# The Role of Auditors



## smiley (17 Jan 2009)

In the wake of the financial shenanigans at Anglo Irish i thought id investigate the exact role an external auditor plays in a company.

Question: How much reliance can one put on an auditors report??

Answer: NONE.

According to Robert Leach (FCCA FIPPM AcertCM)

"An auditors report is an opinion on part of another accountant's opinion, and nothing more.
The auditors report PROVIDES NO GUARANTEE THAT THE ACCOUNTS ARE CORRECT, that the business is trading legally or indeed at all, or THAT THERE IS NO MASSIVE FRAUD GOING ON.

The auditors report is really a curiosity. In fact anybody can prepare company accounts.
The directors can appoint the village idiot if they wish, but the auditors must be professionally qualified accountants.

An auditor states that the accounts are correct and fair and they comply with the Companies act and that is all. If the company is involved in crooked dealings and has been ripped off, it will still get a clean audit report, provided those dealings and rip-offs are properly accounted for!

Warren Buffett has always said one should take audit reports with a big pinch of salt.

""He also complained that many other companies were overstating earnings, and he expressed puzzlement that their auditors let them get away with it.""

Moral of story: Dont take the audit report seriously!


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## webtax (17 Jan 2009)

smiley said:


> An auditor states that the accounts are correct and fair and they comply with the Companies act and that is all. If the company is involved in crooked dealings and has been ripped off, it will still get a clean audit report, provided those dealings and rip-offs are properly accounted for!



This will only change when the accounting profession is no longer permitted to regulate itself, and fines are put in place for negligence. How were they signing off on the property values in the December 2007 accounts - no way they gave a true or fair view of the banks position.

When people are hauled off to Mountjoy for white collar crime there might be a reduction in it - not much hope of this happening here though.


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## smiley (18 Jan 2009)

webtax said:


> This will only change when the accounting profession is no longer permitted to regulate itself, and fines are put in place for negligence.
> When people are hauled off to Mountjoy for white collar crime there might be a reduction in it - not much hope of this happening here though.



I agree entirely. Any industry that regulates itself one has to be highly skeptical of it.

The chances of any of these people going to prison is slim. Money talks.


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## John Rambo (18 Jan 2009)

The role of an auditor is to see if the financial statements give a true and fair view of the business and are free from material misstatement. The are not a 100% sign off on every tiny detail of a company's activities because that would simply take too long and cost too much. Similarly, in a large company what may for the gutter press seem like a big deal may actually be immaterial.


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## Jethro (19 Jan 2009)

It's wrong to say that an auditor's report is worthless, but it's also wrong to say it's any form of guarantee. It's confirmation that accounting and disclosure rules have been followed, that the company is a going concern, and that there is nothing materially wrong in the accounts.

Of course, the view of what is material gets very blurred when emotions are running high. Take Anglo, loans of €87m seem like a very significant amount to an individual but that's less than a tenth of 1 per cent of their total loans. And I'd be prepared to bet there were lots of smaller loans making up the €87m. So they would not necessarily be easily spotted.

I was an auditor many years ago and if one or more people in senior management decide to cover something up it can be a matter of luck as much as skill when (or if) you find it. 

In this case, the rule that says you have to report directors' loans in place at the end of the year but not report on loans taken out and repaid during the year seems plain wrong. Hindsight is great but one or more dodgy directors were always likely to exploit it.

And if Irish Nationwide helped make this happen I wonder if they were up to the same thing? Nothing surprises me any more...


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## VOR (19 Jan 2009)

Any half decent auditor goes straight to the minutes of the directors meetings. Its a quick way to find out whats going on in a company. Surely loans to directors would have been signed off at this level and noted in the minutes? 

If they were sanctioned at that level and not minuted, we got a bigger problem.


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## Jethro (19 Jan 2009)

You're right about reviewing minutes, in my experience. We always reviewed all board minutes.

I have no idea what controls and sanctions operate in banks for loans to directors though.

Not the right ones, it seems...


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## VOR (19 Jan 2009)

Well as the loans were to the head of risk and the chairman then I would expect the board to sign off. 
I mean, what type of bank would allow directors to effectively write their own cheque....ah!!!


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## Jethro (19 Jan 2009)




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## Spondulicks (19 Jan 2009)

Window dressing is the technical term used to describe dressing up the published financial statements. One also looks at cut off issues to see what has been redeemed or paid and if it has been reversed after the year end.

The Labour party's idea of sending in an Inspector is a good one. Someone also needs to safeguard the working papers on which an opinion was based and any representations made by the individuals to the auditors to make sure there not doctored. Remember Arthur Andersen and Enron and the shredder in Chicago?


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## Jethro (20 Jan 2009)

Spondulicks said:


> Remember Arthur Andersen and Enron and the shredder in Chicago?


