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01 December 2023

Global failures put pressure on local auditors

Financial institutions insist on greater scrutiny of deals. (SUPPLIED)

By VM Sathish

Auditing and chartered accountancy firms in the UAE are under pressure to prepare more accurate account books for clients and detect every financial irregularity.

Jolted by the failure of high-profile global financial institutions, such as Lehman Brothers, and multi-billion-dollar frauds like the Ponzi scheme of Bernard Madoff, the auditing sector in the country says its clients – especially banks and other financial institutions – have started insisting on greater scrutiny of deals and asset values.

And at stake is not just the security of their clients – the audit firms themselves are facing perhaps the greatest challenge ever to their credibility. The big four of global auditing – Pricewaterhouse Coopers (PwC), KPMG, Ernst & Young and Deloitte – are all present in the UAE and declined to comment when contacted by Emirates Business.

They are also in danger of facing lawsuits following several scams, some worth billions of dollars. For instance, in the Bernard Madoff affair, the former chairman of Nasdaq floated an investment company, which started a fraudulent multi-level pyramid scheme eventually involving banks such as Spain's Santander, HSBC and the Royal Bank of Scotland. All of these lost at least several hundred million dollars when the scam was unearthed after the recent financial collapse started in the US. The scam, running since 1960, had escaped detection by US federal authorities as well as global auditing firms, which could not even save the banks – their clients – from being singed by it.

In the light of such global events, the auditing profession in the UAE welcomed the recent decision by the Abu Dhabi Government to set up a new audit authority for its departments and undertakings as a timely gesture. Apart from the global big four, the UAE market also has about 20 B-grade auditing firms and hundreds of C- and D-grade auditors. The sector is under immense pressure to strictly follow the code of accounting ethics to prevent financial frauds and improve corporate governance.

Shahab Haider, Managing Partner at Sajjad Haider and Co, said the Abu Dhabi Government's move to set up the audit agency to improve transparency within the government was a welcome step. "The business environment is under pressure, but auditors are not responsible for any of the frauds happening now. Business is done by the management and auditors give only an independent report on the company's financial situation. Auditors are guided by international accounting standards and are generally careful about their profession because their reputation is at stake. Most problems are due to bad management decisions."

He said most of the US companies, which reported losses and frauds, gave false information to auditors. In some of the scandals the companies were maintaining three to four account books, and auditors do business on good faith.

"We have to maintain professional integrity because our international partners do periodically check our papers. Most of the international firms are here," Haider said. The Dubai Chamber, too, has set up a committee to improve auditing and accountancy standards in tune with changing requirements.

Prabhakar Kamat, partner, Morrison Menon and head of DIFC's companies auditing section, said for the next few years, the quality of balance sheets is going to be a big challenge for auditing firms.

"The major challenge facing auditors is to convince clients to make disclosures and improve corporate governance. There are many reasons for companies to overstate assets and not disclose financial details. If the investors' confidence has to be regained, listed companies should set a standard for other companies. The Abu Dhabi Government's decision to set up an auditing agency is a right step. Even the private sector should follow suit and set up its own audit agency," said Kamat.

He said the move by Abu Dhabi might remove the ambiguity about the total assets of Abu Dhabi Investment Authority (Adia), which is reported to fall within a wide range – $250billion (Dh918bn) to $800bn. Such ambiguity will not ensure investor confidence.

Kamat said the move should encourage private companies to improve their disclosure policies. "There is no harm in showing profit in such a bad time. Investors have to be convinced that there is no more hidden bad assets on the balance sheets."

He said banks in the UAE have categorised auditors into A, B, C and D grades, according to their own criteria. However, there is inter-bank discrepancy in this regard. While some auditors are categorised as B by some banks, the same auditors are grouped in the C or D category by other banks. Moreover, some banks in the UAE have recognised many auditors who are not recognised outside the country. "Banks should come together and issue a common list of auditor grading," Kamat said.

While the big four auditing firms charge Dh20,000 per year-end audit for small and medium-size enterprises, B-grade auditors charge 20 to 25 per cent less. The large numbers of small auditors do not have any standard fee structure.

Many auditors in the country feel banks in the UAE are responsible for granting the wrong loans to the wrong people. An auditor, requesting anonymity, told Emirates Business: "Banks give loans and extend credit according to their own internal process, with a disregard for due diligence in some cases. Loans are sanctioned on the basis of their internal processing. As bank employees are driven by the amount of commission that they get from each loan, sometimes they may not follow the due-diligence guidelines. There is no use blaming auditors for such problems."

In his annual review of 2008, Dennis Nally, Chairman and senior partner of PwC, the US, said the sub-prime mortgage crisis and ensuing worldwide credit crunch have reinforced the importance of checks and balances, controls and governance procedures necessary for the global banking system and capital markets to operate in an orderly fashion.

Economic uncertainty also underlines the value of high-quality audits, reflecting the pivotal role of audit firms in ensuring that crucial components of the system are working and reporting properly. The profession is in a more robust state than ever before to deal with the major challenges it faces, especially regarding fair-value judgment in a declining market, Nally's review said.

Khalid Maniar, Managing Partner of Horwath Mak, one of the top-10 multi-disciplinary auditing practitioners in the UAE, said: "The outlook for the auditing profession depends on the general economic outlook for the new year. The global economic crisis has had a knock-on impact on the UAE and we hope the situation will improve in 2009. Banks and companies will be looking at stricter disclosures and accounting. Banks have always been requesting auditors to be rigorous. Managing fraud is difficult because it is difficult to decide who has failed."

Maniar felt auditors in the UAE are doing their job properly and the current developments will make them more vigilant and alert about account books.

New guidelines

The Public Company Accounting Oversight Board, a non-profit private corporation overseeing auditors of public companies in

the US, has issued a new Staff Audit Practice Alert to assist auditors in identifying matters related to the current economic environment that might affect audit risk and require additional emphasis in audits of financial statements.

It discusses six matters: Overall audit considerations, auditing fair-value measurements,

auditing accounting estimates, auditing the adequacy of disclosures, auditor's consideration of a company's ability to continue as a going concern, and additional audit considerations for selected reporting areas.