Silver Bird may well be the first local listed company to sue its internal and external auditors.
IF
ever there were
Malaysian parents who had hoped that their kids would
go into audit, there's probably quite a bit of serious rethinking going
on right now. It looks like the audit profession is in for some harsh
scrutiny and painful soul-searching.
On Aug 1,
Silver Bird Group Bhd
and two wholly-owned subsidiaries filed an action in the Kuala Lumpur
High Court in relation to financial irregularities at the three
companies. One of the 10 defendants named in the suit was
Crowe Horwath,
Silver Bird's longtime external auditors.
According to Silver
Bird's announcement through Bursa Malaysia, the suit against the
accounting firm is premised on alleged negligence and breach of duty of
care and/or its duties and responsibilities to the plaintiffs as
external auditors.
The bread and confectionery maker links this
to Crowe Horwath's “failure to discover and/or detect the financial
irregularities”.
It is believed to be the first such legal action by a listed company in Malaysia against its external auditors.
In
recent years, it's increasingly common to hear of auditors in the
United States, Britain and elsewhere (Japan, India and
Hong Kong, for
example) being sued for professional negligence because they had failed
to spot fraud and warning signs of business collapses.
It's
perhaps an indication of the current thinking that when companies go
under, certain parties should be held accountable for the huge losses
and suffering, and these include the auditors, whose opinion on the
companies'
financial statements are widely relied upon.
The day
after Silver Bird initiated the
civil suit, Crowe Horwath issued a press
release to deny the allegations in the suit, as laid out in the Silver
Bird announcement. The auditors pointed out that they had, in fact,
discovered the irregularities and immediately reported these to Silver
Bird's audit committee and board of directors.
“We believe that
the suit by Silver Bird is frivolous in nature and without basis. We
strongly believe that we have fully discharged our duties professionally
and will vigorously defend our position in court,” added the firm.
Indeed,
as that last line in the press release indicates, right or wrong will
be decided before the judge, unless the case doesn't go to trial.
However, there were no such statements from
Audex Governance Sdn Bhd
and Focus
Internal Audit Solutions (FIAS), who are also among the
defendants. Both are on the list because they have done internal audit
work for Silver Bird, which had outsourced its internal audit function
to Audex Governance before switching to FIAS.
Suits against
internal auditors appear to be rare overseas and it's almost certain
that Silver Bird's civil action against Audex Governance and FIAS is a
first for Malaysia.
The Silver Bird case has thrown the spotlight on the roles and responsibilities of internal auditors.
Internal
audit became a more visible component of corporate governance in
Malaysia when it was made mandatory beginning Jan 31, 2009, for a listed
company to have an internal audit function.
Bursa Malaysia's
listing rules require that the internal audit function be independent of
the activities it audits and that it reports directly to the audit
committee.
In addition, the listed company's annual report have
to include a statement relating to the internal audit function,
informing whether the function is performed in-house or is outsourced,
and the costs incurred for the function in respect of the financial
year.
Despite these rules, most people tend to underestimate the
importance of internal auditors, probably because few people really
appreciate what internal auditors do.
In a brochure, The
International
Institute of Internal Auditors (IIA) reports this lament:
“There is a universal lack of understanding of the internal audit
profession, how it makes a difference in regard to organisational
governance, risk, and internal control; and its value to stakeholders.”
In addition, there's more emphasis on the audit opinion of the external auditors as it's a tangible product of their work.
Also,
the external auditors are seen as independent of the management,
whereas an in-house internal audit function is undertaken by those on
the company's payroll.
The IIA defines internal audit activity as
a “department, division, team of consultants, or other practitioner(s)
that provides independent, objective assurance and consulting services
designed to add value and improve an organisation's operations”.
It
adds: “The internal audit activity helps an organisation accomplish its
objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of governance, risk management and control
processes.”
On the other hand, as Crowe Horwath puts it in
Silver Bird's financial statements for the year ended October 2011, the
external auditors are called in primarily to express an opinion on the
financial statements “based on our audit in accordance with approved
standards on auditing in Malaysia”.
Silver Bird's move to sue the
internal auditors tells us that it's time to take a closer look at the
internal audit function, whether in-house or outsourced. The regulators
and the internal audit profession should be asking some tough questions.
Would
it be possible for companies to sue internal auditors for professional
negligence if they are employees? Who watches over the outsourcing of
the internal audit function and the firms that take on such jobs? What
more can be done to ensure the independence and quality of the internal
audit function?
When financial irregularities are not picked up
by the internal and external auditors, is it possible for one of the
auditors to be exonerated while the other is found to be at fault?
The
Silver Bird case may or may not lead to answers to these questions, but
if the audit profession is truly proactive and dynamic, it wouldn't
wait for the case to be resolved before responding to the reality that
in Malaysia, resistance to the idea of suing auditors is waning.
>
Executive editor Errol Oh hopes he will have the stamina and patience
to follow closely the developments in the Silver Bird lawsuit.
Land sold for a song?
