we will have to invent a new term, based on inspiration from the accounting sector, namely ‘creative auditing’. This is in the wake of the soon-to-be-one-year old unfolding saga of the BAI, which seems to contain several layers each more murky than the other.

It appears that fingers are being pointed against the world-renowned KPMG auditing firm for alleged irregularities that were found in the finances of the BAI group and that the audit firm would apparently not have drawn attention to. Remedial action not having been taken, as it would have been necessary in the circumstances, would have allowed the BAI to continue with its operations which, it is interpreted were clearly not going to be sustainable.

It must be pointed out that an audit report is a retrospective document and gives details of events and transactions that have already taken place. It draws attention to remediable shortcomings having come to the auditors’ attention, the risks involved due to them and it normally proposes remedial measures to be taken to tackle any deficits that are revealed. But, if there are fundamental flaws putting in danger the life of the organization, auditors will not endorse the accounts; they will “qualify” them, meaning that the fundamental flaws have not, in their opinion, been adequately addressed. If KPMG did not “qualify” BAI accounts at some point in time, that would mean that they were satisfied such “life-threatening” problems did not exist or had been satisfactorily dealt with.

We often see audit reports drawing attention to shortcomings observed in the course of the audit exercise. In a sense, these may not even be qualified as ‘la tisane après la mort’ because, as in the case of Government accounts, they keep recurring despite having been drawn attention to in previous audit reports. As articles in this paper have commented, year-in-year-out audit reports about both public and private organisms and government departments invariably refer to a litany of wasteful expenditures – the repetition itself indicates that nothing is done to stop such waste.

However, a new phenomenon came to light when the now notorious MCB-NPF scandal broke out over ten years ago. The bank’s Internal Audit, nor its external auditors, apparently had noticed the irregular accounting practices that had caused substantial prejudice to the bank! And the bank itself had no control mechanism to make out that this was actually happening until it was too late.

Since then we have had the scandals that have shaken up corporate giants such as Enron, Worldcom, Parmalat – and more, amazingly, keep surfacing – and the finger has been pointed repeatedly at fraudulent accounting practices and failures of auditing procedures to detect them. The Sarbanes-Oxley Act was an attempt to impose a more rigorous and systematic framework of practice and an upgrading of standards, especially to keep auditors from finding themselves in situations of conflict in firms for which they were auditors.

The fact remains, however, that in spite of all these attempts at improvement, an audit remains a retrospective evaluation, when the harm has already been done. When this is found out, other devices such a forensic audits may then be resorted to – but again, that is after the event.

Further, more often than not, the damage done is either already far gone and irreparable, or the events and transactions are so far removed in time from the subsequent investigation that it is impossible to get all the proper documents – which may have been disposed of with internal connivance – or the people involved with the collusion have had recourse to wily legal counsels to effectively cover up all manner of colourable devices and conceal their trails of wrongdoing. Then everything is forgotten, conveniently and with the help of connections in high places, the real culprits still run free.

Many people are already asking whether all the flurry of activity unleashed by the Minister of Good Governance is really going to lead to a much-needed clean-up of the occult practices that have been going on? He has put his reputation at stake, and concrete outcomes are awaited. When will they be forthcoming is the big question and worry in people’s mind.

In the case of government expenditures, clearly the procedures already in place that allow them have not over the years prevented the occurrence of the abuses and irregularities detailed in the successive audit reports. It would appear, therefore, that – since prevention is better than cure – there is need for mechanisms to ensure that that there is an ongoing evaluation of expenditure so as to stop the rot at the source itself. This is by law the responsibility of the company’s board of directors, specifically of its Risk Management Committee who should speak out if necessary even against dominant shareholders distorting the accounts or siphoning off the company’s resources.

In the case of the BAI, the issue was how to prevent the alleged siphoning off of monies to other locations or for private use. For a good while at least, the alleged defaulters would have always found the means to exploit loopholes or weaknesses in procedures to their advantage. Thus, the truth would not have come out.

In the case of the government, side by side with the audit function, therefore, there must always be an overseeing monitoring committee to question and oversee expenditures, and also to investigate within weeks or months rather than after the end of the financial year. The regulatory bodies must make it mandatory for private organizations to also set up similar mechanisms so as to avoid the kind of ‘creative auditing’ which, it is alleged, would have been uncovered. It is left to the experts to work out how to set up such a body and define its composition, the level to which it must report, and the time-scale for the implementation of any remedial measures that it would propose eventually, as well as the sanctions to be imposed in case of wilful professional default.

Unless we have some continuous monitoring mechanism of this sort, we will continue to have post-facto audit reports and waste will continue to take place, as well as scandals that will surface when it is too late and those responsible having put themselves safely out of reach of the arm of the law. So the country urgently needs to establish an effective on-going monitoring element along with the auditing structure. This should act as a pro-active component to stop things from being done wrongly in the first place, with the fallout that will benefit the country’s treasury and by extension its citizens – hopefully!

  • Published in print edition on 9 October 2015

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