Everyone loves a scandal. But once the hue and cry is over, there is much for auditors and accountants to learn, says John Knox
Wednesday 26 February 1997
However, both the Audit Faculty of the Institute of Chartered Accountants in England and Wales and the Auditing Practices Board have begun to address the matter. The former has suggested that the accountancy profession "should develop guidance on the application of the fraud auditing standards based on case experience of recent years". The latter proposed in February to "consider the implications of major cases of fraud that have arisen in recent years".
This seems an obvious step. Why then has it not been a continuous process?
Part of the explanation lies in the change in the mechanism for investigation of fraud. In the two decades before the establishment of the Serious Fraud Office, major City scandals were usually met with the appointment of inspectors by the Department of Trade and Industry under sections 431 or 432 of the Companies Act or preceding legislation. Now this is more of a rarity. The scope of such DTI inquiries is broad. Although the terms of reference have been drawn more tightly in recent years, the inspectors can range over the whole subject matter of the scandal.
Moreover, the reports of the inspectors are usually published, unless criminal proceedings are pending. In the past they have been highly influential in bringing about improvements in regulation and professional practice.
The Vehicle and General and the Grays Building Society inquiries of the early 70s led to changes in the regulation of insurance companies and building societies respectively.
Other reports from the 1970s included comments directed at the role of the auditors, with firms or individuals coming in for sharp criticism.
Such comments led to counter-criticism of the inspection system for allowing the inspectors too much freedom to make injurious comments on a privileged basis without proper right of reply. There were other drawbacks. The work of inspectors might need to be halted while any suspected criminal offences they have uncovered were investigated by the police. Now the DTI tends to use fewer public powers and the SFO takes the lead where it appears at the outset of a new scandal that possible criminal conduct lies at its heart. These changes go a long way towards remedying the defects identified.
But the criminal investigation is not intended to cover the whole range of problems which are part of City scandal. Even the totality of alleged criminal conduct is not generally revealed, since those offences that are brought to court are necessarily a segment of the whole.
To be fair, the SFO drew some lessons from case histories in its annual report for 1996. "Accountants should be aware that there are many fraudsters around who want to persuade reputable auditors to sign off what are in fact totally bogus accounts." "Proper audit and other controls need to be put in place to detect any unusual patterns of conduct at an early stage." These comments, banal though they are, illustrate that the lessons are often obvious but need to be repeated. However the SFO has not the expertise to tell auditors how to do their jobs.
Similarly other investigations such as the Bingham inquiry into the role of the Bank of England in the BCCI affair, or the parliamentary committee inquiry into pensions, are not focused on the lessons for auditors.
Disciplinary inquiries, which have also had more prominence since the establishment of the Joint Disciplinary scheme, are of greater relevance, but even they have no direct educational role.
It will not be easy for the profession to draw these strands together. Civil litigation continues to grow and with it concern about auditors' liability. Those facing such litigation will not be happy to see guidance given to auditors that can be related to a case in which they are involved, even if the guidance is an evolution from previously accepted best auditing practice. This, rather than the need to gather information from different sources, may be the real challenge facing the professional bodies
The author is the former deputy director of the Serious Fraud Office and a consultant to accountants Pannell Kerr Forster
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 PornHub turns masturbation into energy in bid to save the planet
- 4 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
- 5 Saudi Muslim cleric claims the Earth is 'stationary' and the sun rotates around it
New theory could prove how life began and disprove God
This is what it's like to be dead, according to a guy who died for a bit
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads