The Auditor and Fraud

More good stuff from the publication Accountancy Age. In the same issue it takes a look at separate legal cases in the UK and the US regarding the liability of Auditors when they fail to detect fraud in the company, particularly where the fraud is being committed by top management.

Auditor not Liable

In the UK case (details here) the court found that the Auditing and Accounting firm Moore Stephens was not liable for damages despite their failure to detect fraud by the boss of Stone and Rolls against his own company. In his judgment in the Appeals Court Lord Justice Mummery described providing a company that perpetrated rather than suffered the fraud as being “contrary to all common sense”.

This case may still be appealed to the House of Lords.

Auditor Liable (maybe)

In the US case (details here) Earnst and Young have been returned to court (after a previous success in the case) to face another hearing in respect of a decision by the bancrupcy court that E&Y are liable for $70 million in damages for not spotting the fraud, The fraud itself was undertaken by the senior management of a company called BCI Holdings. They manipulated the companies inventory figures to ensure that the CEO received an inflated bonus.

So What?

So liability and the auditor is a very serious issue. It is a key issue at the commencement of the audit and the “audit risk” is just a euphimism for potential faults in the Auditors planning and execution – and the resulting potential litigation. So the subject of Auditor Liability being considered in a court case is always worth keeping an eye on. In the case of Ireland, these cases (and the one in the UK in particular) always has the potential to become guiding precedent for the Irish Courts. Therefore these decisions could have an impact well beyond the immediate protaginists.

I for will be watching the ultimate outcomes with great interest.

Sometimes you need Good Advice

I have always been in favour of people researching and making their own decisions regarding the financial issues in their business. This has been gravely tested as the case of the actor Wesley Snipes (he of “White Men Can’t Jump” and “Blade” fame) has unfolded over the last few months. Mr Snipes has been up in court for tax evasion. What is interesting about the case is not that he tried to hide income or under-declare what he earns, rather he was of the view that the Federal Income Tax in the US is illegitimate, and therefore he did not make tax returns between 1999 and 2001.

Choose your Advisors Carefully

In the US, there is a special type of tax advisor who questions the legitimacy of the whole tax system and whether there is a legal requirement to pay Federal Taxes in the US. While there has not been much success in the arguments, a very large scalp has recently been taken by the Inland Revenue Service in the US, with the sentencing of Wesley Snipes to three years in prison for failing to file and pay taxes.

Indeed, based on the advice of a “tax activist” Eddie Ray Kahn and “tax preparer” Douglas P. Rosile Snipes amended tax returns, including the one for 1997 that originally showed a tax liability of more than $7m, restated his liability as $0 and requested a refund. This kicked off a series of events which have resulted in a situation where Snipes now finds himself on bail while he appeals the aforementioned three year sentence. So the advice may have been a bit off.

Wesley Snipes – May have to get used to this pose

Make sure your Advisor Really Knows what they are Talking About

So what is the conclusion here – make sure that you are getting good advice on stuff that can cause you to end up in jail. There are times where the only thing that is acceptable is to actually talk to people who have the training and experience to do the job.

No excuses, no way out.

American Accountants can use International Financial Reporting Standards

Accountingweb.com is reporting that the American Institute of Certified Public Accountants has voted to allow the use of International Financial Reporting Standards as an accepted part of American GAAP. The vote has the long-term potential to facilitate IFRS becoming a de-facto worldwide standard.

Not a Full Move to IFRS

In their press release on the matter, the AICPA point out that they are adding International Financial Reporting Standards to existing American Accounting Standards as an acceptable form of GAAP in which Companies can report. In practice this means that American Companies can continue to choose to report using American Standards, or choose to move to IFRS. In practice only time will tell whether there whether there will actually be a move to IFRS. While there may be advantages to a company that trades or is quoted on multiple stock markets in standardising on IFRS, there may not be a compelling reason for smaller companies in the US to do the same.

Why Could this be Good News?

A very strange thing happened in 1993. Daimler-Benz AG, the first German joint stock company to be listed on the New York Stock Exchange, issued financial statements under both U.S. and German GAAP. In the accounts produced under German GAAP the company reported a profit of 168 million Deutschmarks while under US GAAP they reported a loss of almost 1 billion Deutschmarks. So the obvious question is “which one is right”?

The answer could be “it doesn’t really matter” – the real issue is the confusion that such a conflict causes among investors, analysts, reporters, and anybody else who is trying to work out how the company is doing. Financial reports such as the Daimler do a great disservice to everybody involved. The key to the usefulness of accounts is their consistency so that they can be used for comparison purposes. So anything that helps clarity has to be good.

