Why auditors can’t guarantee there was no fraud at 1MDB
(The Edge, TMI) – There are no auditors in this world who will agree that their signing off on an account can in any way or form be interpreted to mean that they confirm or guarantee that the accounts are completely true, accurate and do not contain any misstatements, by fraud or error.
The backers of 1Malaysia Development Bhd (1MDB) have argued that because international accounting firms like KPMG and Deloitte have signed off all 1MDB’s accounts from FY2010 to FY2014, this meant no money has gone missing and no fraud has occurred.
This argument has been used to justify the not-so-eloquent silence of the management and board of directors of 1MDB, who have refused to respond to questions posed to them about various transactions and the movements of billions of ringgit.
They hide behind that argument despite the fact that 1MDB has run into serious cash-flow problems and can no longer service its debts, and so many questions have been raised about the whereabouts and nature of the so-called Available-For-Sale Investments valued at RM13.38 billion in its accounts for financial year ended March 31, 2014.
Critics of 1MDB have been asked to back off and let the auditor-general complete his work to review the audit of 1MDB.
The argument that because 1MDB’s accounts have been signed off by auditors meant that no fraud has occurred and that money was not missing is flawed. It shows that these people do not know what they are talking about.
They have badly misinterpreted, deliberately or otherwise, the role of external auditors and they do not understand the meaning of an auditor’s report when the auditors sign off the financial statement of a company.
There are no auditors in this world who will agree that their signing off on an account can in any way or form be interpreted to mean that they confirm or guarantee that the accounts are completely true, accurate and do not contain any misstatements, by fraud or error.
The International Standards for Auditing guidelines for auditors state that the external auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error.
That reasonable assurance is based on the external auditor trusting that the management and board of a company have carried out their fiduciary duties and were not involved in any fraud or have concealed any fraud.
Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatement may not be detected, even when the audit is planned and performed in accordance with international accounting standards.
The risk of fraud is higher than those of error because fraud usually involves sophisticated and carefully organised schemes designed to conceal it.
Therefore, it is not the role of an external auditor to determine whether fraud has actually occurred. That is the responsibility of the country’s criminal and legal system.
