Auditor and the law
Reports prepared by auditors are assigned significant probative or evidential value. It is therefore important for the auditor to have an appreciation of the possible use of his or her report in legal proceedings. In this article, I look at how audit reports can be used at law.
Types of audit reports
Common audit reports include the following:
External audit reports or audit opinions on financial statements.
Audit reports on specific areas or based on agreed-upon procedures.
Internal audit reports.
Forensic audit or investigation reports.
External audit reports
In the case of external audit reports an external auditor expresses an opinion on whether a set of financial statements prepared by an entity presents fairly, in all material respects, the results and financial position for the year under review, in terms of the International Financial Reporting Standards (IFRIS).
A typical set of financial statements includes a Statement of Financial Position, a Statement of Profit or Loss and other comprehensive income, Statement of Changes in Equity, a Statement of Cash Flow, Accounting Policies and Notes to the financial statements.
Audited financial statements have wide-ranging use. Generally audited financial statements, because they are verified by an independent qualified auditor, they are widely accepted as having high assurance value. They can be easily accepted as evidence compared to those that have not been audited.
For example, audited financial statements can be used in the valuation of businesses or shares or where certain obligations or rights depend on certain numbers such as revenue. As has been seen in other jurisdictions, an external audit not done properly can have far-reaching consequences on the users of the financial statements.
Aggrieved users may take legal action against the auditor or the preparers of the financial statements.
Audit reports based on ad hoc mandates or agreed-upon procedures instead of carrying out an external audit on the full set of financial statements an auditor may be requested to carry out audit work of a specific type.
Examples may include the following:
Completeness or existence of liabilities.
Existence, ownership or valuation of assets.
Revenue for a certain period for purposes of rent or commission.
Share ownership.
Internal audit reports
The work of an internal audit is very useful in improving or enhancing systems including internal controls. Many companies make use of internal auditors. They may have an in-house or outsourced internal audit function.
Internal auditors conduct audits or review of systems to test aspects such as adequacy, effectiveness or efficiency. The work of internal auditors cuts across the whole business but usually focuses on finance, procurement, human resources, production materials, etc.
Outside enhancing systems, the work of an internal auditor may be used for the following legal purposes:
Staff disciplinary action.
Criminal prosecution.
Civil litigation.
An internal audit report prepared objectively and worded properly can be useful to prove the presence or absence of an offense. I have heard that some internal auditors are used as weapons in corporate politics. If it is true I think it is only a very few bad apples.
Observations by an internal auditor, especially documentary evidence on the alleged violation of systems or standard operating procedures can make or break a case.
Forensic audit or investigation report
Forensic auditors, forensic investigators or fraud examiners carry out investigations on suspected irregular transactions, decisions or violations of company policies or systems. The auditor is usually guided by those engaging him or her.
In my view, due to the nature of the work, it may be difficult for the auditor or investigator to be independent. There is usually more pressure to find a wrong than to find out whether or not there was a wrong. Forensic audit or investigation reports are used in legal proceedings, especially in disciplinary proceedings and criminal prosecution.
Common pitfalls in internal and forensic audit reports
Some reports may be worded properly to meet the standard in auditing. The wording may not meet the standards of evidence required at law, especially in criminal proceedings.
Observations by the auditor may be worded properly. However, challenges may arise when an auditor attempts to interpret the observations at law. I have seen some failed attempts to interpret provisions of certain Acts of Parliament.
I have also witnessed lay attempts to interpret whether violations of systems were intentional to cause fraud or theft or were merely due to negligence. There is the danger of a possibility being reported as fact or as the only possibility.
“Audi alteram partem” or “hear the other side” rule
At law, there is an established principle of natural justice which requires one to hear the other side. Some of the questions to an auditor are:
At what point do you hear the other side, the alleged offender? Is it before or after finalising and sharing your report? Why?
If you do not agree with the explanation given by the alleged offender do you capture his or her responses and state that you do not agree or you simply disregard the response? Why?
Conclusion
Audit reports may have legal implications. They ought to be prepared properly.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice. Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com. Visit www//:hofisilaw.com for more articles.-herald
