Monday, September 20, 2010

DFSA Calls for Audit Improvements

Apparently heeding the comments of  The Rageful Cynic on this blog,  Paul Koster, CEO of the DFSA called for improvements in local auditing as reported by Tom Arnold at The National.
“Are auditors doing enough in that respect? I don’t think so,” said Mr Koster. “I think one of the key areas where auditors right now can gain momentum in the level of trust they provide to the financial market is to increase the level of scrutiny and scepticism in regard to the judgement of management in valuations.”
There's the usual commentary as well about the  need for auditors to get more training so they can understand complex financial instruments.

But the most telling quote of all is at the end of the article.
Auditors speaking to The National have previously accused Gulf companies of using similar accounting practices to mask bad assets and called for greater safeguards to avoid such methods.
Accounting in the GCC is based on IFRS which is a principles and not a rules based approach (the latter being the system in the USA).

Under a rules-based system, the accountant and auditor merely ticks the boxes.  If enough boxes are ticked, the transaction passes the test.  Form may over rule substance.

Under a principles-based accounting system, accountants and auditors are to look behind the form of a transaction to the substance.  The Lehman Repo 105 was a very clear scheme to get around the rules.

That local auditors are whining about violations and doing nothing to stop their clients is a very clear indication that the problem isn't training.  It isn't greater skepticism (or scepticism).  It isn't a lack of scrutiny.  

Very simply put, it's a lack of professional ethics.


Laocowboy2 said...

Ethics true - but the regulator needs to show that he is ready to back up the auditor(s) if they go head to head with the client. Having sat on the client side I have been able to see the pressure that can be brought (supported by sophistry) on the auditors in terms of veiled threats of loss of business not only from the client but from acssociated companies (sometimes including the quasi-governmental sector).

There are also cases where auditors (or individual managers) have gone to regulators with ,atters that concern them only for the "problem" to be buried.

Perhaps there should be a standing rule that changes in auditors be a matter which regulators should always examine in case there are non-commercial 'reasons".

The Rageful Cynic said...

Simply a well-timed comment on my part in response to a well-timed post by yourself... So if we end up in a hyper-regulated market you have only yourself to blame :)

I agree with Laocowboy, without the backing of regulators or government entities, auditors may be unable, or unwilling, to go head-to-head with firms.

Especially in this part of the world where connections and the continuation of "good standing" with high profile, powerful local firms can mean a lot to auditors.

Abu 'Arqala said...

LC2 and TRC

I take your points.

I have seen them in action. And in another part of the world, I have seen a regulator go "blind, deaf and dumb" when I - non auditor - informed him of a financial crime well beyond fiddling with the accounts.

Even if the regulator backs up the auditors, I don't think that solves the problem. The client could always move business later or not award new business to the "offending" firm.

It would be hard to link to disputes. A quiet word and the preferred firm could adjust its bid to become competitive. Impressions of team quality could tip a bid.