Auditor's dilemma

Hi all,

I just wanted to share with you a real-life story of one of my accounting professors.

Just to give some context: My professor was a fresh manager in one of the big four accounting firms in India and he was assigned to do an audit of a company that runs coal-mining operations. (He mentioned that coal-mining operations were notoriously abused for its ability to launder money as it has high cash balances and inventory.) He went there with his team of auditors 3-5 people (did not mention exact number) for a week.

The coal mine was located in a rural part of India, you had to take a domestic flight then a 5-6 hours drive to the actual site of operations. When he reached the site for his audit he felt that the atmosphere was some what hostile. The employees would be avoid talking to the team or be slightly evasive when talking to them. After a the first two days, one of the employee came up to him and said to him: "Lets take a walk, I have got a story to tell you." So he brings him aside and tells him a story about a former auditor.

The story goes... [A couple of years back, there was this auditor, young and very hardworking. He did his audit very well and he found a material misstatement in the cash balance. He followed protocol and submitted a report back to his audit partner to indicate that there was a material misstatement. The partner then informed him that they will look into it and for him to wrap up the audit and come back. However, this auditor being very diligent decided he would do more digging. He found other smoking guns within the company's financial accounts and wrote up another report. The next day he was found dead on the railway tracks.] 

Now, just put yourself in my professors' shoes for one moment. What are you going to do? Someone just threatened your life. Are you going to do the same level of digging? 

My professor did complete his job of reviewing the cash balance, but he did it intelligently without breaking any laws. (Whether it was ethical, I will leave it for you to decide.) 

The next day at lunch, he got his team of auditors to seat at the other end of the canteen. Then he shouted over at them and said "Hey team, let's do the cash count on thursday!" Sure enough when they did the cash count, the numbers tied exactly.

The point of this story is to emphasize the point that auditors only express their opinion on whether the financial statements are free of misstatements. (Please note: Although the financial reports are prepared by the auditors. All numbers are provided by management.) Hence, I would like to point out that some numbers do lie and also don't completely rely on financial statements.

It is very important to know the role you are playing. If you are an investigator, do what your role permits, rather than trying to be a judge.

(General) auditors are GPs of the clinic. You smelt a rat in any "disease-spreading events", escalates up after the initial work within your capacity, rather than trying to fight it alone. We need GP role to contain the "cost" for medical treatment. It is a waste of resources to see a specialist for flu. The same for "general" auditors, IMHO.

There are several means for the auditor. To abstain from opinion, report to law enforcement for a potential fraud, or express an opinion of concern(s), among others.

(20-04-2017, 11:20 AM)YMPL Wrote: It is very important to know the role you are playing. If you are an investigator, do what your role permits, rather than trying to be a judge.

(General) auditors are GPs of the clinic. You smelt a rat in any "disease-spreading events", escalates up after the initial work within your capacity, rather than trying to fight it alone. We need GP role to contain the "cost" for medical treatment. It is a waste of resources to see a specialist for flu. The same for "general" auditors, IMHO.

There are several means for the auditor. To abstain from opinion, report to law enforcement for a potential fraud, or express an opinion of concern(s), among others.

In this case it is like this, patient puts a gun up to the GP and says give me a report that says I am fine. Is the GP going to say you are unwell?

"There are several means for the auditor. To abstain from opinion, report to law enforcement for a potential fraud, or express an opinion of concern(s), among others."

In Singapore yes. I wish to highlight this was in India, where corruption is rampant. A report to law enforcement might not result in a single thing being done. Additionally, would you take that risk knowing that maybe even the police may not be on your side? And what for to be dead but right? 

As for expressing an opinion, the previous dead auditor was very gunho and tried very hard to put out a report, digging deeper into the company's operations. Obviously there was some issue of partners' not following up seriously on the dead auditor's report. I am not in anyway condoning the actions of my professor but I am very certain that given the circumstances a reasonable person would be swayed to act in the same manner.

