The latest string of accounting problems and stock plunges across the globe yet again bring to the centre stage the role played by the auditor.
Now, sniffing out fraud is no child’s play. No police can hope to prevent every crime. Nonetheless, such frequent scandals call into question whether this is the best the Big Four: KPMG, Ernst & Young (EY), Deloitte Touche and PricewaterhouseCoopers (PwC) can do. And if so, whether their efforts are worth the high fees they collect in annual audit fees.
On account of these mistakes, the gap between what auditors’ believe is their full stretch of responsibilities and investor expectation has kept growing wider.
Key questions here include; are the Big Four becoming more negligent in their duties or more prone to enabling big risks in accounting? Have they become too secure in their positions? Is this concentration bad for the industry?
Before we jump into conclusion, let’s first refresh our memory on a few scandals. In 2010 Jon Carnes, a short seller, sent a cameraman to biodiesel factory that China Integrated Energy (a KPMG client) said was producing at full blast, and found it had been dormant for months. Stock plunged over 90 per cent and the company was eventually delisted from Nasdaq.
The next year Muddy Waters, a research firm, discovered that much of the timber Sino-Forest (audited by EY) claimed to own did not exist. Stock lost over 95 per cent of its value.
Last year, Steinhoff International Holdings (audited by Deloitte), the JSE-listed furniture and clothing retailer, was pushed to the brink of collapse following an accounting scandal that spanned several years.
Its stock lost over 85 per cent in a matter of days. This year, India’s securities regulator has banned PwC from auditing listed companies in the country for two years after failing to identify accounting fraud at Satyam Computer Services.
Same story applies locally. In 2012, the Capital Markets Authority (CMA) accused CMC Holdings, a listed motor dealer, for operating secret offshore accounts amongst other financial malpractices.
Two years ago, it was revealed that Uchumi Supermarkets was cooking its books to hide massive losses to mislead investors. In the same year, Mumias Sugar was also on the regulators crosshairs for cooking books.
In each case, the Big Four auditors gave “clean” audits.
My conclusion on this matter is this: An auditors’ assignment is to give an “opinion” meaning there’s no “guarantee” that audited statements are ever correct.
They merely opine on whether financial statements meet accounting standards. Theirs is to “obtain reasonable assurance” that accounts are “free of material misstatement”. Consequently, don’t expect audits to have the rigour of forensic investigation.
Further, in an oligopoly of four – they control 80 per cent of all auditing business for listed companies at the NSE—challenging their dominance remains a tall order. Auditing listed firms is a lucrative business and one that will always play into the strengths of the Big Four.
So, what does this mean to you? It means that the auditor cannot save you from falling victim to dodgy accounting. You’re on your own.