 
The conviction that was later unanimously overturned by the Supreme Court? 

Provided a very convenient scapegoat for the authorities though, and by the time the decision was reversed Andersen was gone.

Great media headlines though, but not a cent for those that lost money...


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## Spondulicks (23 Jan 2009)

Let us see if the regulatory body for accountants has a backbone or not - have we now got a new oversight body down in Naas?


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## John Rambo (24 Jan 2009)

"...True and fair view and free from material misstatement."

The directors' loans in Anglo were clearly NOT material given the size of the business and its loan book, so their omission from the financial statements is irrelevant from an accounting point of view.


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## webtax (24 Jan 2009)

John Rambo said:


> "...True and fair view and free from material misstatement."
> 
> The directors' loans in Anglo were clearly NOT material given the size of the business and its loan book, so their omission from the financial statements is irrelevant from an accounting point of view.



But missing a director taking a loan of over €100m out while providing little or no secutiry _is_ a material mistatement. It shows a culture of avarice and disregard for shareholders funds that would have led to investors asking serious questions about how their money was being used.

There is a reason why directors provide letters of representation & their loans are supposed to be reviewed properly by the auditors.


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## John Rambo (24 Jan 2009)

That is not correct. There's a difference between the directors' loan account and a commercial loan taken out by one of the directors.

Having said that, I'm surprised it wasn't picked up. It's basic Prof 3/Cap II stuff to check a month either side of the year end for unusual transactions. It would seem to me that the Sarbanes Oxley US stuff needs to be implemented in full on this side of the Atlantic - different audit partners supervising jobs etc etc. 

The €100M loan would not have been material...it represents less than 0.16% of the total loan book.


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## webtax (24 Jan 2009)

John Rambo said:


> There's a difference between the directors' loan account and a commercial loan taken out by one of the directors.



But in light of what we know to date the distinction between the two is likely to have been very blurred in Anglo. I doubt that the loans were given to 'Seanie' on anything resembling a commercial basis.


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## tiger (24 Jan 2009)

[broken link removed] in fridays irish times from the Chief Executive of the Institute of CharteredAccountants in Ireland.


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## capall (25 Jan 2009)

Auditing for alot of the big firms is the least profitable of their business streams.
Companies want the cheapest price they can get for an audit. The same firms KPMG,Ernst & Young,PWC etc  earn much more lucrative fees from the firms they audit providing tax advice ,corporate finance advice etc
There is a conflict of interests going on in some cases

The bulk of audit work is done by trainee accountants and the audit partner will review the audit file and sign off . 
In the case of small businesses you can be sure every transaction and balance will be verified but in the case of the AIBs and Bank of irelands ,an audit is a pretty toothless exercise.


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## John Rambo (25 Jan 2009)

capall said:


> Auditing for alot of the big firms is the least profitable of their business streams.
> Companies want the cheapest price they can get for an audit. The same firms KPMG,Ernst & Young,PWC etc earn much more lucrative fees from the firms they audit providing tax advice ,corporate finance advice etc
> There is a conflict of interests going on in some cases
> 
> ...


 
Some of that is true...

However, you don't seem to understand materiality or the audit process. You seem to be ignoring the other staff involved - seniors and managers. Yes, more transactions will be ignored in the bigger companies but that is because the level of materiality is much higher.

Yes, you are right about other areas within the accountancy firm providing greater revenue but to suggest there's anything untoward going on isn't particularly fair.

Also, suggesting companies go for the cheapest audit is not accurate either. Were that the case, the Big 4 would go out of business as they charge significantly higher fees. Usually people use Big 4 for the credibility their name provides, and their international presence.


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## capall (25 Jan 2009)

I believe the current set up with audit firms also providing other services to their audit clients is a problem. It affects their willingness to push hard on audit issues for fear of losing the real money spinning work they have with their audit  clients. 

Transactional auditing is of limited value regardless of what level you set materiality at.  The auditing firms always fall back on the mantra that they must rely on management assurances, in that case what is the real value of an audit ? Not much as far as I am concerned

During company scandals a hue and cry is always raised about where were the auditors,people seem to be under the mistaken impression that an audit opinion is actually of some value and gives some assurance as to the soundness and solidity of the business when in fact it doesn't

Having said all that the auditors in the case of Anglo Irish I believe did not comply even with the basic duties of auditors as outlined by the CEO of the Institute of Chartered accountants in fridays IT letter


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## Bronte (26 Jan 2009)

capall said:


> Having said all that the auditors in the case of Anglo Irish I believe did not comply even with the basic duties of auditors as outlined by the CEO of the Institute of Chartered accountants in fridays IT letter


  I can't open the letter but if what you say is true what is the Institute going to do about it?


