VOLUME EIGHTEEN
THE EXTERNAL AUDITS OF BENEFICIAL FINANCE CORPORATION LIMITED

 

 

CHAPTER 54
THE EXTERNAL AUDITS OF BENEFICIAL FINANCE:
INTRODUCTION

 

 

TABLE OF CONTENTS

 

54.1 TERM OF APPOINTMENT B

54.2 SCOPE OF INVESTIGATION

54.3 INFORMATION SOURCES

 

 

 

54.1 TERM OF APPOINTMENT B

 

The Terms of Appointment of the Investigation require me to inquire into and report on the `External' and `Internal' audits of the accounts of the State Bank of South Australia ("the Bank") and Beneficial Finance Corporation Ltd.

Chapter 23 - "Internal Audit of the State Bank", of my first Report addressed the Internal Audit of the Bank, relevant to Term of Appointment A(g), and Chapters 45 - "The External Audits of the State Bank: Introduction" to Chapter 53 - "The External Audits of the State Bank: Findings and Conclusions" address the Investigation into the External Audit of the Bank, relevant to Term of Appointment B.

Chapter 37 - "Internal Audit of Beneficial Finance" addresses the Investigation of the Internal Audit of Beneficial Finance. Chapters 54 - "The External Audits of Beneficial Finance: Introduction" to Chapter 60 - "The External Audits of Beneficial Finance: Findings and Conclusions" focuses on the Investigation of the External Audit of Beneficial Finance, relevant to Term of Appointment B. Specifically, Term of Appointment B (as amended, 23 December 1992), requires:

"The Auditor-General is to investigate and inquire into and report on whether the external audits of the accounts of the Bank and Beneficial Finance Corporation Ltd ... were appropriate and adequate"

In Chapter 23 - "Internal Audit of the State Bank" of my first Report, I commented on the distinction between the objectives of Internal Audit and External Audit. To restate, the primary obligation of External Audit is to provide an opinion on the entity's financial statements based on evidence obtained from examination of the entity's records and from third parties as appropriate, and including the evaluation of the entity's internal controls to the extent that the auditor chooses to rely on selected controls. The principal responsibility of Internal Audit is not to attest to the entity's financial statements, but to monitor the systems of internal control introduced by the Board and management to safeguard the entity's assets and promote operational efficiency. To this extent Internal Audit is not part of the internal control system, which should be able to operate effectively without internal audit, but a monitoring function. In reaching its objective, External Audit may, where the auditor considers it appropriate, and after proper review, rely on the work of Internal Audit.

In considering Term of Appointment B, I consider that I am entitled to investigate the procedures carried out by the external auditors and to determine whether those procedures were proper, and whether the information elicited by the auditors provided a proper basis for the opinion which they expressed in each of the years under review. That is, I am required to determine, by this inquiry, whether the opinion of the auditor was proper in the circumstances. This requires me to inquire into the exercise of the auditors' judgement, in the circumstances, as to proper procedures and as to proper conclusions which could be drawn from the information before the auditors.

In my view, I am not limited to determining whether the particular judgement or opinion formed by the auditor was one within a range which might be reasonably open to him. I consider that Term of Appointment B requires me to have regard to the view which would be likely to prevail in the profession.

"Audit" in my view is used in my Terms of Appointment to mean an "official examination and verification of accounts and records". That is, it is the process of examination and verification which is the essential element rather than simply the outcome of the process, ie the opinion expressed by auditor.

The terms "appropriate" and "adequate" potentially overlap. In the context in which they are used, "appropriate", in my view, is used in my Terms of Appointment to mean "proper" or "fit for a particular purpose", and "adequate" in my view is used to mean "sufficient".

The purpose of an audit is clearly to enable the auditor to express an opinion on the accounts, and, in my opinion, the appropriateness and adequacy of the audit is to be determined having regard to this purpose.

The Investigation has therefore been conducted by way of detailed review of the working papers of the auditors, with the co-operation and assistance of the auditors. I have approached the Investigation on the basis that I am not required to conduct a fresh audit of the accounts of Beneficial Finance and the Beneficial Finance Group so that I can express my opinion on whether the accounts gave a true and fair view. It may be, however, that as a result of matters arising out of the Investigation, I would be able to make a finding that the accounts did not give a true and fair view by reason of exceptions specifically noted.

I draw support for my conclusions from the pronouncement of the Professional Accounting Bodies in Statement of Auditing Standards AUS1, which provides in part:

"3. This statement of Auditing Standards describes the basic principles which govern the auditor's professional responsibilities and which must be complied with whenever an audit is carried out ...

4. An audit is the independent examination of financial information of any entity ... when such examination is conducted with a view to expressing an opinion thereon ...