This is potentially great news – lets just watch how this plays out?

Setting an Appropriate Level of Regulation

As an industry, audit practice is subject to at least two levels of scrutiny and regulation by parties external to the audit firm itself. In addition there will also be an internal quality assurance mechanism in anything but the smallest practices. This scrutiny and attention to compliance is justified to a large extent by the many scandals that have seen some form of audit failure, however there must always be a balance between the level (and therefore cost) of regulation and the level of risk that is mitigated that is achieved by what appear to be ever increasing levels of scrutiny and regulation.

But if some Regulation is Good isn’t More Regulation Even Better?

The logic in a statement such as this is quite seductive – especially where the effects of the of the regulation have yet to be fully worked out, and where the wider community is in the grip of a news frenzy following the discovery of another scandal. And this is very understandable, the losses to many people in, for example, the collapse of Enron were very real. Peoples pension funds were destroyed, investors lost plenty, and confidence in the capital markets was severely undermined.

For years we in the auditing profession have countered this with an argument that there is a danger of over-regulation, and that over-regulation could result in a range of consequences from large increases in compliance costs to flight from markets that are considered over-regulated to less regulated, but this was largely speculation. There is evidence coming through however that this is now coming to pass in some jurisdictions.

Sarbanes Oxley

Following the collapse of Enron, the Houses of Congress in the United States implemented the Sarbanes Oxley Act (sometimes known as “SOX”). Understandably the act sought to prevent such a collapse in the future by implementing a significant regulation and compliance regimen on all companies quoted on the Stock Markets of the US. Many companies have found the implementation of SOX an arduous task. This has led to a number of unintended consequences, including US Companies moving off-shore, Companies which trade on both US and International markets withdrawing their US listing, companies choosing not to list on US exchanges, and as recently reported by the Wall Street Journal, increases in the requirement for Financial Controllers and Compliance Officers, as well as the Chief Financial Officer having to take on more responsibility than ever before.

Better Regulation not More Regulation

My own view is that regulation and oversight needs to be balanced against th risks the regulation is designed to counter. Not all companies are potential Enrons and should not treated as such. Over regulation will stifle innovation and take management time away from the activities which create value for their company. A soft-touch approach is not necessarly a bad thing.

Two More Free Software Programs for the Practicing Accountant

In a previous post I mentioned a couple of free and open source programs that can be used in any accounting practice. Today I will look at two further software packages that may help in the operation of a practice. The first is another accounting package, and the second is mindmapping software.

TurboCash

TurboCash is the first free accounting package that I used. It is a windows only program, but will work on systems running anything from Windows 98 on, and will run on older hardware as well. The package is very flexible and can be adapted to most commercial situations.

It can handle debtors, creditors, comprehensive stock control, VAT management, batch-entry system, multi-lingual interface, year-end financial statements, comprehensive reporting and analysis,
and bank reconciliations.

There is also a significant community and commercial support system available. The forum is a good source of information (but it appears to be down at the moment), and unlike many open source products, you can purchase support services.

Having use it I can say that it is quite intuitive, but I do find GnuCash easier to use.

Freemind

I really like using mindmaps as a way to think about projects, record meetings, study and a wide range of other applications. Freemind is a simple package that works on all of the major operating systems out there. If I’m honest (and I always am) it is not as polished as some of the commercial products out there, but that said you get used to its little quirks, and I love using it. Freemind needs Java to run so you need to make sure that you have it.

The great thing is that you can easily change colours, use clouds to group thoughts together, insert images, and use hyperlinks. This means that in addition to writing your ideas down, you can link out to useful websites or documents.

Small Business Financial Reporting

The Accounting Standards Board recently published a slightly updated version of the Financial Reporting Standard for Smaller Entities, usually know by it initials FRSSE. The aim of this standard is to bring together the reporting requirements for smaller entities into a single document. The text of FRSSE can be found here on the ASB website. What I find particularly interesting is the lack of use of this standard in Ireland. Of course I should clarify that when I say that I am talking about in my own experience.

The standard lays out its own objective as follows:

The objective of the FRSSE is to ensure that reporting entities falling within its scope provide in their financial statements information about the financial position, performance and financial adaptability of the entity that is useful to users in assessing the stewardship of management and for making economic decisions, recognising that the balance between users’ needs in respect of stewardship and economic decision-making for smaller entities is different from that for other reporting entities.

