Scepticism in Accounting

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Julius Marshall
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1 Scepticism in Accounting Numbers Never Lie (although sometimes they are somewhat misleading) Brett Goodyer Partner Impact Forensics 1

2 Vantage Forensic Accounting The only Forensic Accounting specialist firm South of Sydney and North of Melbourne What do we do? Business Valuations Fraud Investigations AML/CTF Program Setup and Assessment Commercial Litigation/Economic Loss expert work Investigative Accounting assignments Business turnaround 2

3 Back to 1 st Principles Well, Google tells me ac count ant noun /əˈkount(ə)nt/ A person whose job is to keep or inspect financial accounts the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and other decision makers make resource allocation decisions Just in case you forgot what it is that you do 3

4 An Auditor An external auditor expresses an opinion on the reliability of the financial statements of an entity. An internal auditor expresses an opinion on the internal control framework of an entity. Both are required to be professionally sceptical. 4

5 Who are you? Whether you are: An Auditor; Financial Accountant; Management Accountant; Financial Controller/CFO; Tax Specialist; or Any specialist subset Professional scepticism should be a natural state of being, but to what degree? 5 5

6 Professional Scepticism An accountant should be professionally sceptical; An Auditor must be professionally sceptical; A Forensic Accountant is a professional sceptic. 6

7 A Definition Professional scepticism is the propensity of an individual to defer concluding until the evidence provides sufficient support for one alternative/explanation over others. Hurtt (2010) But where on the scale of scepticism do you and should you sit? 7

8 In Practice The opposite of jumping to conclusions or shooting from the hip. It requires a questioning mind and a critical assessment of evidence. It is useless without professional judgement. It means not ignoring contradictory evidence. It also appears to be in short supply 8

9 In the Media ASIC Chairman Greg Medcraft wants to make the financial gatekeepers accountable 17% of all Audit files Big 4 firms failed to provide sufficient evidence to support the opinion given. In small firms this was 31%. Tough stance on audit files: If the auditor hasn't documented the work, the presumption is that the work wasn't done. 9

10 In the Media Centro Property Group Accounts omitted $2 billion in current liabilities and $41.75 billion in financial guarantees; Collapsed in 2007 when it revealed that it was struggling to refinance those shortterm facilities; Shareholder class action against Centro and PWC (auditors) 10

11 In the Media Melbourne Storm and their second set of books. Astarra/Trio and their offshore hedge funds, dodgy audits and National Australia Trustee independence. HIH, and well, their HIHness. Bridgecorp. Westpoint. The auditors are pilloried in all cases, but is it just their fault? 11

12 Just Auditors? But the same attitude or approach should be exhibited by everyone involved in preparing financial statements. Why does it fall to the auditor to detect what should never have gotten into the Financial Statements in the first place? But being professionally sceptical does not just relate to Financial Statements. 12

13 Why the Accountants? We are Financial Gatekeepers We have the advantage of possessing special skills and experience that the general public does not. Being vigilant and diligent in assessing the facts within the framework of our experience and skills and within our area of responsibility is all that we can do. But if we don t ask the questions, who will? The auditors might well miss it! 13 13

14 Management Accountant Possess an intimate understanding of the financial systems, the corporate environment and employee actions Adopt a heightened level of PS with regard to potential for fraud or cost centre manipulation Their unique perspective within the organisation arms them with tools that no one else has If not you, then Who? 14 14

15 Financial Accountants Possess an intimate understanding of the financial systems, the corporate environment and employee actions Adopt a heightened level of PS with regard to potential financial misstatements and fraud. A thorough understanding perspective within the organisation arms them with tools that no one else has If not you, then Who? 15 15

16 CFO Sufficiently removed from the daily collation, analysis and presentation of data to provide a fresh set of eyes. Merely applying strategic long term guidance and high level advice is not sufficient if there is evidence in front of you and you are not asking the questions you ought to. If not you, then Who? 16

17 Characteristics of PS A questioning mind; A suspension of judgement; A search for knowledge; Interpersonal understanding; Autonomy; Self Esteem. Development of a Scale to Measure Professional Skepticism R Kathy Hurtt. Auditing. Sarasota: May Vol. 29, Iss. 1; pg. 149, 23 pgs 17

18 Maintaining and Honing PS PS will dull over time Understanding what may be happening allows you to stay alert to the possibility that it is happening to your client or your business. Networking with peers Professional development Independent study academia 18

19 Maintaining and Honing PS Instinct Tends to be a label given to subconsciously noticing something that you consider unusual. An extension of professional judgement. Takes time to develop, but can be nurtured. May need to be reigned in! 19

20 Some PS Mottos to Live By If you need to be convinced, look for evidence to explain it, not someone to convince you. Make up your mind based upon the information you can get, not the information given to you. Professional scepticism means taking nothing for granted. If not you, then who? 20

21 Conclusions You could be the difference between your client, your company or even you being taken for a ride or being exposed to greater risk than intended It is fine to trust but the ability to evaluate facts and circumstances in light of one s experience and observations will set you apart as a Professional Accountant

22 Questions? 22

Education of Principle Based Auditing. Reference to concepts from Code of Ethics Paul Hurks

Education of Principle Based Auditing Reference to concepts from Code of Ethics Paul Hurks Principle based Auditing Principle-based regulation for auditing: Public interest Professional Accountant Code