IGTA Journal - Summer 2020

Falling in the trap The auditors seem to fall always in similar traps. The Wirecard payment firm default is the best proof of the risk of inappropriate audit. The company admitted recently the EUR 1,9 billion of cash “probably never existed”, then it collapsed. It seems that auditors have failed for three years in a row to request crucial pieces of information from a bank based in Singapore. The auditors have relied their review on documents and screenshots coming from third party trustee or from the company itself. Doesn’t it ring a bell? It reminds us of the Enron, or closer to us, Parmalat in 2003 (i.e. A 3,9 blillion EUR held offshore and forged). There are other interesting examples of failures. Does it show a deterioration of audit quality that is unacceptable? Does it come from an exceptional situation and fraudsters well organized? Difficult to claim. However, we should make sure there is no deterioration of external audit quality, in general. Is WIRECARD the tree that hides the forest? Is WIRECARD, as we use to say in French, the tree which is hiding the forest? They sometimes find an agreement on a big fine although the damages can be much bigger. In the ENRON case, it went up to the bankruptcy of the audit firm (one of the big fives). Therefore, it is not the first time an audit firm (even a large one) had displayed an unacceptable lack of curiosity about how and where a multinational corporation has parked its liquidities. In another case, JPMorgan also mixed up client money and own funds for billion of USD, audited by a large audit firm. First thing: all have been hit at a moment or another. The fines (when applied) aren’t in proportion to the damages, in my view. The construction group Carillion was also glued in a similar case, and in Belgium, Lernout & Hauspie was one of the major scandals ever with Moneytron. Therefore, the last omission and failure to check on where a customer stored money, is important given the size of the company, the country, the DAX index participation, and amount involved. Even if it was a collusive fraud, it is the duty of auditors (and they do) to control directly from the bank the amounts on the accounts and not to rely on third party and client confirmations. It is one of the major principles young auditors learn. Fast closing and fees cutting do not help improving quality The fact customers pay less and less and want faster closing, does not contribute to increased audit quality. However, the base principles must be kept protected. Excess cash on bank accounts is maybe the most important one. As for rating agencies, the auditors (and CRA’s) are paid by customers (by issuers), rather than by a third party, more independent, like a supervisor. You can be tempted to reduce costs and indirectly to impact accounts review quality. The cheaper, the lighter the audit review, I guess. They also run audits because they expect lucrative side businesses like advisory, tax or other services. The business model is a bit truncated by the cheap audit subsidized by expensive advisory (to compensate). It is always at the expense of audit quality. Again, we cannot generalize the situation. However, it is a real risk. There are potential conflicts of interest that regulations try to mitigate. The split between both may help in better pricing audit services IGTA eJournal | Summer 2020 | 28