Retired public accountant and auditor Michael Toney, who has welcomed the probe on the circumstances that led to the Finance Ministry’s discovery of a $2.6 billion error, says he hopes Auditor General Jaiwantie Ramdass also launches a probe into the Audit Department to identify areas that may need to be improved.
Toney indicated this in a statement on the imbroglio between the Government and the Auditor General yesterday.
Toney noted that he qualified as a chartered accountant in 1974 and has spent the majority of that time in the practice of auditing. Also, over that time, he said he served on many boards of directors and their audit committees, either as chairman or member.
He said he based his insights on the issue on newspaper reports. He noted principles followed by external auditors and gave an explanation of the concept of materiality.
Toney noted his understanding that the Finance Ministry is to submit the Public Accounts to the Auditor General by January 31 of the following year—four months after the end of the State’s financial year end of September 30—and the date by which the Auditor General is to submit her audit opinion (report) is by April 30, three months after the Ministry’s submission.
“My understanding is that these dates are set out in the laws of the country and, given that this is the people’s business, missing these deadlines is taken seriously,” Toney said.
On the submission of the public accounts on January 31, 2024, Toney said, “While this question is being debated, each side is digging its heels in deeper and deeper, and in the meantime, much more fundamental matters that ‘we the people’ need to consider aren’t being addressed.
“It seems to me, first of all, that all parties agree that a $3.4 billion error is a material error. I’m heartened to hear that the Minister of Finance will cause a probe to be done as to the circumstances that led to this material error being discovered...”
Toney said his comments on the Auditor General’s department were deliberately directed to the department and not to the person currently holding the office of Auditor General.
“I do so because I note that the incumbent was appointed in November 2023, two months after the 2023 year-end, and at a time when the 2023 audit would have been in progress,” he said.
“My experience is that a change at that level in any accounting firm and during an audit of such critical importance is usually fraught with challenges in terms of handover, execution of procedures and reporting, which have to be carefully managed if the assignment is to be successfully completed.
“Be that as it may, my major concern is that as an auditor, I would be embarrassed to have my client inform me of an error of the magnitude of $3.4 billion being discovered in the accounts, six months after the end of the year and just one month prior to the issuance of my audit report.”
He added, “I’d want to review my audit programme and procedures to find out exactly why, if they were properly executed, the potential for or an actual error of this size would not have been identified and brought to my immediate attention.”
Noting reports that the discrepancy was caused by challenges in processing tax refunds with a new electronic system, Toney said it’s standard audit practice that when a new system is to be introduced into an accounting network, that activity is flagged at a very early stage—usually the audit planning stage—and a special audit programme is designed to ensure that the new system would be generating accurate information.
“Is this kind of strategy and consequential testing still done? One would assume that by now, the system error has been identified and repaired. Has the audit department since tested the system to ensure that the error will not occur again?” he asked.
Toney said while the legal pundits are poring over briefs and appearing in court—resulting in costs that “we the people” have to pay, “I’ve heard nothing said about the more fundamental questions mentioned above concerning the process for ensuring the integrity of our financial statements”.
Saying the Auditor General is the gatekeeper of T&T’s financial statements, Toney added, “If we cannot rely on the opinion of the auditor as it relates to financial statements, especially our financial statements—the public accounts—then on what or on whom do we rely to hold the stewards of the public purse accountable?
“I sincerely hope that, as a result of this experience, like the Minister of Finance, the Auditor General launches a probe into the Audit Department to identify areas in the Department that may need to be improved.”
He added, “Having sat on both sides of the table—as auditor and as client—issues such as this case in point occur regularly: clients report material errors that they had previously missed and that the auditors, too, had not discovered. When such matters were presented, the primary focus would be to address the issue immediately so that the auditor could satisfy himself in order to still issue an unqualified audit opinion and still meet his deadline. It is usually a nerve-wracking time on both parties but the main objective is to present credible financial data to the user of the financial statements.”
Toney said he realised that in the case of the public accounts, certain deadlines are set by legislation and its interpretation seems to be the cause of the legal imbroglio.
He also said he found it strange that in a matter that is so important to T&T’s financial governance, neither the Institute of Chartered Accountants of T&T (ICATT), nor any of the public accounting firms have so far not commented on the matter.
Toney’s areas of
concern in impasse
• An auditor is usually required to examine financial statements prepared by the client in order to render an opinion (the auditor’s opinion) as to whether, inter alia, the statements are free from material errors. He/she does so by examining the client’s books and records in order to satisfy him/herself the figures are accurate to within the materiality limit and prepared in accordance with the generally accepted standards applicable to the particular entity being audited.
• A material error can be defined as an error of such a magnitude that it would cause a reader of the financial statements to form a different view than what he/she originally had regarding those statements. For example, if the statements that I had prepared for my auditor indicated profit of, say, $1,000, and in executing the audit I found an error of, say $700, that caused the profit to be now $300, it can be said that the $700 error is a material error. Decisions that would have been made given the former result now have to be recalibrated given the new result.
• Auditors usually work with materiality limits depending on the specifics of the entity being audited. This is a limit beyond which the auditor will not tolerate in rendering his/her opinion on the financial statements. It is a highly professional judgement call on the part of the auditor and one that is sanctioned by the highest-ranking member of the audit team.
• Different firms have different methods of establishing materiality. It is not necessary to go into these methods here. Suffice to say that the setting of materiality limits is a standard practice in auditing.
Audit planning
• One of the critical phases of an audit is the planning phase. It is during this phase that the auditor will try to get a sense of what to expect during the course of the audit. It is also at this time that the materiality limit will be set, new systems introduced by the client and high-risk areas identified. This sets the basis for the audit plan including resource allocation, and key deadlines.