Memo to accountants: you are all now professional skeptics

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Memo to accountants: you are all now professional skeptics

• 08 March 2019
• Accounting
• Ciaran Ryan

This report was compiled with the assistance of Lettie Janse van Vuuren, chief technical advisor at the SA Accounting Academy (SAAA) and Nicolaas van Wyk CEO of the SA institute of Business Accountants (Saiba).

In one key respect, the accounting profession has lost its way: professional skepticism is no longer part of the accountant’s armoury.

As we noted in an earlier article, the accounting professional has some work to do to restore public trust after a string of accounting-related scandals, starting with Masterbond and moving on swiftly to Leisurenet, VBS Bank and Steinhoff, to name the most obvious.  That’s not even counting the looting at state-owned companies under the watch of the “accounting profession”.

Read: It’s time to end chartered accountant’s monopoly

As accountants, we can point the finger of blame at auditors who missed the obvious, or turned a blind eye when things just didn’t look right. It’s easy to see how this selective blindness can creep in when the organisation you are auditing is also paying for your lunch.

But all accountants have to develop the mindset of the professional skeptic. This is no longer an option.

As Comair CEO Erik Venter noted when announcing his resignation from the SA Institute of Chartered Accountants (Saica) last year, over-regulation of the profession and the audit function is partly to blame. It has reduced the audit function to a tick box exercise. It’s easy to miss the big risks when you have so many boxes to fill. The old-style audit involved interviews with senior executives leading to the preparation of balance sheets based on sampling of transactions by a senior audit partner with deep understanding of the business risks. These days 100% computerised systems allow financial statements to appear at the touch of a button, but with no appreciation of the logic of the resulting balances.

Here’s another problem: because of over-regulation, despite all its good intentions, auditors are inclined to over-audit.

That’s not what is required. What is required is the auditor’s sleuthing skills to identify the key risks in a business and hone in on that. That’s the most likely place to find misstatements and incorrect estimates.

Auditors and accountants can no longer merely tick boxes and pass this off as an audit completed.

Let’s start with auditors. International Standard on Auditing (ISA) 540 requires auditors to exercise professional skepticism in relation to accounting estimates. The auditor’s “consideration of inherent risk factors, and its importance increases when accounting estimates are subject to a greater degree of estimation uncertainty or are affected to a greater degree by complexity, subjectivity or other inherent risk factors. Similarly, the exercise of professional skepticism is important when there is greater susceptibility to misstatement due to management bias or fraud.”

In an article in Personal Perspective Series, published by the International Accounting Education Standards Board (IAESB), authors Keith Bowman and W. Morley Lemon argue that all accountants need to develop the mindset of the professional skeptic.

“It seems apparent that if professional skepticism has been diligently applied throughout the financial reporting process, the odds that purposeful or intended errors in the data are less likely to exist. There are many examples of where financial statements went bad when incorrect information was successfully entered at some point it in the statement preparation process.”

How does one exercise professional skepticism as an accountant? Start be challenging estimates, since this is where self-serving judgments are allowed to enter the financial records. Are these estimates reasonable or is there inherent bias in the assumptions. Do the estimates fit within the appropriate accounting principles?

If not, challenge them, correct them, report them. Maintain a skeptical attitude throughout the report gather process, since this will improve the quality of information in an organisation and engender a culture of honesty, fairness and exactitude.

There are two types of material errors that can affect the integrity of the financial information flowing from this process—errors from intentional misstatements to report results that impairs the faithful representation of the information and errors that result from the incorrect application of the appropriate accounting principles. It could be argued that intentional misstatements could arise from any level in the financial reporting process and that these errors have the potential to increase in importance as the commission of errors rises through the reporting process. For example, fraudulent expense reporting versus management of loss provisions in a financial institution.

Auditors and accountants are spending way too much time on irrelevant matters, rather than focusing on things that matter – such as Non-Compliance with Laws and Regulations (NOCLAR), the international ethics standard for auditors and other professional accountants.

NOCLAR requires auditors and accountants to report any act of omission or commission, intentional or unintentional, committed by a client or employer, by those charged with governance, by management or individuals working for or under direction of a client or employer which is contrary to the prevailing laws or regulations.

NOCLAR took effect in July 2017, but remains a vague and fuzzy concept for many accountants.

Understand that your professional future as an accountant could well depend on knowing NOCLAR.

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