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Eric Bloch Column

Who’s really to blame for bank woes?

THE horrendous state of much of Zimbabwe’s financial sector, as has been exposed over the last 10 months, has justifiably created an outcry that those who are responsible for the immense losses must be held acc

ountable.

Fingers have been pointed in various directions, but progressively an intensifying castigation of bank auditors has developed. If the auditors have conspired to occasion the losses, or to conceal them, they must be severely disciplined, as also if they were guilty of gross negligence in the fulfilment of their duties, or if they acted in breach of their professional codes of ethics and conducts.

However, recently there has been growing tendency to seek to blame the auditors of the insolvent, distressed and troubled banks to such an extent as to type-cast them as the principal culprits without any consideration as to whether, in fact, they are to blame and should be held accountable. They have become the Aunt Sally of the media and of the afflicted depositors, without any regard as to whether it is just and fair to direct the missives of accusation at them.

It must be acknowledged that, as in any sector of society, there will be auditors who stray from the straight and narrow. Their professional bodies, such as the Institute of Chartered Accountants of Zimbabwe strive to ensure absolute compliance with their laws and bylaws, rules and regulations of good conduct and, wheresoever they become aware of any infringement, they seek to act firmly to discipline offenders and protect society.

But, throughout most of the world, the need to do so has been the exception, rather than the rule, for not only do most accountants and auditors adhere strictly to their codes of conduct, no matter how onerous those codes may be, but most of them strive to fulfil their duties with absolute responsibility, compliance and transparency.

However, their doing so does not automatically protect them from being perceived as those responsible for untoward activities within entities audited by them, even if such activities have been transacted and recorded in a manner prima-facie correct and the untoward characteristics not necessarily being readily identifiable.

Most countries in the free and developed world subscribe to the Basel Committee on Banking Supervision and the Basel Protocols, which operate to ensure, insofar as possible, that there be good governance within the world’s banking systems, prevention of money-laundering, containment of the funding of terrorism, drugs and other international ills and that probity and integrity should be the foundation stones of the world’s financial institutions.
 
Among those that recognise the Basel Protocols is Zimbabwe.

On the issue of the external auditors of banks, a paper prepared by the Basel Committee, in association with the International Auditing Practices Committee of the International Federation of Accounts (IFAC), addresses the role of the external auditor and the required interaction and communication between that auditor and those responsible for bank supervision (in Zimbabwe previously the Registrar of Banks, within the spectrum of the Ministry of Finance and Economic Development and now the Reserve Bank of Zimbabwe).

That paper states: “The primary responsibility for the conduct of the business of the bank is vested in the board of directors and the management appointed by it. This responsibility includes, amongst other things, ensuring that those entrusted with banking tasks have sufficient expertise and integrity and that there are experienced staff in key positions; adequate policies, practices and procedures related to the different activities of the bank are established and complied with, including the promotion of high ethical and professional standards; systems that accurately identify and measure all material risks and adequately monitor and control these risk; adequate controls, structures and accounting procedures; the evaluation of the quality of assets and their proper recognition and measurement;
 
‘know you customer’ rules that prevent the bank being used, intentionally or unintentionally, by criminal elements; the adoption of a suitable control environment, aimed at meeting the bank’s prescribed performance, information and compliance objectives; the testing of compliance and the evaluation of the effectiveness of internal controls by the internal audit function; appropriate management information systems are established; the bank has appropriate risk management policies and procedures; statutory and regulatory directives, including directives regarding solvency and liquidity, are observed; and the interests not only of the shareholders but also of the depositors and other creditors are adequately protected.”

Very clearly, primary responsibility for the conduct of a bank’s operations with total integrity and prudence vests in the board of directors, as appointed by the shareholders, and in the management appointed by that board.

The paper of the Basel Committee also addresses, in detail, the role of the banker’s external auditor, stating:
“The objective of an audit of a bank’s financial statements by an external auditor is to enable an independent auditor to express an opinion as to whether the bank’s financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework . . . The auditor designs audit procedures to reduce an acceptably low level the risk of giving an inappropriate audit opinion when the financial statements are materially misstated.

“The auditor assesses the inherent risk of material misstatements occurring and the risk that the entity’s accounting and internal control systems will not prevent or detect and correct material misstatements on a timely basis. The auditor assesses risk as being high unless the auditor is able to identify controls that are likely to prevent or detect and correct a material misstatement and conducts test of the controls that support a lower assessment of risk. Based on the assessment of risk, the auditor carries substantive procedures to reduce the overall audit risk to an acceptably low level.

“The auditor considers how the financial statements might be materially misstated and considers whether fraud risk factors are present that indicate the possibility of fraudulent financial reporting or misappropriation of assets. The auditor designs audit procedures to reduce to an acceptably low level the risk that misstatements arising from fraud and error that are material to the financial statements taken as a whole are not detected.”
The Basel Committee’s paper then asserts:

“The external auditor’s report is appropriately addressed as required by the circumstances of the engagement, ordinarily to either the shareholders or the board of directors. However, the report may be available to many other parties, such as depositors, other creditors and supervisors. The auditor’s opinion helps to establish the credibility of the financial statements. The auditors opinion, however, should not be interpreted as providing assurance on the future viability of the bank or an opinion as to the efficiency or effectiveness with which the management has conducted the affairs of the bank, since these are not objectives of the audit.”

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