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All groups need to do the following task

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All groups need to do the following task

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1) summaries the parts assigned to your group (in tabular form/pictorial/data flow diagram; be creative if possible)
2) Add relevant sections in Companies Act 2016 which ever applicable in the parts assigned.
3) Add one recent case (latest five years) to support or contradict the issue in parts assigned to you.

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W1: page 1315 -1317 (exclude abstract)
W2: page 1318-1319
W3: page 1320
W4: page 1321-1322 (till end of section 3.2)
W5: page 1323-1324 (start from section 3.3 until end of it)
W6: page 1324-1325 (from section 3.4 till end including conclusion; exclude references)

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3) 3.2 Duty in the context of Group of Companies

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3) 3.2 Duty in the context of Group of Companies

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Barclays Bank v Grant Thornton

Grant Thornton is the auditor of VEH Essen Hotel Group (VEH). VEH entered into a loan agreement with Barclays Bank. Barclays Bank has been relied on the auditor report in considering to provide the loan facility to VEH. VEH then became insolvent and were unable to pay back the loan.

Barclays thereafter brought a claim against the defendant auditors (GT) for alleged negligence in their production, for the Company, of non-statutory audit reports provided to third parties, which had been sent to Barclays. In particular, the reports failed to identify the fraud of two employees of the Company, who had allegedly deliberately misled GT about the true sales and expenses position the company. The Court held that the disclaimers included in the reports were sufficient to preclude GT owing a duty of care to Barclays. However, the Court considered that there were, nevertheless, some circumstances in which auditors could owe a duty to third parties – for example, if reports provided to the third parties did not contain disclaimers.

This is another positive decision for accountants covering a very important area.

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Based on Companies Act, by virtue of S. 174(1) and (2) of ‘the Companies Act’, an auditor is required to prepare an auditor’s report and give his ‘true and fair view’ of the matters required by S.169 of ‘the Companies Act’ but in the new Companies Act 2016 they give exemptions to certain private companies – mainly dormant and small ones – from having to appoint auditors when they already stated before that  If it is a holding company, the auditors are required to report on the consolidated accounts. The auditors’ report is a formal document.
Though the reason why they give exemptions to SMPs is meant to help small companies reduce their compliance costs, especially when these companies are owner-managed. But this exemption can increase the favor of fraud and misstatements to the company's financial statements now that they do not have to appoint auditors to audit their company. And after all, SMPs are businesses too; they’re not exempt from industrial disruptions.
Reference;
Oh, E. (2017, September 02). A tough test for audit industry. Retrieved from https://www.thestar.com.my/business/business-news/2017/09/02/a-tough-test-for-audit-industry/

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The Colonial BancGroup, Inc. et al v. PricewaterhouseCoopers

PricewaterhouseCoopers (PwC) is the audit firm that had been appointed by the Colonial Bank to audit its account. Colonial Bank has put its trust towards PwC to make sure that their account and transaction is free from fraud or any miscellaneous bad attempt towards its company either from third party or within the company.

PwC are being charged and sued due to unable to find and discover the massive fraud that occur within the company.  Colonial Bank bought $1 billion of worthless assets that were concocted by rogue Taylor, Bean & Whitaker Mortgage (TBW) executives which is the subsidiary of Colonial Bank. The loan occur in this transaction were never happened.

PwC claims that sophisticated frauds are difficult to detect, and audits are no guarantee of exposure. However, those claims seem suspicious, given their intimate understanding of Colonial Bank and the size of involves monies, it would have been almost impossible to miss the fraud as massive as that. Colonial Bank believe that the auditors are actually aiding it.

This case is the prove that the auditors are not taking a proper step in detecting irregularities.

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S 244. Compliance with approved accounting standards.

The directors of a company shall ensure that the financial statements of the company and, if the company is a holding company for which consolidated financial statements are required, the consolidated financial statements of the company are made out in accordance with the applicable approved accounting standards.

