Auditors are not forensic investigators – Booker

Changes are in the pipeline which will have a dramatic impact on the way that auditing firms handle public-interest entities (PIEs) as from December 2016 – but Deloitte CEO Malcolm Booker is very wary about how this could work in practice.

According to the legislation, auditors would have to enter into a proactive discussion of audit matters, described by Deloitte’s practice director Bernard Scicluna in Deloitte’s Transparency Report for 2014 as “a new era requiring the auditor to originate information about the audited PIE, in contrast to the current situation where auditors opine on information generated by management or those charged with governance”.

But Mr Booker does not believe that an auditor’s role is to be a watchdog for creditors, employees or anyone else that may be impacted by a company.

“There continues to be a gap in expectation between what auditors see as their liability zone and what regulators and the public view as the auditor’s responsibility.

“There have been high profile court cases which delved into this – and no doubt there will be others. It is very difficult to bridge that gap. Sometimes the press does not help as there is incorrect information and headlines which are not technically correct, especially when companies fail, or there are issues within a company.

“Our responsibilities are defined by law: our statutory obligation in terms of the Companies Act is towards the company’s shareholders. Clearly from our point of view, if you extend our liability to the whole world, it makes our job very difficult as we would really have to consider whether we want to do that kind of work,” he said.

There have been cases where auditors were given information which was untrue or only partly true, in which case, he stressed, the auditors were victims of fraud, just as anybody else was.

“Certainly, if the directors are acting in a fraudulent manner, it is going to be very difficult unless you have someone who goes in there with a forensic hat on. Some of these frauds are very complex and very difficult to pick up, unless you can do forensic accounting and investigate. But then you have changed my role.

“An auditor would simply not take on that responsibility unless he was compensated for it – and even then it might not be sufficient as you have exposed him to liability for everything.”

The rulebook for auditors is changing all the time. The current handbook is a staggering 900 pages long – and it keeps changing.

“It is not impossible but I do not think people appreciate how tough it is. Standards are getting more complicated and the bar is being raised all the time, all the time, all the time,” he said.

Audit is only part of Deloitte’s revenue – 31 per cent of its €21 million in 2014 – compared with 52 per cent for tax and legal services and 17 per cent of financial advisory services. Work for clients overseas is also increasingly important, representing 63 per cent of its revenue.

“Deloitte has always focused a little bit more on the prospects outside Malta rather than in Malta, and this year was no exception. We see huge opportunities doing work here for international clients overseas as well as getting international clients here. It is all about selling product Malta. If Malta can offer them a good package then they are prepared to use Malta as a base. I am very optimistic and I think the perception outside Malta is good on the whole,” he said.

“Having said that, far too often people we speak to bring up the World Bank report which talks about the ease of doing business in the country. We really need to do something about that as Malta is not where it should be I know it is on the government’s agenda; I just hope they manage to do so sooner rather than later as it makes you feel very uncomfortable when you try to sell Malta and they bring it up. For me, improving our ranking is a priority.”

The tax advisory business is also becoming more and more complicated, with public outcry mounting as cases like Swissleaks bring into question the role of banks in tax avoidance, and the European Commission trying to find ways to close the tax loopholes which have allowed global firms such as Starbucks, Google and Amazon to avoid paying tax by carefully engineering their tax jurisdictions.

Mr Booker said there was a clear distinction between tax avoidance and tax evasion – and that the comments in some the file reviews relating to Swissleaks were clearly indicative of the latter. But he agrees that the debate has generated a call for tax morality.

“Irrespective of what the law permits you to do, is there an argument that asks whether it is the right thing to do?

“Certain aspects of tax planning are legal but are deemed to be very aggressive. People are now saying is there a moral argument in favour of paying your fair share of tax. Obviously that gets very complicated as it is very subjective.

At the very least we could have a bit more guidance as to what constitutes ‘tax morality’, what people feel is ‘crossing a line’,” he said thoughtfully.

Asked whether there might be any implication for Malta, he said it all depended on how aggressive tax practitioners were being in the advice given to foreigners considering relocation to Malta.

“There are various degrees of aggressive tax planning and the most extreme might not be sustainable. Having said that, I would like to think that the Big Four in Malta do not give aggressive tax advice,” he said.

Regulators are putting more and more pressure on audit firms. Over the past few years, more and more limits were put on the amount of revenue a firm could derive from non-audit services if it were also the client’s auditor – particularly for PIEs.

Deloitte said in its recently published transparency report that 39 per cent of its tax and financial advisory revenue came from non-audit clients.

“The fundamental rule is that as an auditor you must be independent of your client. The view was that if you derive a substantial amount of fees by providing other services to the audit client, it may impair your objectivity,” he explained.

With all these legislative and regulatory changes underway, Mr Booker believes that Deloitte will look very different in five years’ time.

“We are going to be more international than we are today. I think we will be stronger and more important as players within the financial services community as well as the community in a broader sense,” he said.