It has taken longer than expected for the inevitable and outright boring line of argument about changes to audit regulation in Australia to be trotted out in the wake of the collapse of fintech firm, Wirecard.
Nothing can be more irritating than seeing a local angle on an international collapse taking the form of nothing more than a predictable line: fix audit regulation or face an Australia Wirecard.
Senator Deborah O’Neill, the principal parliamentary agitator for the audit regulation inquiry currently underway, delivered over the past week.
These are lines typically thrown about when people want to be associated with domestic advocacy on changes to audit when the example, quite frankly, has bugger all to do with Australia in the first instance.
Previous iterations of this particular debate would have seen ‘Wirecard’ replaced with ‘Enron’ or ‘HIH’ or ‘Compass Airlines’ or ‘Cambridge Credit’ or the National Safety Council of Victoria or some other blasted corporate cadaver that apparently has some kind of symbolic significance because somewhere there must have been an issue with recording keeping, financial statements or allegations of substandard auditing.
It treats a subject matter that requires nuance and expertise in a manner that trivialises the complexities of all of the issues surrounding accounting and audit regulation.
It is equally ridiculous for commentators and observers to line up the Kingman, Competition and Markets Authority and Brydon reports from the United Kingdom in a row and pretend that there is some kind of application to Australia’s regulatory regime.
They don’t.
I have lost count of the number of times people have asked me what I think of the three reports. My response remains now as it was then: why do they matter?
These three reports contain prescriptions for an environment in the UK, and the regulatory environment in the UK is very different to that in Australia. While both countries have had a body called the Financial Reporting Council, the functions of each respective organisation is different.
Australia needs regulatory solutions that are shaped for the environment here rather than based on some reports written only with the UK operating environment in mind.
Accounting and auditing standards are generally global, therefore auditing and accounting standards are not where so-called reformers riding in on their white stallions necessarily ought to be looking. The legislators know this in Australia. The parliamentary committee having a bit of a ‘look and see’ at the audit regulation framework has already recommended measures that will increase transparency in terms of audit tenure and some other issues.
They also know damn well, if they bother to study the history of accounting and auditing regulation, that sovereignty in those two areas of law was aligned with the notion of international consistency rather than developing Australian-only guidance when the International Accounting Standards Board was brought into fruition.
These are complex areas of regulation that deserve a far more nuanced approach than the lame headline-seeking bleats referring to audit regulation needing to be fixed so we avoid an Australian ‘Wirecard’.
Complexities include the fact that standards set overseas and adopted here may have consequences that impact on smaller accounting firms more than they might on the larger firms such as the Big Four.
Audit regulation alone cannot fix what was the fraud that has been widely reported by journalists and others regarding Wirecard. Nor can it fix any alleged failure to check balances with specific parties. That is an enforcement matter rather than another excuse to tighten the thumbscrews through regulation, in what people believe to be some mystical science of truth telling.
The auditing standards do not require the absolute truth to be attested to by auditors. They cannot require absolute truth because there are too many variables at play. The auditing standards require auditors to determine whether entities comply with a reporting framework in all material respects. I missed the bit where the auditing standards required the determination of absolute compliance and absolute truth.
Audit reports have a disclaimer in them for that particular reason and it is quite possible that users don’t read the entire audit report to get to the bit where it actually says that the audit does not guarantee that the financial statements are free from fraud or errors.
The auditor’s opinion makes that statement quite clearly because auditors are aware that they conduct audits on a sample basis, they don’t look at everything.
Do people actually read those bits of the audit report? There is a valid discussion point here about the format of the audit opinion and whether the auditing standard setters and the accounting profession more broadly did themselves justice when they changed the report around some years back.
The whiz kids that set auditing standards decided what readers go looking for – the audit opinion – should be up the front, with the rest of the more detailed material following - a bit like the old inverted pyramid taught at journalism school.
This means that people might be tempted to skip the more detailed analysis that lives in the auditor’s report because they just want to know whether there is a big green tick or a red cross there for company accounts. That is irresponsible of those that are reading the audit report and any shareholder or journalist that fails to make an effort to read the audit report properly is doing themselves an injustice. Those details are there for a reason.
It might be worth contemplating whether the audit opinion should go back to the older format so that people must wade through the qualifiers and all of the challenging material before they get to the auditor’s opinion.
The audit report sets out the auditor’s role as well as the role played by management. These sections are important because they tell people about the process of the audit and what the auditors may have done to reach a view on the set of numbers.
The disclaimer that relates to fraud and error needs to be unpacked a little. Commentators do forget that other factors shape the outcomes in corporate governance and one of those is that management may lie.
The assumption that auditors will always have cooperative management that will assist them in getting at the truth or provide them with timely access to all of the relevant facts is piffle.
Analysis of audit and corporate collapse frequently omits this consideration because people assert that auditors should have been able to pick everything up that might be wrong with an entity. There are times when management and staff will collude to hide things and lie to people.
It is highly likely that management will lie to an auditor at some stage in their career. The auditor needs to have the emotional maturity and experience to recognise it. This is ‘grey hair’ territory rather than something you can readily teach people in university or post-graduate qualifications.
Dishonest, stubborn and uncooperative management can only be fixed by changing the managers. That is nothing to do with the auditors but is the responsibility of those in charge of governance that appoint them. A read of the KPMG report into the Wirecard circumstances released in April 2020 was littered with instances in which Wirecard management refused to supply documents on a timely basis as well as a failure to provide appropriate access to senior management to be interviewed.
You cannot legislate against stupidity in a management context. You can only hope that a board of directors will wake up to the fact that managers are playing a game of high brinkmanship that will only cause the company to fall flat on its hiney if the personnel continue to serve.
It was clear from the KPMG report that the management did not like the idea of being looked at closely. This is where the problem in part lies with Wirecard. Management played games. One could reasonably conclude that the behaviour towards the auditors may have been similar.
Commentators in across Europe have also been looking at the detail of accounting standards and whether there are any issues that need tweaking in the accounting framework. These issues are a continuing debate and ones that merit greater examination. Were there accounting choices that were made by Wirecard that meant that outsiders were unable to pick problems a mile away before it was too late?
Those are the substantive issues related to how people from outside could have forecast or understood precisely what was going on in Wirecard.
The auditors of Wirecard from EY will have their records and paperwork to demonstrate what they did or didn’t do in the context of the audit. This will reveal itself in subsequent investigations or court cases. It will largely be guesswork from commentators to speculate how those matters will resolve themselves. There can be no doubt that many people across the world will await further developments with interest.
Glib political rhetoric that suggests things must change or we will have an ‘Australian Wirecard’ does nothing to encourage an intelligent examination of the possible ways in which audit and accounting regulation, which includes the nature, scope and appropriateness of oversight and enforcement in Australia, may be improved.