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## Jethro (30 Jan 2009)

Bronte said:


> I can't open the letter but if what you say is true what is the Institute going to do about it?


 
There is absolutely nothing at all in the letter that suggests the auditors at Anglo did not do a complete and correct audit.

There is an enormous amount of muddled thinking, guesswork, supposition and hysteria in the media about all of this (and in this thread too). A lot of people seem to have boiled down the situation as follows: Huge loans to Seanie were floating in and out in the month before/after year end and the auditors failed in their duty to spot and report these so the bank collapsed.

I am not too happy to jump to any conclusions unless I can base them on facts. Some facts I know and some are still to be provided.

Fact: The new Chairman of Anglo - Donal O'Connor said at the shareholders EGM that the loans to Seanie were on normal commercial terms and based on the bank's normal lending criteria (security, risk, etc.).

Fact: The new Chairman told shareholders that the terms of the loan facility allowed Seanie to repay part of the loans and draw down amounts subsequently without putting a new agreement in place - he said it was a revolving credit facility. Just like your overdraft and mine, well maybe a bit bigger  This means that movements up and down in the balances might not seem unusual or draw attention.

Fact: The auditors do not have to report on loans to bank directors taken out and repaid during the year. I am sure this will now change, but the fact is the auditors did not fail to report something that they were obliged to.

Question: How many individual loan accounts made up the facility? I don't know and I haven't seen anything revealed on this. So how likely is it that individual transactions would be spotted in a review for unusual transactions around year end. If €100m is immaterial in the context of the bank's accounts then if a number of smaller accounts and transactions made up the whole then they are even more immaterial and harder to pick up. I'd be willing to bet this is not as simple as we have been led to believe.

Question: Has the Seanie loan fuss made a single jot of difference to the value of the bank's total loan book? Have the revelations themselves been shown to have had any effect on the underlying assets? If it's all about his borrowing shenanigans can I assume other bank shares have held firm or even risen while Anglo shares fell? Errrr.....

All I know is that I'm holding fire until I know a lot more about all of this...


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## capall (30 Jan 2009)

OK let me explain how you would audit director loans

How many directors are we talking about ,less then 10.

You take the bank listing of directors balances and you verify this with the individuals involved and the balance on the banks systems
Then you print out an account history for that director say Sean Ftzpatrick ,lets assume that SF has an account number with the bank and all his loans and balances with the bank are shown under this account number. 
How complicated is that ? How long would that take ?

If you think any benign view can be taken of SFs  actions you are on your own I think. As for Ernst and Young their audit procedures were deficient to the point of negligence


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## Damian85 (31 Jan 2009)

There is a statutory responsibility for auditors to test directors' loans and any related party transactions in their fieldwork, and materiality isn't a consideration.

It would be simple to access SF's account details and they were no doubt accessed.

However, as SF's activities haven't distorted the true and fair view of the financial statements, EY had no reason to report it in their audit opinion. Not to be too cynical, but even if EY were to report it, it is unlike they would want to upset the client in question over something as financially immaterial, and put the huge auidt fee they receive at risk.

It certainly does highlight a flaw in the audit reporting mechanism.


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## Spondulicks (31 Jan 2009)

Materiality is not just about the size of the loans. 

Would investors have appreciated knowing that the chief executive who became the chairman was so heavily personally indebted. 

How might they have voted on his appointment if they had been aware of this?

Would they have invested or divested if this information had been made know to them?

Were there conflicts of interest?

Did the credit committee function as indicated in their own procedures? 

How come all directors loans come before the Board of a credit union and even if not provided by legislation, a similar principle would not be followed in a financial institution?

Are the Revenue Commissioners satisfied regarding the disclosure they receive from auditors, tax advisors and directors across all financial institutions or are they enjoying principles based taxation?


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## John Rambo (1 Feb 2009)

Why do people keeping using the term "director's loan" incorrectly? These were commercial loans, not movements in the directors' loan account.


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## capall (1 Feb 2009)

Directors loans are directors loans.

The fact that it is a commercial loan means that there is no taxable benefit to the director and also in the case of a bank that it can exceed the normal 10% rule but it is still correct to refer to them as directors loans

Strangely enough that is why they are required to be disclosed in the accounts as directors loans


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## Jethro (2 Feb 2009)

capall said:


> lets assume that SF has an account number with the bank and all his loans and balances with the bank are shown under this account number


 
"assume" - that's what I mean, all you can do is assume when you don't have the information.



capall said:


> If you think any benign view can be taken of SFs actions you are on your own I think.


 
What benign view? All I've said is that I'd like to see the facts. I know that's a boring view and it's easier to rush to judgment, but hey, I'm strange 



capall said:


> As for Ernst and Young their audit procedures were deficient to the point of negligence


 
I take it you were a member of their audit team then? Or you live with one of them, who showed you their work?

