Just Fire the Damn Auditors !
Introduction
'Accountants only slow things down when figures get in the way.
Never been an account in the name of Evita
Peron'
(Tim Rice and Andrew Lloyd Webber - Evita)
The words auditor and accountant are sometimes used interchangeably even
in the profession. It seems that Che Guevera, who played the fictional role
of social commentator in the musical Evita was referring to accountants in
their capacity as auditors, the type of people who face a serious
occupational hazard. Directors and management, and that includes
politicians, do not like auditors who take their job too seriously. To them
auditors are a necessary evil imposed on them by law, an overhead that
creates disruption for the finance staff, wastes important management time
and adds no value to the business.
It is surprising the number of companies which appoint and retain
auditors without only a modest idea of their statutory duties, their
reporting obligations and their potential liability for poor quality work
which may cause shareholders, investors and other third parties considerable
losses. Management, particularly in privately owned companies, consider
auditors as they do employees - there to carry out their instructions and
wishes particularly in matters relating to tax savings, disclosure of
information (which in practice means non-disclosure) and transactions
involving directors and management.
Under the Companies' Act and by implication the Corporation Tax Act each
incorporated entity is required to have its financial statements audited by
a member of the Institute of Chartered Accountants of Guyana. (ICAG). The
auditor has considerable legal rights to information and explanations and
access to records, documents, books etc. which in his opinion are necessary
to enable him to carry out his statutory duties. I highlight in his opinion
because of the number of times auditors are asked why they need a particular
record or access to a person. Nothing arouses more suspicion in an auditor
than an apparent reluctance to make a record or access available!
Independence
The Act imposes a standard of independence which in small societies is
not always easy to maintain. In the absence of an effective audit committee,
the mutual interest of auditor as well as the management is served by a
close relationship between management and auditor. While the auditor is
technically and legally appointed by and responsible to the shareholders,
his fees are fixed by the same directors whose stewardship he is required to
report on. Often the audit fee is a small proportion of the total amount he
can collect from the client in any particular year. For example, he can
expect payments for disbursements, tax and accounting work and lucrative
consulting assignments. It is the directors who decide whether such work
will go his way. Given that fees are the principal if not only source of
income, he cannot afford to antagonize those directors.
Duty of the Auditors
There is some anecdotal evidence that auditors of certain companies also
do professional work for individual directors and other related parties who
have other business interests. While there is no official pronouncement on
this practice, such close relationship is best avoided to ensure that there
is not only real, but also perceived independence.
The principal duty of the auditors is to make a report to the members on
the accounts examined by them. He is expected to exercise reasonable care
and skill in making enquiries and investigations. In re Kingston Cotton
Mills Co., Lopes, LJ remarked: " An auditor is not bound to be a
detective, or… to approach his work with suspicion or with a foregone
conclusion that there is something wrong. He is a watch dog, but not a blood
hound…" Expounding on this, the late Lord Denning, in a case dealing
with the duties of an auditor, said thus: 'An auditor…. is not a
professional adder-upper and subtractor"
For all of the provisions of the Companies Act which set outs the duties
of the auditor, case law interpreting the statutes and pronouncements by the
accounting profession on what are and are not good accounting practice and
standards of auditing, the scope for disagreement between client and auditor
is wide. Indeed it would be worrying if there are not differences of opinion
on matters of substance since the perspectives from which they view matters
are so different. For example, auditors like to have what they refer to as
audit evidence. On the other hand, when in what is still a cash society, the
client asserts that he does not have records to support payments which he
affirms on all the holy books were legitimate business expenses, do you tell
him you will not accept his statement, effectively telling him you do not
believe him? And if you continue to doubt him, is he not going to say that
the relationship is not sustainable and he considers its termination
unavoidable?
Disclosure
Then there is the question of disclosure of information. The Act and
accounting standards which have been accorded legal status, have attempted
to specify the nature and details of information which need to be disclosed
and/or be available to the shareholders. For example, Section 104 of the
Companies Act provides for remuneration paid to a director to be specified
in the constituent documents of the company or in a service agreement
approved by the shareholders. Auditors routinely report that records and the
statements comply with the Companies' Act and applicable accounting
standards. But would this be supported by a critical review of those
statements or the records required to be maintained? And how does one
auditor insist on a particular treatment when the client tells you no one
else is doing it your way?
One of the products of the audit is a management letter addressed to the
directors setting out some of the errors, control weaknesses and the
recommendations of the auditor designed to reduce such weaknesses and errors
in the future. Management sometimes uses all kinds of reasons why particular
items should not be included or, if included, so watered down as to become
meaningless. How does the auditor protect his independence and convey his
concerns while avoiding conflict with the client and accusations about
non-cooperation?
Taxation
One of the most serious areas of potential conflict is in relation to
taxation. It is incredible the number of clients who wrongly believe that
the duty of the auditor is to assist in tax minimisation. Even if the
auditor is acting as the agent of the client in his tax affairs, he has to
consider his own exposure if it is proved that he has aided and abetted the
client in tax evasion. In any case, his role as preparer of tax returns is
separate from that as auditor, a distinction that the client understandably
finds hard to appreciate.
Firing the Auditor
Modern company law and practice have sought to protect the auditor from
arbitrary dismissal usually at the instigation of the directors who of
course are elected by the shareholders. The law requires a shareholders
resolution at a special meeting to remove an auditor. The problem is that
the director is no more than a surrogate of some powerful shareholder and it
would be like appealing to Satan in hell. However to ensure that the change
takes place in the most transparent manner, the law provides for any auditor
who resigns or who receives a notice or learns of a meeting of shareholders
called for the purpose of removing him from office or to appoint another
person to fill the office of auditor, to submit to the company a written
statement giving the reasons for his resignation or the reasons why he
opposes any proposed action or resolution. When the company receives the
statement it must send a copy to every shareholder entitled to receive
notice thereof and to the Registrar.
To protect its integrity, the profession has established rules which are
embodied in the law which require a successor auditor to seek professional
clearance from the outgoing auditor. This includes a written statement of
the circumstances and the reasons why, in that auditor's opinion, he is to
be replaced. He may, however, accept the appointment if within fourteen (14)
days of the request he has received no response.
In practice and in the case of private and controlled public companies it
is not too difficult to change auditors for any of a number of reasons.
While the outgoing auditor may make a convincing case why he thinks he is
being unfairly treated, he is unlikely to want to be seen struggling to hold
on to the engagement and often quietly withdraws. After all, even if the
auditor's case is made, if confidence and mutual respect no longer exist,
there is no basis for a continuing relationship.
On the other hand and depending on the circumstances, the auditor should
recognise that he has a wider public interest obligation and he has to
resist improper pressure. Professionals are one of the pillars of governance
in the society and at all times they have to take a professional stand even
at the expense of challenging directors and management. One has to wonder
how differently things might have been if Guyanese professionals had taken a
different stand on the accounting, economic, legal, political and social
challenges which have faced us over the decades.
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