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The Gatekeepers are not Guilty

According to the numbers, we're going bankrupt... Photo Credit:

Several companies have collapsed recently amid huge media clamor. Among other things, an accusing finger was also pointed at the gatekeepers, including accountants, lawyers, officers, members of the board of directors and the regulators, who did not foresee and warn the public in advance.

One of the notable incident was the collapse of the real estate developer Inbal Or, following suspicion of tax evasion of millions of dollars, defrauding of buyers and criminal activities that led to a witch hunt for those guilty of these omissions. The accusations included the "bankruptcy" of the accounting profession and calls to examine the professional liability insurance policies of the attorneys and accountants involved. .

This was followed by the collapse of the Canadian real estate company Urbancorp, which raised NIS180 million on the Tel Aviv Stock Exchange, became insolvent within three months and whose controlling shareholder declared himself bankrupt.

The gatekeepers definitely have a heavy responsibility and it is clear that they must thoroughly examine the financial conduct of the company. They must take notice of "red lights" in all that relates to irregular conduct that is not consistent with accounting principles. There is no place for creative accounting interpretations.

Regarding the accountants' work, take note of a significant piece of information – 12% of the companies listed on the stock exchange attached a "going concern" warning to the 2015 financial statements of companies, including Alon Blue Square, Africa Investments, the oil and gas exploration company Gva'ot and others. This warning was attached to several dozens of companies trading on the stock exchange during this period.

This shows that accountants do carry out their work faithfully, and warn, to the extent needed, about the possibility that a company might not meet its obligations. A timely "going concern" warning could save a company and provide an opportunity to embark on a recovery plan and inform the public about the situation.

However, even if there are isolated and difficult cases of collapsing companies in which "going concern" warnings were not given, they still do not impugn the work of all the gatekeepers, including the accountants.

Regarding the management and conduct of a company, the immediate and direct responsibility, first and foremost, is of the company's owners, management and board of directors. It is they who have responsibility for all of the company's day-to-day operations, cash flow management, reaching high-risk decisions and conveying correct information to the professionals.

But when the conduct involves deceit and fraud, including false reporting to the professionals, responsibility moves to the regulatory and criminal sphere. The gatekeepers do not have the investigative tools of the tax authorities and the police for investigating matters that were conducted with subterfuge and deception.

However, this does not lessen the obligation of the gatekeepers and their full responsibility for a thorough examination. They must not be satisfied with a superficial examination. They must continue and persist and be aware of any problem in a company. For example, they must understand that frequent turnover of professional staff and senior consultants could be evidence of serious problems. They must warn of illegal actions, behave with courage when dealing with differences of opinion with the controlling shareholders, demand updated answers accompanied by substantiated documentation and mainly act with courage to issue a "going concern" warning when it is justified.

However, there is a line between honest and reliable conduct, during which human errors occasionally occur and most of which can be resolved with acceptable processes, and conduct intended to conceal illegal activity.

Accountants have been assigned very heavy responsibility. Whereas attorneys are protected by "attorney-client privilege", accountants are not, and they are also subject to the obligation of "independence". Beyond their obligations to their clients, they also have the obligation to report to the tax authorities and essentially their obligation is defined "toward the entire world".

The significance is that all readers of the reports, including the authorities, banks, investors, potential buyers, employees holding options, etc., should be able to rely and depend with assurance on the reports. Therefore, the obligation of caution and prudence is manifold.

There are those who will claim that the eroding audit budgets could be a reason for the lack of depth. In response, we say that accountants should refuse to service an engagement if the budget is insufficient for investing the time resources needed to staff a skilled audit team and to perform a comprehensive, worthy and substantiated audit. All audit work must comply with accepted accounting principles and auditing standards and the audit budget must not influence this. Anyone taking responsibility for performing an audit must do so in the best possible manner.

The Accountants Law requires complete separation between the accountant performing the audit and the accountant providing business advice and other services, such as valuations. There must be no blurring of the lines between the audit and the related consulting services and only those services permitted by law. The "independence" law and regulations require insistence on such separation.

There must be no outside influence whatsoever on the audit, which must be focused on the financial statements. The work must include adhering to the values of transparency, identification of warning lights and red lights. This must be done while insisting on prudence and caution for the benefit of the company, its managers and employees and in the case of a public company, for the benefit of the investing public and the economy.

Translated from the Hebrew article which appeared in Globes 



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Sunday, 21 July 2024

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