I can't think of any other way you could have access to the work done.

Ok, sorry for the sarcasm, but that is a very sweeping statement you've made there.


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## capall (2 Feb 2009)

Yes,I am assuming that Sean Fitzs loans were actually recorded on the banks loan system ,because if it wasnt then we are really talking about major league fraud here 

I can say that E&Ys audit procedures were deficient because they audited Anglo Irish Bank for 8 years and never detected these loans.
I dont believe that Sfitzs loans were recorded on the back of an envelope so normal correct audit procedures capable of being performed by a first year trainee auditor would have identified what was going on


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## Jethro (2 Feb 2009)

capall said:


> I can say that E&Ys audit procedures were deficient because they audited Anglo Irish Bank for 8 years and never detected these loans.


 
Why would you have audit procedures to detect something that neither presents a material risk nor is subject to a disclosure requirement?


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## capall (2 Feb 2009)

As has been pointed out by a previous poster when something is required to be disclosed in the accounts by specific legislation then materiality is irrelevant it needs to be verified 100%

E&Ys audit procedure for the directors loans was obviously to send out a form to the directors to sign off on the balances at year end and that was the extent of the audit work they did

There is a reason why specific legislation was enacted to disclose directors loans in company accounts,it is important and relevant information for shareholders ,creditors ,employees etc. Even the smallest company is required to disclose directors loans 

The market reaction to the Directors loans issue in Anglo despite the amounts being immaterial in terms of the banks overall lending tells you how critical  directors dealings with the companies they run are regarded.

The fact that Sean Fitz felt it necessary to do what he did also tells its own story. The fact that he could indulge in this simple cover up over years and years also tells us that he had obviously no fear of this being detected by the Anglo auditors


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## Jethro (3 Feb 2009)

Now I'm clear on your points. You don't actually understand the disclosure requirements for banks. That settles it at last. 

Took me a few posts to work out though





capall said:


> As has been pointed out by a previous poster when something is required to be disclosed in the accounts by specific legislation then materiality is irrelevant it needs to be verified 100%


 
You're absolutely correct. And, of course, there is no requirement for banks to disclose the existence of, or movements in, loan accounts to directors during the year, just the balances at year end (it's different for banks). So the auditors didn't fail as regards disclosure. You can't blame them for the rules, illogical though they may seem.



capall said:


> E&Ys audit procedure for the directors loans was obviously to send out a form to the directors to sign off on the balances at year end and that was the extent of the audit work they did


 
"Obviously" ??!! Interesting conclusion to draw. I can't see how you'd know what they did to verify the year end balances. I may also respectfully suggest that if auditors adopted your approach to compiling evidence and drawing conclusions they wouldn't last too long...



capall said:


> There is a reason why specific legislation was enacted to disclose directors loans in company accounts,it is important and relevant information for shareholders ,creditors ,employees etc. Even the smallest company is required to disclose directors loans


 
As noted above, the requirement for banks is different to the requirement for other companies. The latter have to disclose movements, but banks do not.



capall said:


> The market reaction to the Directors loans issue in Anglo despite the amounts being immaterial in terms of the banks overall lending tells you how critical directors dealings with the companies they run are regarded.


 
I've no argument with that. You should certainly be chasing the legislators and regulator on what seems to be a senseless difference in the disclosure requirements for banks. If the rules were the same it's almost certain that none of this fuss would have arisen at all.

I do appreciate that when a company gets into difficulty or even fails it's common for some quarters to shriek at the auditors. All of the big firms have faced this regularly, but it's still extremely rare for negligence suits to be proven. As I mentioned previously, it would be nice and simple in this case to assume that if the movement on Seanie's loans had been disclosed in the accounts each year that all would be rosy in the Anglo garden. But the truth is that it would not have made a bit of difference to the current situation. Go back 12 months or more and people would simply have said that the fact he was investing in property and Anglo shares just showed that he's as smart as everyone else and was making money from such a wonderful strong, ever-rising market. It would probably have been seen as a sign of his own confidence and would have boosted other shareholders' confidence too.

And I AM NOT condoning his actions in moving loans up and down. Like you, I think he's an a**hole, and I wish we were near the end of the situation where cowboys can rise to positions where they can behave as though they were untouchable. But I don't truly believe we are. We see it all the time in business. 

But his loans have nothing to do with the mess. Remember what Joe Moore did with the PMPA group of companies - ignored all rules and common sense and the whole house of cards came down. Now that really was down to the chairman.

I don't know if you saw the recent BBC programme on the 1929 crash and subsequent global depression? The comparisons with recent history were eye-opening. No-one thought the market could ever fall. The global economy (in 1929!!) would keep everything afloat. People borrowed enormous sums to invest in shares and in property. The rest is history...


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