On a side note, my professor tendered his resignation soon after this incident.

it's expected... wat can u do as auditors? the best way out is to get out asap, no point endangering ur life over a job!! :O

(20-04-2017, 11:45 AM)Duskerdawn Wrote: In this case it is like this, patient puts a gun up to the GP and says give me a report that says I am fine. Is the GP going to say you are unwell?

Well, If I am the GP, I will give him the report, and then report to authority after I am safe to do so. In real life, the patient will not demand it with a gun but go to other doctors who are willing to do it for a fee.   . In short, it is a question, whether the "fee" is important to you.

(20-04-2017, 11:45 AM)Duskerdawn Wrote: "There are several means for the auditor. To abstain from opinion, report to law enforcement for a potential fraud, or express an opinion of concern(s), among others."

In Singapore yes. I wish to highlight this was in India, where corruption is rampant. A report to law enforcement might not result in a single thing being done. Additionally, would you take that risk knowing that maybe even the police may not be on your side? And what for to be dead but right? 

As for expressing an opinion, the previous dead auditor was very gunho and tried very hard to put out a report, digging deeper into the company's operations. Obviously there was some issue of partners' not following up seriously on the dead auditor's report. I am not in anyway condoning the actions of my professor but I am very certain that given the circumstances a reasonable person would be swayed to act in the same manner.

On a side note, my professor tendered his resignation soon after this incident.

Why you bother on the "effective" of law enforcement, as a "general" auditor? You do what your role mandate. In your story, the auditor was trying to "prove" beyond the role. He smelt a rat and raised a doubt. Let "partners" do the rest.

For the on-the-ground auditor, it's just a job. The fat fees goes to the partners who are usually not even on the ground but they are the one who decide whether to take the job. The only "safe" way they will report any irregularities is when they are back home. Then there is the question of who will check the irregularities.

Would you do the job? It's easy to say how it should be done when we are in the safety of Singapore highly regulated system which has a culture of punishing crimes. But sometimes it makes us believe that the whole world works like this.

http://www.smh.com.au/world/thailand-rev...3oy7r.html

Personally I think the numbers are good enough because there are always clues that one can pick up, eg the cash doesn't flow, the efficiency or margins is abnormally high, products / factories are not where they are supposed to be, etc. That said I find it incredibly difficult to say with any certainty what a resource / commodities company actually has except what it has produced historically ie execution vs hope.

https://www.valuebuddies.com/thread-8036...#pid138503

PS I would still add that it makes more sense that SGX appoints auditors for the listcos and pay them out of a listco contributed fund to reduce conflict of interest.

(21-04-2017, 07:54 AM)specuvestor Wrote: PS I would still add that it makes more sense that SGX appoints auditors for the listcos and pay them out of a listco contributed fund to reduce conflict of interest.

Then if got a scandal like Enron, sgx would be affected very badly, don't they want to take that risk

(21-04-2017, 10:23 AM)zz... Wrote:

(21-04-2017, 07:54 AM)specuvestor Wrote: PS I would still add that it makes more sense that SGX appoints auditors for the listcos and pay them out of a listco contributed fund to reduce conflict of interest.

Then if got a scandal like Enron, sgx would be affected very badly, don't they want to take that risk

They are just an independent "regulator"... why would they be at risk... so much so as sgx listcos blowing up

(21-04-2017, 02:02 PM)specuvestor Wrote:

(21-04-2017, 10:23 AM)zz... Wrote:

(21-04-2017, 07:54 AM)specuvestor Wrote: PS I would still add that it makes more sense that SGX appoints auditors for the listcos and pay them out of a listco contributed fund to reduce conflict of interest.

Then if got a scandal like Enron, sgx would be affected very badly, don't they want to take that risk

They are just an independent "regulator"... why would they be at risk... so much so as sgx listcos blowing up

I would actually love the idea that SGX appoints auditors for the listcos. However, I think its highly unlikely that it will happen. 

Would like to add hypothetically speaking, if there is a scandal, it is still the auditor who gets into trouble. Auditor is still the main party responsible for the audit since they have failed in their audit. 

SGX doesn't audit the company, it appoints. (Unless a lawyer argues that SGX was negligent in hiring a professionally qualified auditor...etc. Some other argument along that lines.)