As organisations focus on encouraging corporate governance, Prosper magazine’s Christine Kasemiire speaks to Mr Stephen Luyonjo, an auditor and accountant at Fathom Associates about the value of auditing to businesses. Mr Luyonjo is also the chairman of the Investment Club Association of Uganda.
What is auditing?
New age auditing was created in the 17th Century with the industrial revolution. When companies expanded into Africa, it meant one individual could not finance it alone. He needed help from others and those were called shareholders. Since the shareholders were not required in directly running the company, they delegated their powers to the board of directors who also delegated to executive management. Because power is trusted to different people, when it comes to certifying a company’s performance, an auditor, who is an independent body, is qualified and trained to review their books and accounts as well as their internal control environment. Internal control environment are systems within which you are working to guard against fraud.
What information do you look at when auditing a company?
When a company states its profits, we as auditors, ask for their books of sales, expenses, invoices, the assets of the company, the bank statement and contracts for a financial period. There after we say, based on our assessment, we feel that your books of account are fairly stated or represent a true and fair state of affairs. They do not say are accurate.
Why aren’t they accurate?
Its important to note that auditors do not give 100 per cent accuracy because it is almost impossible. It would be very expensive to look at every transaction done.
A company deals in millions of transactions. So, we test its internal controls and processes, trial books and others to determine whether they are fairly accurate.
What are the different types of audits?
There are many types of audit but these are the major ones. The commonest type of audit is the financial statements audit that happens once a year by looking at the supporting documents. That type of audit does not track fraud.
There is a different type of audit called the forensic audit, which specifically tracks to see if there was any kind of fraud in the transaction or in an entity.
There are also internal and external audits. Internal auditors assess the internal control environment on a daily basis and they are mainly employed within the company.
External auditors come in once a quarter or year.
How do companies defraud audits?
That happens alot because the financial statements audit does not discover fraud. Since a company deals in millions of transactions, if a company official intentionally commits fraud, they can get away with it. That is because when we are auditing, we sample transactions based on the auditing standards. We sample from various months and if a transaction does not fall in that sample, we would not notice that fraud. In addition, because we sample transactions basing on materiality (large sums), small transactions are usually not included. Those piled up small transactions could lead to getting away with substantial amounts of money.
Notably financial statement audits are not meant to detect fraud. If someone feels fraud is taking place, then they should have a forensic audit done.
How can an auditor mitigate the risk of fraud?
As an auditor, you are not exonerated in fraudulent circumstances. You ought to visit the company and assess their internal control environment. If you feel the system cannot detect for itself possible fraud cases, as an auditor, you are required to avoid doing that audit because it will be high risk. Take an example of Enron, a large energy cooperation in the United States that kept misreporting its financials, year on year, when it was later discovered to having covered up fraud in 2001, it took down with it several audit firms. You can be sued if you notice the internal control environment is lacking and continue reporting their books of accounts as fairly stated.
What challenges do auditors face?
Fraud is one of them, poor internal controls and because Uganda is largely informal, we have challenges dealing with lack of professionally qualified staff.
Most people employ their friends or family despite lack of professional skills. Lack of marketing is another problem. You don’t see many billboards of audit firms which hinders the penetration of new firms into the market.
Worse still, Ugandans do not appreciate the value of audits which limits the growth of the economy since taxation is also cheated. They only ask for quick audits at the request of a bank which cannot be done consequently, the audit firms lose out on a customer.
Why don’t some Ugandans appreciate auditing?
Many people operate individually which leaves the company small with no need for auditing.
What standards govern the auditing profession?
The audit standard board every so often reviews the audit standards. These standards stipulate instructions such as the communication module used for audits; you ought to speak to previous auditors if you are a new auditor for a company and the planning and execution of an audit.
Recently, they included new reporting standards in auditing. Before, an auditor merely reported the fairness of books of accounts but now, we are required to give key notes of concern, for example, if we are concerned about something going on in the company.
Is the legal environment favourable for auditing?
There are many laws, well-intended but zero implementation. I am very concerned about our level of enforcement. Usually, when a company is filing returns, they include their auditor but Uganda Registration Services Bureau does not follow up to make sure the auditor is truly the one. Some companies do not even file returns.
What do you think should be done to grow the auditing business in Uganda?
There is need to sensitise people about the benefits of auditing. I think government should invite auditors to address people on the benefits of auditing.
What would they benefit from an audit?
Audits give assurance to all stakeholders of the enterprise on its productivity, for example the shareholders are informed of what happens with their money, an investor is given prospect when seeking to invest and Uganda Revenue Authority among others.
The company benefits in credit acquisition since audited books are needed to determine the company’s creditworthiness.
In addition, a management letter is issued to a company after auditing; pointing out all pertinent issues they need to address to effectively run their company.
What is your take on the Crane Bank saga?
Based on news analysis released by the press, I believe there were control weaknesses that were never addressed. There are conflict of interest risks associated with a shareholder being part of the board. He will front his individual interests in place of the company’s.
Plus, there was laxity on the side of Bank of Uganda.