At the Annual Meeting, one of the decisions the shareholders make is accepting the outside auditor and the company receives a fee for auditing the books. 99.9% of the time, shareholders accept management’s recommendation for a wide variety of reasons. Often times as smaller investors we believe the large company has enough experience to see fraud or irregularities that audit companies should catch. In the past, one of the reasons things were not caught was the company was using the audit to get into the door, but making fees for a wide range of consultancy within the firm.
In an article by Huw Jones of Reuters, the Global Chairman and Chief Executive of EY Carmine Di Sibio said in a note to clients, EY regrets not uncovering the fraud at German company Wirecard earlier. The company collapsed after it was short of E1.9 ($2.9 billion), the auditor EY missed it.
Mr. Di Sibio says the lesson learnt is EY will be using data analytics for fraud testing including using social media and banking transaction records. (EY will use data analytics similar to the method your bank ensures you are doing what you are supposed to do). Mr. Di Sibio said these innovative technologies will raise the bar and go beyond currently accepted professional standards. (Hopefully we will read in the auditor’s report that all available technologies were used during the audit).
Auditors are not primarily responsible for detecting fraud, but a British report says they should be. Mr. Di Sibio said the fraud at Wirecard was highly complex designed to deceive everyone – investors, banks, supervisory authorities, investigating lawyers, and forensic auditors.
Linking to dividend paying stocks, as investors we expect companies with a long track record of making profits do it legally and consistently. One of the reasons to invest in these type of companies is there should be very limited fraud, investors know how the company makes its money and the margins being received. If you do not know, ensure the company is not your biggest holding.
There are more questions than answers, till the next time – to raising questions.