The document is not short (it goes to around 190 pages), but this is still a significantly smaller amount of information than the rest of the accounting standards – and it is all in one place.

Is this GAAP?

The short answer to this question is yes. The FRSSE has taken its lead from Accounting Standards – in essence it has taken the requirements from the rest of the Accounting Standards and then amended and simplified them, where appropriate, into a single document for Smaller Entities. So simply put the FRSSE can be used as a substitute for the application of the full suite of Accounting Standards when creating a set of accounts for a qualifying company (i.e. a company that falls under the definition of “small” in Irish Company Law).

Why is it not used more?

I wish I could answer that question. I could speculate on that but that is all it would be, speculation. What is clear is that it receives relatively little attention on the accounting syllabus. It is also the case that a significant number of those who work in accounting, especially those in charge of accounting practices, would have qualified before the introduction of the standard. In addition even if it was well covered on an accounting syllabus it still may not be the approach used in the practice that the part-qualified or newly qualified accountant moves in to. So even where there are people who have an understanding of the application of the FRSSE in a practice, they may not be in a position to influence its use.

So what can be done?

As I see it (and it is just my opinion) there are two parts to this; first is at the education and training stage, and the second is at the CPD and practice management stage.

Education and Training: The FRSSE should be used as the basis for early training on the mechanics of accounting and as an introduction to Company Accounting. This would ensure that the Standard is worked with for a protracted period, rather than appearing as one of many standards in existence. This would also help to ensure that the standard is not seen as a “poor relation” to be kept to one side.

CPD and Practice Management: The other track of the approach involves providing information and guidance to practice members through CPD courses and recommendations on practice management. Earlier on in the year I tried to organise a speaker to come and talk at a CPD event on FRSSE, but I found it impossible to find anybody in Ireland who could talk on the subject. Now in fairness I am sure that if I had scoured the country I could have probably have found somebody, but certainly our usual trainers were not willing to talk on it.

I feel that there is a scope for an alternative approach that would be of benefit to accountants, students and customers. It may be something I return to in the future via this blog, the Institutes Magazine, or an on-line CPD.

I would love to get some comments – you can add comments by clicking on the title of this post or by clicking on “no comments” below.

Learning Techniques

Studying to become a Professional Accounting is a great career choice. More often than not however, those who study to become an accountant do so on a part-time basis. With time being at a premium it is essential that every minute spent studying is as productive as possible. Attacking the books without a plan of action may work for you, you’ll be lucky however, as it is far more likely that you will find yourself improperly prepared for the exams.

As someone who has completed a range of exams over the years, I have used a range of techniques, and I am going to share some of them with you here.

1. Speed Reading

Speed reading is a skill that can, believe it or not, be learned by anybody. Most people read significantly slower that they are capable of because they have fallen into certain bad habits in their reading. The two techniques I find most helpful are:

1. Place a ruler on the page as you read down through the page
2. Do not speak the words on the page, either our loud or in your head

The ruler does two function, it provides a reading guide, and it prevents you from reading back over the text you have already covered. The usefulness of a guide is self evident however a lot of people do not like the idea of blocking off the ability to go back over, for example the page of a book, as they worry that they will miss something. This is not how it works. The brain does pick up the words, even when you don’t say it in your head.

Try it out for yourself – use a ruler to pass down through the page of a text book, go off for a cup of coffee, then come back and answer a question on the text just covered. You should find that you have excellent recall of the page – better in most cases than when you use your normal reading technique.

See the video below:

[Youtube=http://www.youtube.com/v/cPOIZ6DGXWE&hl]

2. Mind Maps

Don’t make notes on a page, use mind maps. A mind map is a visual description of the material that you wish to study. Wherever possible single “trigger” words or short phrases should be used to represent what you are trying to summarise. Using multiple colours and diagrams, in addition to the structure of the mind map, helps even further in embedding the material into the memory. It works because the mind map is a closer representation of what is believed to have happens in the brain.

There are two main ways to create the mind map, use a pen and paper or use software. When using pen and paper the best way is to use A4 paper and multi-colour pens (I usually use a 4-in-1 pen to do it). Start in the middle of the page and draw out from there

You can see the effect of the use of colour and drawings above.

There is also software available to allow you to create mind maps on your computer. There are a range of offerings out there, the one I use is an open source program called freemind.

In my exam career I had excellent recall on the day of the exam (usually I could remember the full diagram). See the video below, this included Tony Buzan, the man credited with inventing the mind map.

Why not try these out, you never know they might just find a better way to study.

