Tuesday, June 9, 2015

FIFA – Where were the auditors?

In the murky world of international commerce, the directors and auditors of companies are responsible for guarding against operational carelessness and naughtiness of all kinds. Watching them from above are state supervisory authorities; and down in the boiler-rooms are the salaried managers and minions. I’ve been all those things, in my time, except a state supervisor, so very little happens in the world of international commerce that is new to me.

Directors are paid handsomely to direct the strategy of their companies. With the cooperation of outside auditors the directors are obliged to ensure that the Profit & Loss Accounts are a “true and fair” statement of the operations and that the Balance Sheets give a “true and fair” statement of the assets and liabilities. 

There’s nothing particularly onerous in this second, shared, duty. It might require a long time, and cost a lot of money – and they might never uncover any errors. And, there may be no errors to discover. BUT if there are some errors to discover, and they aren’t detected, then the directors and auditors deserve to be held accountable.

Regrettably, good directors and auditors are not as easy to find as they used to be. As long as directors observe the formal regulations set out in their companies’ charters, and as long as auditors pay lip-service to the relevant GAAP rules (Generally Accepted Accounting Principles), then the regulatory authorities tend to give the published Financial Statements a pass.

The blame for every corporate fraud in history rests with the directors and auditors of the enterprise. For some reason, auditors never get as much flak as directors. Speaking as a former auditor, that’s not the way it should be. After all, a company’s auditors only have the one job. They are independent. They have the run of the entire premises of the company, with carte blanche to inspect what they want. Nobody can deny them access to any records – or any physical equipment, come to that.

They can write their own audit programs. As a young man I once got the thrill of my life when one manager rather reluctantly gave way to my request to see some record or other. “I don’t know what use that will be to you”, he said. “Nobody’s ever asked for it before.” The record was indeed of no value to me, in the event – but it was a useful reminder to him that I set the limits to my investigations, not him.

At least, not if he wanted a “clean” audit report. Such a thing was held in higher regard then than it is today. After all, incredibly few companies in history have ever gone bankrupt without a clean audit report. What does that say about changing auditing standards? 

Cayman’s own financial scandals have all arisen because of inadequate auditing. BCCI (Bank of Credit and Commerce International), Parmalat, Enron – and now FIFA. Not a dollar should have gotten past the auditors of any of them, never mind millions. What’s gone wrong, in recent decades?

Every one of those companies’ auditors had an excuse, and I know what it is. The “audit budget” was too tight. Overall budgets (so many hours at so much an hour) are agreed each year between one of a company’s directors and one of its audit firm’s partners, often during a round of golf. The audit partner divides the dollar total by his preferred hourly rates, and the minions are ordered to do their work within the calculated number of hours. (As a mid-level minion, years ago in Canada, I was seriously threatened with firing when I insisted on extra time, beyond the budget. My fellow minions all took the easier path. Ah well, that’s a story for another time.)

The term Enron accounting has entered the dictionaries, but it ought to be called Enron auditing. The current FIFA furore should be bringing down the auditors as much as the directors and officers. The BCCI investigation in the 1980s did result in the demise of one of the world’s biggest audit firms, but all their hotshots quickly found employment with the others. There is little downside in being an audit partner. (I’ve got a personal story about the principles that prevailed in that audit, too, for another day…)