April 21, 2021

The Editor Speaks: Are Cayman’s Auditor Generals watchdogs or bloodhounds?

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Colin WilsonwebCayman Islands former Premier and now Leader of the Opposition would have us believe a “bloodhound”.

First it was Dan Duguay and now it is Alastair Swarbrick.

Duguay was Auditor General of the Cayman Islands from February 2004 to May 2010.

McKeeva Bush said Duguay was not good at his job without actually saying why he wasn’t good at it.

Bush did everything in his power to have Duguay removed and when the Cayman Islands new governor, Duncan Taylor, arrived in 2010, he got his chance.

Taylor decided a new broom sweeps clean and as he appoints the Auditor General and it also coincided with Duguay’s contract expiry he did not renew it.

Bush was ecstatic.

However, not for long.

Alastair Swarbrick arrived and if Bush thought Duguay had been prying too much into the government accounts he got a horrible shock. Swarbrick was even worse.

I say worse but I should say even better.

Duguay had been the first Cayman Auditor General to ask questions as to where the public money was being spent, why and where was the paperwork? When he didn’t get the answers and definitely no paperwork he went to the press.

Bush was furious. He was the premier and his word was good enough. He was doing his best for the Cayman Islands and he didn’t have time for all the nonsense of accountability. He was the law.

When Swarbrick arrived he not only carried on exactly where Duguay had left off, he demanded even more accountability.

Now Bush said Swarbrick was Taylor’s “hit man” and he was put there by the dastardly faceless people in the UK’s Foreign and Commonwealth Office to “bring him (Bush) down. And, by bringing him down the whole of the citizens of the Cayman Islands!

So should an auditor be a bloodhound?

I would have said yes. I am wrong.

From Watchdog or Bloodhound? The Push and Pull Toward a New Audit Model

By Deepak Sarup, CISA, FCA

More than 100 years have elapsed since the Court of Appeal in England delivered a landmark judgment in the Kingston Cotton Mills case. The facts were reasonably simple and not contended by the parties. The company’s managing director, who subsequently confessed the frauds he committed, had falsified its accounts. In particular, the quantities and value of the company’s stock had been falsified for many years but there was nothing on the face of the accounts to excite suspicion. It was suggested to the court that the auditor should not have relied solely on the representation of the managing director and should have further investigated the matter. In a unanimous judgment, the three Lord Justices reversed the decision of the lower court and found in favor of the auditor:

“It is the duty of an auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, careful, and cautious auditor would use.

“An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watchdog, but not a bloodhound.

“Auditors must not be made liable for not tracking out ingenious and carefully laid schemes of fraud, when there is nothing to arouse their suspicion …So to hold would make the position of an auditor intolerable.”

—Lord Justice Lopes

Regarding Kingston Cotton Mills (1896)”

In this famous judgment, Lord Justice Lopes, perhaps unintentionally, shaped the very ethos of the audit profession for the next century. In the watchdog mindset, the profession adopted a passive approach to an audit, together with an implicit presumption that the representations made by management could be, and indeed should be, relied upon. Yet, whatever the merits of this philosophy 100 years ago, the audit profession is increasingly seen as having failed to meet the public interest, particularly over the last few years. The flood of recent corporate failures and the sad demise of one of the Big 5 audit firms attest irrefutably to the flaws of the watchdog-driven audit philosophy.

At Enron, the starting point for these recent failures, the profession tried, unsuccessfully, to rationalize the patently failed audit. The complexities of Enron’s business model and the appearance of compliance with the accounting rules for “special purpose entities” offered some mitigation. On the other hand, the circumstances of the multibillion-dollar fraud at WorldCom are hard to even attempt to rationalize. The transfer of lease payments for use of third-party networks, from expenses to capital, is something that is “taught in the first few weeks of a core financial reporting class. That is why people are asking, given its basic nature and its magnitude, how could it have been missed.”

The alleged frauds at Tyco International, Adelphia Communications, HealthSouth Corp. and Dutch retailing giant Ahold NV all beg the same questions: What were the auditors doing? Is the audit approach fundamentally flawed? Is the current audit model broken? Has self-regulation failed?

The audit profession appears to have been caught off-guard in the scathing, some would even say demonizing, attacks by regulators, legislators and the media. The instinctive reaction of the profession has been to put its head in the sand and vigorously defend the audit model as it stands while, at the same time, reminding everyone that the perpetrators of the frauds are the only real culprits. The profession has bemoaned that the audit is “seen as the first line of defense against business failure whether driven by corporate greed, mismanagement or more general economic downturns.”

For the auditing profession, the unfolding events herald a strong pull away from self-regulation. Indeed, new legislation has sought to curtail this power aggressively. For example the Sarbanes-Oxley Act in the US, among others, restricts the ability of an accounting firm to provide nonaudit services to an audit client and establishes an independent oversight board with powers to sanction errant audit firms.

You can download the whole article at: http://documents.routledge-interactive.s3.amazonaws.com/9780415508117/articles/watchdog.pdf

So Bush shouldn’t blame Duguay, nor Swarbrick, nor Taylor, nor the FCO. The blame lies with the corrupt super power houses who thought they were God and could do what they liked. They didn’t have to have a paper trail to show accountability for their actions.

Bush arrived too late. The damage had been done. Everyone wants accountability now and an Auditor, especially an Auditor General is now a bloodhound.

 

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