Note: These skills can be used every day in work, not just for study!

“Top 10 Reasons I like being an Accountant”

The Late Show with David Letterman regularly does a “Top 10″ on topics of the day. With “Tax Day” just passed in the US they decided to do a “Top 10 Reasons I like being an Accountant” – very funny. You can watch it below.

Good stuff – but they forgot the most important one.

When things are good we get paid to help you to deal with all that money you have, when things are bad we get paid to help you deal with all that money you owe!!!

Ah accounting humor, it never gets old.

Is there an Accounting “Expectation Gap”?

In auditing one of the risks inherent in the process is the “Expectation Gap”. Put simplistically this is the gap between what the client expects as an outcome from the audit, and what the auditor can actually achieve. An example might be as follows:

Client – I expect the auditor to find every theft in the company, even the little ones

Auditor – I structure my work so that there is a reasonable chance of detecting fraud and error, but I don’t examine every document so I can’t detect every fraud

This is an ongoing problem that is a recognised part of auditing, and auditors try to manage this risk in a number of ways – including by including clear terms in the letter of engagement that explains to the clients that they will not be in a position to detect absolutely every single occurrence fraud and error. Rather they will detect material (i.e. sufficiently large to impact the company) fraud and error.

Expectation Gap in Accounting

The question I am asking here is similar gap in expectation in accounting. The examples I am thinkinf of are quite mundane:

• Have customers expected you to provide advice on the best structure for their business or personal finances?
• Do they expect to be able to contact you at a moments notice?
• Do they expect you to put in hours not directly related to basic accounting service but are surprised that this in not included it in your agreed base charge?
• Do managers or the Board in the company you work for expect you to wring data on performance out of a sub-standard records system?

To me all of the above examples also come under the heading of “Expectation Gap”. If that is the case then, just as in auditing, this gap needs to be clearly managed. How? Well a letter of engagement might be one approach, providing your customers with a clear charge card at the beginning of your relationship might be another, yet another is to have an “if in doubt policy” – if a client asks for extra work you tell them there and then what the charge will be. Also include a description of what work is being provided as part of a contract for an agreed price and include a clear statement that extra work will be charged at €X per hour.

These simple approaches can save a lot of trouble further down the line.

Free and Open Source Software

A number of years ago while looking for free (as in no charge) software I first discovered open source software, since then I have been gradually immersed in a parallel computing universe where sharing and community has replaced patents and secrecy as the way to do business. The open source world is a place where a mix of professionals and gifted amateurs work together on code that is open to anyone to examine and change, a feature that actually makes the software more secure.

The range of available software is mind-boggling everything from whole operating systems to small text editors are available for “free”, with free usually being in both terms of cost, and in terms of having the freedom to access and change the source coded.

Over time I will bring many of the developments to your attention through this blog, but today I will start with just two, openoffice an suite of tools similar to Microsoft Office, and GnuCash my favoured open source accounts package.

Openoffice.org

Openoffice.org is a complete suite of productivity tools which broadly match those available in the Microsoft Office suite. It includes a wordprocessor, spreadsheet, presentation, database, drawing and expression creation software. The interface will be very familiar to those who are used to MS Office, but that said there are some differences, so switching to OOO may require a small amount of relearning – but not very much. You will find all of your favourite features in OOO such as spell check, table creation, insert image, and in addition you will find some that you don’t have in MS Office, but you will find very useful – the ability to create a pdf document from within any OOO programme springs to mind. In addition you can set up openoffice to save all of your documents into the familiar Microsoft Office formats (.doc, .xls etc) meaning that if you need to send it on to somebody still using MS Office they will be able to read it without even knowing that it came from a different software package.

GnuCash

GnuCash is my preferred accounting package. I have been using it for around a year now and have found it easy to use and very customisable – I can get the reports and chart of accounts that I want with ease. While I generally do not run windows (I run Ubuntu an open source operating system) I have just checked the website and found GnuCash available for Windows and Mac also.

I should point out that I only use it to take the accounts to Trial Balance stage, and I create in the Openoffice Spreadsheet program from there, but I love what it does for me and I have found it great to use – even better that many paid for software.

A Word of Warning

It is only fair to point out that most Open Source software is released on an “as-is” basis and you use it at your own risk. That said more and more large companies are releasing their software as free and open source and charging for support. The names are surprising and include; IBM, Sun Microsystems, VMWare, Google, and even Microsoft (I know, I know). All of that said, I have yet to come across a problem that I cannot fix with a couple of searches on Google.