Auditors are not wayfarers, trouble makers, cowboys or money doublers

What had hitherto been a whispering campaign against auditors suddenly acquired a different dimension at the World Economic Forum in Davos, Switzerland from 20th January to 23rd January 2016. Actually, it was the irrepressible Richard Quest, the CNN anchor man and lead “interrogator and inquisitor” who was ever ready to bait some of the most powerful men and women in business, politics, and public service as well as a brace of regulators (and supra-regulators). The stellar performers this year were the likes Axel A. Weber, the Chairman of UBS; Mario Draghi, Chairman of European Bank; James P. Gorman, Chairman of Morgan Stanley and Donald Tusk, President of the European Council.

What sparked off the media frenzy and prompted the vigorous interest of Richard Quest was the news report from Nigeria where the Lagos state Head of Service, Mrs Olabowale Ademola, was quoted as blaming auditors for corruption. According to her, most reported cases of fraud and scandal in the Nigerian public sector emphasised the failure of the internal audit function; of which auditors cannot absolve themselves of the blame.

She said, “We have failed the nation and this failure, to my mind, is directly responsible for the widespread insecurity that Nigeria is experiencing today.” She said auditing represented the cornerstone of good public governance. “Auditors help public sector organisations to achieve accountability and integrity, improve operations, and instil confidence among citizens and stakeholders by strengthening governance responsibilities of oversight, insight and foresight,” she noted. Ademola said the failure of auditors to effectively play their roles must be urgently addressed, stressing that the time had come for auditors in the state public service to expand their horizon and think more radically in the discharge of their duties. “The days of merely cross-checking vouchers against receipts and writing lame copy-and-paste reports are fading fast and would soon be over,” she said.

The retired partners of KPMG who were in Davos in large numbers did not require any prompting to wade into the robust defence of our beloved profession notwithstanding the fact that we have not been paid our gratuity and pension. We summoned a world press conference and made it very clear that our detractors are just being malicious and vindictive. It even reeks of vendetta combined with a vicious campaign of calumny. Our defence of our profession which has served us well and which hopefully we too have served with integrity as well as devotion for several decades was anchored on the theme: “Auditors are not wayfarers, trouble makers, cowboys or money doublers”

We are adamant that there is gross misconception about the role of auditors in the scheme of things and the limits of our powers as well as the boundaries prescribed by the ethics, ethos and fundamental principles of our profession.

This is not to suggest that we have achieved perfection or that we do not have bad eggs (like all other professions) in our midst.

There is no merit in attempting to deny the monumental damage done to the accountancy profession and by extension the role (and integrity) of auditors by the Enron scandal which erupted in the United States of America in 2001.

It eventually consumed the auditors Arthur Andersen & Co. which was among the “Big Five” largest international accountancy firms.

Following the  scandal in which $100bn in revenue from energy giant Enron was found to have sustained itself by means of institutional and systematic accounting fraud, Andersen’s performance and alleged complicity as an auditor came under intense scrutiny. The Powers Committee (appointed by Enron’s board to look into the firm’s accounting in October 2001) came to the following assessment: “The evidence available to us suggests that Andersen did not fulfil its professional responsibilities in connection with its audits of Enron’s financial statements, or its obligation to bring to the attention of Enron’s Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related-party transactions”.

On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron, resulting in the Enron scandal. Although the conviction was later reversed by the Supreme Court, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple (Andersen Legal Dept.) and David Duncan (Lead Partner for the Enron account) were cited as the responsible managers in this scandal as they had given the order to shred relevant documents.

Since the U.S. Securities and Exchange Commission cannot accept audits from convicted felons, the firm agreed to surrender its CPA licenses and its right to practise before the SEC on August 31, 2002—effectively putting the firm out of business. It had already started winding down its American operations after the indictment, and many of its accountants joined other firms. The firm sold most of its American operations to KPMG, Deloitte & Touche, Ernst & Young and Grant Thornton LLP. The damage to Andersen’s reputation also destroyed the viability of the firm’s international practices. Most of them were taken over by the local firms of the other major international accounting firms. In Nigeria, Arthur Andersen metamorphosed into KPMG.

The Andersen indictment also put a spotlight on its faulty audits of other companies, most notably Waste Management, Sunbeam, the Baptist Foundation of Arizona and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the then biggest bankruptcy in history (and has since been passed by the bankruptcies of Lehman Brothers and WaMu in the 2008 financial crisis) led to a domino effect of accounting and corporate scandals that continue to tarnish American business practices.

On May 31, 2005, in the case Arthur Andersen LLP v. United States, the Supreme Court of the United States unanimously reversed Andersen’s conviction due to what it saw as serious flaws in the jury instructions. In the court’s view, the instructions were far too vague to allow a jury to find that obstruction of justice had really occurred. The court found that the instructions were worded in such a way that Andersen could have been convicted without any proof that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The opinion, written by Chief Justice William Rehnquist, was also highly sceptical of the government’s concept of “corrupt persuasion”—persuading someone to engage in an act with an improper purpose even without knowing that an act is unlawful.

Even earlier than Enron, there was the case of Jim Slater in Britain.

From 1967 Jim Slater built a business worth more than £200m, but it collapsed when the stock market and property bubble burst in 1974.

(to be continued next week)

J.K. Randle