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…)