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At a glance
As told to Alexandra Cain
Question: “I am an audit manager responsible for the audit of the financial statement of a large family-owned business — one of my prominent clients — that is under financial strain. During an audit, I found evidence of materially misstated revenue figures.
The client’s CFO asked me to overlook these discrepancies, arguing that doing so was necessary to avoid breaching loan covenants. The audit engagement partner is aware of the situation and hinted that maintaining this client is crucial for us.
The client has also threatened to discredit my firm if we do not give a clean audit report, in addition to moving their business to a competitor. What are my options?”
Answer: The first step is to further escalate what you have found by seeking advice. It is important to remember that if the error is intentional, auditors need to consider fraud risk.
In this case, if the engagement partner hints that they do not want to lose the client, then it can put the audit manager in a very difficult situation. Auditors can face real commercial and personal pressures when making difficult judgements, particularly when acting appropriately may strain client relationships.
A professional accountant or auditor has the responsibility to uphold ethical and professional standards for their accounting body, their firm and themselves. Audits keep company reporting on the “straight and narrow”.
They provide objective and valuable information for shareholders, and other interested parties, who rely on the auditor and accounting firm to act according to APES 110: Code of Ethics for Professional Accountants’ (the Code) fundamental principles of integrity and objectivity.
Consequently, turning a blind eye to any intentional misstated figures is likely not aligned to the ethical standards required by their professional accounting body. Audits have to be documented and reported accurately at the time they are completed, otherwise they lose their value.
If talking to the engagement partner has not resolved the issues, escalation is available through other channels within the accounting firm, including speaking to another partner and seeking external advice — while ensuring confidentiality is upheld. For guidance through these steps, see section 360 of the Code: Non-Compliance with Laws and Regulations.
It is a red flag for threats to be acceptable within the organisation’s culture. Similarly, the culture needs attention if the accounting firm puts pressure on the auditor to turn a blind eye. Not reporting the misstatements will ultimately not reflect well on the client, the auditor nor the firm.
Any intentional act by management or the CFO to manipulate financial records is a clear red flag for fraud risk. In such circumstances, auditors are required, at a minimum, to act in the public interest.
Where suspected fraud or an intentional misstatement is identified, it must be appropriately challenged, addressed and reported in accordance with professional and ethical obligations. Failure to do so undermines audit quality and public confidence, and it exposes those involved to significant consequences.
Communication is important here. The worst thing you can do is give in. An honest conversation between client and auditor is needed to explain the reality of what is involved and what is at risk if the misstatements are ignored. As a result, the client may decide to forewarn the loan providers of the situation, particularly if this is a one-off in an otherwise unblemished history.
It can feel confusing for an auditor in a compromised position, being torn between upholding standards and perhaps risking their own financial security. If you are still unclear as to the next step, follow the accounting firm’s whistleblowing procedure. You have to tell the truth — for your professional reputation and that of the firm.
