http://www.thestar.com.my/Business/Business-News/2015/03/21/Audits-alone-cant-solve-all/?style=biz

Audits alone can’t solve all

Saturday, 21 March 2015

BY: ERROL OH

Not all audits are created equal. We need to ask questions

BRINGING in the auditors – or at least, promising or threatening to do so – seems to be the standard response to a controversy or a dispute these days. That’s a good thing for the audit industry because it enhances its profile and reflects the high regard for the profession.However, all that goodwill can easily evaporate if people have wrong ideas and unrealistic expectations about audits. Perhaps the worst thing that can happen to the audit industry is for the public to believe that an audit will uncover all truths and therefore neatly resolve a complex problem. That can only end in disappointment.

We must understand that not all audits are created equal. The same goes for auditors. Whenever somebody announces a special audit, here are a few questions to bear in mind:

• Do we know exactly what the auditors have been asked to do?

When performing an audit, everything that an auditor does is based on the terms of reference agreed upon by him and the client. These usually spell out the auditor’s role and responsibilities, the scope of work, what the auditor requires, and what he will produce at the end of the engagement.

The terms of reference determine how much work will be done and how the findings will be presented; they’re akin to a set of instructions from the client.

We can’t assume that an auditor will sniff out any irregularity once he’s called in to go through a company’s books. It depends on where he and his team are looking, and what they’ve been asked to do.

For example, if an auditor is hired to verify a company’s transactions and balances with selected trade debtors, it’s highly unlikely that the audit will detect fraud using bogus vendors. It would be like a misdirected game of hide-and-seek, in which the seeker is told to search only the bedrooms when the hiders are all in the kitchen.

Also, the thoroughness of an audit hinges upon access to information and the audit fees.

An auditor’s work hits a barrier when certain information isn’t made available. Perhaps the client cites reasons for withholding it. A third party refuses to cooperate. Or the records have gone missing. This may be significant enough to limit the audit findings.

The size of the fees also influences the time and effort spent on an audit. The right thing to do would be to design an audit that would satisfy the requirements of the terms of reference and to set a fee based on the work to be done. However, in the real world, not every client will say yes to the fee quoted. There’ll often be negotiations, and in that process, the compromises may include scaling down the work.

• Who pays for the audit, and who does the auditor deal with?

This question relates to the independence of the auditors and how their findings are shaped.

In the case of annual audits mandated by the Companies Act, the companies pay the audit fees and the auditors’ reports are addressed to the shareholders. However, the auditors engage a lot more with the companies’ directors (especially members of the audit committees) and key executives than they do with the shareholders.

The auditor-client relationship is sometimes less clear when it comes to special audits. Typically, it’s the boards that commission the special audits, sometimes without the knowledge of shareholders or the obligation to report to them. And yet, the fee comes from the companies’ coffers.

Can an audit be conducted with total independence if the auditor reports to interested parties or if there’s little transparency on the exercise?

• What happens to the audit findings?

An audit is only as good as the findings it yields. If there’s no commitment to publicise the audit report, how will people be assured that all has been revealed? Or that the audit has examined the right areas?

One aspect that complicates this is that most auditors want to be indemnified if their reports are to be made public. They fear that the legal fallout from the release of the reports will be costly and damaging.

For the man in the street, it should be all about transparency and how strongly professionals stand by their work, but apparently, things are not that simple.

• What happens after the audit?

An audit alone can’t solve much. It’s the response to the audit findings that matter most. If the audit exposes wrongdoings, will there be further efforts to gather evidence so that action can be taken against the alleged culprits? Will there be enough will to rectify the weaknesses highlighted by the auditor? The best way to give an audit a good start is to pledge to share the findings and to act upon them.

Executive editor Errol Oh hopes editors will never be confused with auditors.