Better auditing could lasso corporate cowboys

| September 10, 2018

In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Professor Janek Ratnatunga, CEO of the Institute of Certified Management Accountants (ICMA), has criticised current corporate audit controls as being inadequate to reign in bad behaviour and called for an innovative approach to the audit and more severe penalties.

In what Professor Ratnatunga refers to as the ‘silence of the auditors’, he asserts that the failure of the audit profession is illustrated by the recent revelations by Mr Rod Sims, Chairman of the Australian Competition and Consumer Commission of corporate misbehaviour, of companies found guilty of concealing faulty products, safety issues, price-fixing, criminal cartels, false, misleading and deceptive advertising, and false product claims.

The companies mentioned by Mr Sims are iconic names such a Ford, Telstra, Thermomix, Flight Centre, Heinz, Nurofen, Meriton Optus Internet and Pental.  In addition, there is the ethically questionable behaviour of banks currently being revealed in the Royal Commission.

Professor Ratnatunga asserts that most of the companies being exposed received a clean bill of health via an unqualified audit opinion.

“The external audit is supposed to operate as a trust mechanism to persuade the public that capitalist corporations and management are not corrupt and that companies and their directors are held accountable,” says Professor Ratnatunga.

Such events, he believes, fuel suspicions that auditors lack the necessary independence, expertise and incentives to deliver the promised ‘true and fair’ account of corporate affairs.

This could be a controversial position for many in the financial services profession, but Professor Ratnatunga believes that ICMA’s members, management accountants, can play a stronger role.

“It’s time for management accountants to further distance themselves from the financial accounting and auditing professions and ensure that they are able to inculcate good strategic governance and strategic audit practices in their organisations,” he urged.

He is also calling for compulsory strategic audits to evaluate business decisions and practices that have a potential of significantly diminishing the reputation and value of the company.

“Key business practises in marketing, advertising, supply-chain, manufacturing, human resource management, information technology as well as finance need to be strategically audited to ensure that brand reputation and shareholder value is ‘future-proofed’ against such rampant bad behaviour,” he says.

“Further, it is important for government legislation to significantly increase the cost of bad behaviour. Currently, penalties are often easily absorbed by the sheer volume of revenue generated by such unethical actions.”

Professor Ratnatunga supports the recommendations of Mr Sims, that penalties and fines should be 10 to 20 times higher than they are today.

“Alongside such hefty fines, a statutory strategic audit and strong whistle-blower protection will increase the chance of bad behaviour being exposed and fined, and their executives sent to jail,” he urges.

“Perhaps it’s best to have a Royal Commission on the Auditing Profession to evaluate if Auditors have been short-changing their clients, who are the shareholders and not the directors and management”, he concludes.

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