Artikel ini disumbangkan oleh seorang lagi rakan penulis yang juga sedang mengikuti pengajian Sarjana 'Forensic Accounting and Financial Criminology'.
The ethical principles governing your professional responsibilities as an auditor include independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour and technical standards. There are few ethics issues in auditing that shown where there is no code of ethics, or where the code of ethics permits a degree of conflict of interest, the auditors tread at their own risk. The most common issues are on independence and competence.
Issues in professional independence
As an approved auditor, you should maintain a high level of professional independence at all times. The lack of independence may be considered a contributing factor to unsatisfactory performance, especially where you are involved in the day-to-day management of a fund or are in a position to influence the fund’s decision making processes. The SEC claimed that auditors failed to exercise due professional care in 71% of the enforcement cases and to maintain an attitude of professional skepticism in 60% of the cases. In general, this failure on the auditors’ part can be found throughout the sanctioned audit engagements. There are several cases that can be lessons for other auditors in professional independence.
Cap Gemini (French Company) and Ernst & Young, Potential Self-Dealing case
Responding to SEC criticism of ostensible conflicts of interest, some major accounting firms, such as KPMG and Arthur Andersen, have spun off their consulting arms as independently owned and managed entities. Ernst & Young LLP chose another route. The story of E&Y and its alliance with Cap Gemini leads from a regulatory no-action letter to a court case alleging breach of the accountant's fiduciary duty. The tale leads to "lessons learned."
Independence of Auditors: SEC No-Action Letter to Ernst & Young LLP on Alliance with Cap Gemini Ernst & Young LLC. By no-action letter dated May 25, 2000, the SEC's Chief Accountant advised Ernst & Young LLP that it would consider E&Y to maintain its independence even though Cap Gemini Ernst & Young were to provide IT services to E&Y audit clients. The no-action letter imposed a number of conditions that
(1) limit at the outset and within five years end E&Y's equity interest in Cap Gemini;
(2) impose limitations on Cap Gemini's use of the E&Y name;
(3) require a strict separation of E&Y and Cap Gemini's corporate governance;
(4) forbid any revenue sharing between E&Y and Cap Gemini;
(5) forbid any joint marketing agreements between E&Y and Cap Gemini; and
(6) restrict any shared services between E&Y and Cap Gemini
Unfortunately, an SEC no-action letter is not a vaccine against client lawsuits. Accountants engaged in management consulting should pay careful attention to a ruling against Ernst & Young, LLP ("E&Y") and its successor in interest (by sale of consulting business), Cap Gemini Ernst & Young, U.S. LLC ("CGEY"). This case is instructive to anyone in a licensed professional capacity engaged in ancillary or multidisciplinary consulting practice.
In a pre-trial ruling in early January 2002 on a motion to dismiss, without deciding the final outcome, the court found that E&Y was potentially legally subject to claims of breach of fiduciary duty and punitive damages arising out of a failed software implementation by CGEY, a company in which apparently E&Y is a substantial owner. (The was no allegation or showing of a failure to exercise the skill and care of a reasonably diligent accountant, so the court noted that there were no claims of professional malpractice (whether relating to accounting or computer consulting).
The alleged facts of the case, if true, would be particularly egregious. The following reports are provided according to the court's pre-trial decision. Whether the allegations will be proven remains to be seen.
In June 2000, E&Y recommended to a client, a medical and nutritional company, to retain CGEY as the vendor to implement a commercial off-the-shelf software package that the client had selected, based on E&Y's recommendation, for its short and long-term business needs. E&Y made a number of representations to the client to induce the client to hire CGEY, and the court concluded that, without those representations, the client would probably have selected another IT service provider. E&Y reportedly represented that
(1) CGEY was competent, experienced and qualified to implement the system selected by E&Y, and
(2) CGEY's performance of services had already been "coordinated" with E&Y.
A fiduciary relationship existed between the accounting firm and its client for several reasons. First, the client had developed a relationship of trusting the accounting firm's judgment based on prior professional services. Second, the accounting firm offered to provide additional consulting services. Third, the medical and nutritional company was less sophisticated than the accounting firm in the "specialty" for which the accounting firm and the services firm were hired.
When a fiduciary fails to disclose personal interests preliminary to contract, and/or represents the existence of a questionable competence and experience critical to the contract and procures a benefit such as that alleged to E&Y and the newly formed CGEY, the risk of liability for the negligent misrepresentations and a question of fraud is properly alleged." Atkins Nutritionals, Inc. v. Ernst & Young, LLP, NYLJ, Jan. 10, 2002. Accordingly, a fiduciary relationship arose and could have been breached if proven at trial.
KPMG Canada case (Lack of Independence.)
In June 2005, the Securities and Exchange Commission entered into a settlement, in an enforcement action, with KPMG LLP (KPMG Canada), a Canadian audit firm, and two of its partners, Gary Bentham, the audit engagement partner, and John Gordon, the concurring and SEC reviewing partner. The SEC asserted that KPMG Canada, Bentham and Gordon lacked independence when they audited the 1999 through 2002 financial statements of Southwestern Water Exploration Co. (Southwestern), a now-bankrupt Colorado corporation.
The SEC claimed that KPMG Canada provided bookkeeping services to Southwestern and then audited its own work. Specifically, after KPMG Canada prepared certain of Southwestern’s basic accounting records and financial statements, it issued purportedly independent audit reports on those financial statements. KPMG Canada’s audit reports were included in Southwestern’s annual reports that were filed with the Commission.
The SEC found that KPMG Canada, Bentham and Gordon engaged in “improper professional conduct” within the meaning of Rule 102(e) of the SEC’s Rules of Practice by virtue of their violations of the auditor independence requirements imposed by the Commission’s rules and guidance and by generally accepted auditing standards in the United States.
Issues of professional competence
The auditor should be professionally competent, having the skills and knowledge to conduct the audit assignment, and he/she should maintain professional competence through appropriate continuing professional education and training.
CAs in public practice are especially vulnerable to risk if they don't stay up to date on the latest developments in auditing and accounting. This fictionalized account case describes the missteps that landed one of CAs members in front of the Professional Conduct Enquiry Committee (PCEC). Names and circumstances have been changed to preserve anonymity.
Bill, a sole practitioner, won the NPO audit engagement. Funded by a government agency, NPO had a number of branches throughout the province. The agency's funding agreement limited administrative expenditures, forbade expenditures in defined conflict of interest situations, required proper documentation, and required the auditor to report all unresolved issues in a management letter, regardless of materiality.
NPO's previous auditor had qualified his audit opinion for two reasons: five of NPO's branches hadn't produced sufficient supporting documentation for expenditures, and the audited statements from two branches had not been received. (These two branches operated independently and appointed their own auditors.)
Bill was confident he and his only staff member, Robert, a CA student, were up for this exciting but challenging audit.
A number of issues arose during the audit:
* The audited financial statements from the two independent branches were received, but Bill failed to notice that they hadn't amortized capital assets, as was by then required under the funding agency's policies. Bill had not informed the other auditors of this change.
Robert vouched a sample of expense items and noticed that ten items were not properly documented. Bill concluded that these were either satisfactorily explained or not material.
* Robert also found that NPO had administration expenditures in excess of the funding agreement's limitations. Bill subsequently stated that officers of the funding agency had assured him these excess expenses would not be challenged. Bill did not obtain confirmation of this departure from the funding agreement and did not report the matter.
Shortly after Bill issued his unqualified audit report, the government agency did a review of the grant to NPO. That report recommended disallowing material expenditures based on inadequate documentation and conflict of interest violations. Given the unfavourable review, Jim, the agency employee responsible for following up on these recommendations, was surprised that Bill's audit report was unqualified and that his management letter didn't address the expenditure issues found by the agency. Furthermore, he noted that the financial statement format did not comply with new CICA Handbook recommendations. Jim was concerned enough to refer the matter to the PCEC.
The Outcome
The PCEC found that Jim's concerns were valid, determining that Bill had breached several rules, particularly Rules 203 and 206:
Rule 203 requires that a member sustain his professional competence by keeping himself informed of, and complying with, developments in professional standards.
Rule 206 requires that a member in public practice perform his services in accordance with generally accepted standards of practice of the profession, including the recommendations set out in the CICA Handbook
The PCEC determined that Bill had not obtained sufficient audit evidence and had failed to document important matters. Most significantly, Bill could not demonstrate how he'd resolved the outstanding ten sample items. Bill's failure to comply with new CICA Handbook recommendations, and the absence of amortization of capital assets for two branches were of additional concern to the PCEC.
Because of the above breaches, the PCEC also found that Bill had breached Rule 202 by not performing his professional services with due care.
In addition, Rule 205(a) prohibits association with written statements that a member should know are false or misleading.
The PCEC felt that Bill should have known the audit report and statements were misleading.
The funding review made NPO and the funding agency aware of Bill's lapses. Accordingly, the PCEC concluded Bill had also breached Rule 201.1 by failing to maintain the good reputation of the profession.
Bill accepted the PCEC recommendation that he be issued an anonymous reprimand, attend a number of professional development courses, agree to a third party tutor file review prior to the release of any assurance reports for one year, and pay the costs of the investigation and a significant fine.
The Message
Bill had considered himself relatively up to date, but it had been a while since he'd undertaken any formal training in auditing and accounting. The PCEC investigation led him to strengthen several areas, but he's still not sure he'll ever reverse his loss of credibility with NPO and the funding agency.
As the business world becomes increasingly complex, members need to sustain individual professional competence by keeping abreast of and complying with developments in professional standards. This is especially important for small practitioners who don't have access to a national standards group to help keep them current.
