AUDITORS TO THE SLAUGHTER
In his 2018 article “The Silence of the Auditors”, Professor Janek Ratnatunga, CEO of the Institute of Certified Management Accountants (ICMA), called for a Royal Commission into the regulation, independence, politics, production and knowledge base of auditors. He stated that while banks were marched like lambs to the slaughter, to sheepishly admit their significant ethical and moral shortcomings in the Haynes Banking Royal Commission, those who audited these financial institutions appeared to have escaped scot-free.
A recent scandal at National Australia Bank (NAB), one of Australia’s Big-4 banks, triggered unanimous bipartisan support for a parliamentary inquiry into the potential conflicts of the big audit firms. Due to start in late 2019, the inquiry is not quite the Royal Commission that Professor Ratnatunga and others called for, but it is welcome and long overdue.
The NAB scandal erupted when a whistle-blower leaked a treasure-trove of documents to Australian newspapers. The documents made for disturbing reading and they shone an embarrassing light on the private workings of the bank and the cosy relationship it had with its auditor of 13 years, Ernst & Young (EY).
Professor Ratnatunga says, “external audits should act as trust mechanisms that assure the public that capitalist corporations and management are not corrupt and that companies and their directors are accountable. But audit is also big business.”
Auditors collect enormous amounts in audit and non-audit fees. In the past decade alone, the Big-4 auditing firms raked in more than $1 billion from the Big-4 banks. EY earned $286 million from NAB between 2008 and 2018. In that same period, ANZ paid their auditor (KPMG) $203 million, and Commonwealth Bank and Westpac paid PwC $330 million and $248.5 million respectively.
While the need to hold auditors accountable is recognised in many countries, Professor Ratnatunga says such calls have been largely ignored. A damning 2015 report issued by the International Forum of Independent Audit Regulators (IFIAR) stated that:
“…there are persistent deficiencies in critical audit areas relating to audit work on the controls within companies designed to prevent abuses, valuation of assets and liabilities, and disclosures of crucial information to the public.”
“In the financial services sector, it seems an independent report is whatever the client’s money can buy,” says Professor Ratnatunga.
The standard audit industry response to criticism is to deny the problem or issue new auditing standards, audit reports, codes of ethics and promises of tougher action. Professor Ratnatunga believes these solutions inadequate, as they all rely on tweaking accounting standards (IFRSs).
Professor Ratnatunga points out that the standards are issued by the IFRS Foundation and the International Accounting Standards Board (IASB) and that the Big-4 accounting firms exercise complete control over those organisations by stacking the Boards and controlling the development, production and modification of accounting and auditing standards.
Professor Ratnatunga says, “consequently, although the public bears the cost of audits and audit failures, it has no right to see audit files or make an assessment of the quality of audit work. It is only when a whistle-blower leaks documents that we become privy to what goes on behind the scenes. And it is not pretty.”
Professor Ratnatunga asserts that, “If the Australian Parliamentary inquiry results in an admission of negligence by auditing firms, they escape liability because under most jurisdictions they do not owe a ‘duty of care’ to any individual shareholder, creditor, employee, superannuation scheme member, or any others affected by their negligence.”
In many Western economies, regulatory retribution is often hampered by the ‘too big to close’ syndrome. However, in early 2018, PwC was banned from auditing listed companies in India for two years after accusations of negligence in its audit work. Indian regulators are also now pushing for a five-year ban on Deloitte and KPMG over allegations the firms helped conceal bad loans at a major infrastructure and finance group that subsequently defaulted in 2018 and triggered a credit crisis.