6. The Standards set out in this Statement are mandatory ...

21. Auditors shall obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable them to draw reasonable conclusions therefrom on which to base their opinion on the financial information."

I have considered submissions from the Bank's external auditors that Term of Appointment B should be interpreted so that an adverse finding could not be made unless I am able to conclude that no reasonably competent auditor could have expressed the opinion which the auditors expressed, and that the incorrect opinion was a contributing cause to the financial position of the Bank and Bank Group as reported in February 1991. Such a finding would, in my view, correspond with a finding on the principal elements of a cause of action against the auditors for negligence. In my opinion, for the reasons noted above, Term of Appointment B does not require this. A professional person may be wrong without being negligent. In my opinion, Term of Appointment B requires me to assess the appropriateness and adequacy of the external audit having regard to what a reasonably competent auditor should have concluded to be proper in the circumstances. It is for others to determine whether there has been negligence on the part of the auditors which caused a loss. I therefore reject the submissions by the Bank's external auditors in this regard as to the interpretation of Term of Appointment B.

 

54.2 SCOPE OF INVESTIGATION

 

Throughout the period under review, Beneficial Finance prepared accounts comprising Profit and Loss Statements, Balance Sheets, and Notes to the accounts, for each financial year, and for the six month period ended 31 December each year. The accounts reported the financial results and financial position of Beneficial Finance Corporation Limited and the consolidated accounts of Beneficial Finance Corporation Limited and its Subsidiaries. Commencing with the year ended 30 June 1986, the accounts also included a Consolidated Sources and Applications of Funds Statement.

In each of the years under review, in respect of the accounts for each financial year and for each six month period ended 31 December, the auditors reported to the shareholders in Beneficial Finance (ie to the Bank) that, in their opinion:-

(a) The accounts and group accounts were properly drawn up in accordance with the provisions of the Companies (South Australia) Code.

(b) The accounts and group accounts so drawn up give a true and fair view of the state of affairs of Beneficial Finance, as at the balance date, and of the results for the year then ended, and, so far as concerns shareholders in Beneficial Finance (ie the Bank), the group accounts give a true and fair view of the state of affairs of the group and the result for the year then ended.

(c) The accounts so drawn up give a true and fair view of the other matters required by Section 269 of that Code to be dealt with in the accounts and the group accounts.

(d) The accounts so drawn up are in accordance with Australian Accounting Standards and applicable Approved Accounting Standards.

The auditors' report also stated that the auditors had audited the accounts and group accounts in accordance with Australian Auditing Standards.

The Investigation was directed to the assessment of the appropriateness and adequacy of the External Audit of the accounting records and accounts of the Beneficial Finance Group. The assessment involved the review and evaluation of the audit process applied by the appointed external auditors in relation to the accounting records and `group' or `consolidated' accounts, for each of the financial reporting years ended 30 June 1985 to 30 June 1990. The audit process comprises three main phases, notably, planning of the audit, execution of the audit, and concluding and reporting on the audit. These phases were examined in terms of the Accounting and Auditing Standards of the Professional Accounting Bodies and the statutory requirements applying at the relevant time.

 

54.3 INFORMATION SOURCES

 

The critical information sources used in the Investigation of the External Audit of the accounting records and accounts of the Beneficial Finance Group included:

(a) Annual Reports of the Beneficial Finance Group containing the financial statements and Auditors' Reports.

(b) External Auditor's Working Papers, which record the auditor's planning, procedures, and conclusions drawn from the evidence obtained.

(c) Audit Policy and Procedure Manuals, Directives, and Guidelines, issued by the External Auditor firm, for the purpose of providing professional guidance to their staff when conducting audits.

(d) Correspondence between Beneficial Finance and the External Auditor, including engagement letters and management letters.

(e) Transcripts of evidence, resulting from interview proceedings with the External Auditor.

(f) Board Minutes and Papers, and Executive Committee Minutes and Papers.

(g) Monthly, quarterly, and half-yearly, operating reviews of the Beneficial Finance Group.

(h) Information arising from the Investigation into the Internal Audit activity of Beneficial Finance, discussed in Chapter 37 - "Internal Audit of Beneficial Finance".

(i) Information arising from the Investigation into the External Audit of State Bank of South Australia, discussed in Chapters 45 - "The External Audits of the State Bank: Introduction" to Chapter 53 - "The External Audits of the State Bank: Findings and Conclusions" of this Report.

(j) Advice of experts retained by me to advise on auditing standards, practice, and procedure, concerning the audit of banks and financial institutions and the application of those standards, practices and procedures by the external auditors in the years under review.

(k) Evidence and submissions of the External Auditor following release in October 1992 of a draft report setting out my tentative findings.