Deceptive accounting an exercise in duplicity

Is it a common and acceptable practice for reputable auditing professionals to distort the accounts of companies with some end in mind? And if the answer is yes, then can the professional auditing and accounting firms indicate to the national community what are the circumstances when such a practice can be justified?

These admittedly provocative questions are asked against the background of long-standing auditor/accountant Mr Chanka Seeterram’s admission to the Commission of Enquiry into the Clico and Hindu Credit Union financial disasters that in auditing the accounts of the HCU in 2005, he chose to leave out of the financial accounts a loss of $31 million.

“People were demanding funds, I was thinking about the members, investors. It was a compromise in that it would buy some time for the HCU to get its act together,” Mr Seeterram told the commission. By his own admission it was an act intended to dupe members of the HCU, the general public and surely the regulatory financial agencies into believing that the HCU was in good financial health.

This situation was compounded by the fact that Mr Seeterram stated under oath to the commission that the operations of the HCU were replete with irregular lending practices. To appreciate this act of deliberate deceptive accounting, it must be understood in the context of the financial statements of a company being the major indicator to investors, shareholders and others of the financial state of the company.

The accounts are of vital importance if the shares of the company are publicly traded on the stock exchange. In such instances, brokers, individual investors and others base their investment decisions on the audited financial statements to determine whether or not dividends and growth in capital may be forthcoming from investment in the particular stock.

At the national level, the accounts of major companies also tell a story about the general state of the economy. While there is no evidence to suggest that Mr Seeterram and his firm were part of the financial hara-kiri that transpired at the HCU, the non-disclosure of the true financial state of the credit union in 2005 surely hid the information from the regulatory agencies.

Further, as was disclosed at the hearing by former finance minister Karen Tesheira, while this was happening at the HCU, that institution was befriending politicians and assisting with finance in their campaigns.

To give an international perspective on the actions of the auditor who told the commission that he deliberately did not include the $31 million loss in the financial statement, it was the same practice that was engaged in by the firm of Arthur Andersen (then one of the five largest auditing and accounting firms in the world) in relation to the American energy giant Enron.

Through the use of “accounting loopholes” and “poor financial accounting,” Arthur Andersen painted a false picture of the state of Enron. Eventually, when the truth surfaced, shareholders lost a reported US$11 billion, with the value of stocks declining from US$90 per share to under US$1. The crash of Enron became inevitable.

But that was far from the last word on such exercises in duplicity. The Enron crash was the first in the economic meltdown which precipitated first the recession in the United States and then the international financial troubles of the world economy, from which it is yet to recover, with several European economies in intensive care.

Only yesterday this paper editorialised about questionable practices in the legal profession. The ACCA, the T&T professional group that speaks for accounting and auditing firms, needs to advise its members and inform the national community on such underhand practices in the financial sector.