Audit chief urges scepticism

Improper valuations in statements could lead to more crises, says international expert.

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Auditors need to be more sceptical of financial statements provided by companies to prevent improper valuations that could lead to future financial crises, says the head of an international audit inspection group. "The role of an auditor is always to be critical when there is evidence provided by a client and to challenge that evidence," said Steven Maijoor, the chairman of the International Forum of Independent Audit Regulators (IFIAR).

"There have been cases in the Netherlands where auditors really should have gone further when auditing financial assets. They should have been more sceptical." Mr Maijoor, also the managing director of the Netherlands Authority for the Financial Markets, spoke as regulators from more than 30 countries and top representatives of the "big six" auditing companies attended an IFIAR meeting at the Yas Hotel in Abu Dhabi.

Auditors have recently been in the spotlight after several incidents where they failed to uncover frauds at companies. Ernst & Young, for instance, was singled out in the Lehman Brothers case. The firm is accused of hiding US$50 billion (Dh183.65bn) of troubled assets to make its debt levels appear lower. In Dubai, the Dubai Financial Services Authority (DFSA) also required Damas International to replace Ernst & Young as its external auditor as part of corporate governance changes it imposed after executives were found to have made unauthorised transactions.

In both cases, Ernst & Young stood by their audits. The DFSA has been increasing its oversight of auditors, said Amanda Line, the Middle East director of the Institute of Chartered Accountants in England and Wales. "Their role is expanding," Ms Line said. "They have been doing it in the DIFC [Dubai International Financial Centre] for some time, but now they are getting involved with [Emirates Securities and Commodities Authority]."

Ms Line said the practice of inspecting the quality of audits of financial statements had become established in developed markets since the collapse of companies such as Enron and WorldCom almost 10 years ago. Investigations into those companies revealed systemic problems with the way they reported their financial situations. While audit inspections are relatively new to the region, they are expanding rapidly, Ms Line said.

"This is now a very core function of capital markets," she said. "I'm absolutely sure that in two, five, 10 years, it will be across the board and part of the whole audit framework of the Middle East." Mr Maijoor said the discussions at the IFIAR meeting this week highlighted three critical issues in the world of financial reporting: the need for more scepticism by auditors, better oversight of branch offices of larger audit groups and stronger protocols within audit companies to approve audits.

Pointing back to the Netherlands, where the regulator put out its first report recently about deficiencies in auditing standards, Mr Maijoor said that the financial crisis of the past two years had revealed new weaknesses in the system of reporting financial information. He gave the example of his inspectors in the Netherlands finding that valuations of complex structured financial products were inaccurate.

"What we have seen in the Netherlands is the client said they were valued on market prices, but they were actually valued on models," Mr Maijoor said. "Analysts need auditors to challenge companies on these issues." @Email:[e-mail]