S 245. Accounts to be kept.

(2) A company, the directors and managers of a company shall cause appropriate entries to be made in the accounting and other records within sixty days of the completion of the transactions to which the entries relate.

S266. Powers and duties of Auditors.

(3) An auditor of a company shall have a duty to form an opinion to each of the following matters:

(a) whether he has obtained all the information and explanations that he required. nd the auditor shall state in his report the particulars of any deficiency, failure or shortcoming in respect of any matter referred to in this subsection.

(4) An auditor of a company has a right of access at all reasonable times to the accounting and other records, including registers of the company and is entitled to require from any officer of the company and any auditor of a related company such information and explanations as he desired for the purpose of audit.

(5) An auditor of a holding company for which consolidated financial statements are required:

a)      has a right of access at all reasonable times to the accounting and other records including registers, of any subsidiary, if necessary; and

b)      is entitled to require from any officer or auditor of any subsidiary included in the consolidated financial statements, at the expense of the holding company, such information and explanations in relation to the affairs of such subsidiaries included in the consolidated financial statements.

(12) An officer of a corporation who refuses or fails without lawful excuse to allow an auditor of the corporation, or an auditor of a corporation who refuses or fails without lawful excuse to allow an auditor of its holding company –

(a) to have access to any accounting and other records, including registers of the corporation in his custody or control

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Section 266(1) requires the auditor to report to the members on the company’s annual accounts

Section 266 (3) provides that an auditor shall have a duty to form an opinion to the following matters, whether:

·         he has obtained all the information and explanations that he required

·          proper accounting and other records have been kept by the company as required

·         returns received from branch offices are adequate; and

·         procedures and methods used to calculate amount in consolidated accounts were appropriate

and the auditor shall state any deficiency, failure or shortcoming in his report

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The largest settlement involving a pharmaceutical company, the British drugmaker GlaxoSmithKline agreed to plead guilty to criminal charges and pay $3 billion in fines for promoting its best-selling antidepressants for unapproved uses and failing to report safety data about a top diabetes drug, federal prosecutors announced Monday. The agreement also includes civil penalties for improper marketing of a half-dozen other drugs.

The fine against GlaxoSmithKline over Paxil, Wellbutrin, Avandia and the other drugs makes this year a record for money recovered by the federal government under its so-called whistle-blower law, according to a group that tracks such numbers.

Those in the pharmaceutical industry have stressed that the activities revealed in the recent settlements occurred many years ago, and practices have changed radically since then. The Glaxo settlement includes an agreement by the company to withdraw bonuses from top executives if they engaged in or supervised illegal behavior, believed to be a first.

Hence, it was their own executive who were involved with the fraud activities with external party.

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1 Malaysia Development Berhad (1MDB) scandal

Ernst and Young (EY) is one of the audit firm that involved in auditing 1MDB. When they had been requested some of the documents were not produced, they refused and decided to sign off as 1MDB’s auditor. Then, appointed in their place was KPMG, who approved the accounts for the years 2010, 2011 and 2012 ending March 31. At first, they have signed off an unqualified audit report. When it comes to the fair value of investment, the auditor (KPMG) was asking for more information and some details verified, however they were terminated too as an auditor for 1MDB. KPMG wanted to issue qualified audit report to the public, unfortunately in December 2013, Deloitte had been took over the KPMG and approved both 2013 and 2014 accounts. However, the Department of Justice has found that massive theft involving billions of dollars occurred at 1MDB. The Malaysia Securities Commission reprimand and fined 2.2 million ringgits (US$535,000) for breaching linked to the 1MDB global financial scandal that saw billions siphoned out of state coffers. For the years 2015 to 2018, there is no account have been filed, which makes it four years in all. Parker Randall was allowed to access 1MDB accounts seized by the police. Lastly, when the Malaysian Institute of Accountant (MIA) want to investigate both KPMG and Deloitte, they said that the account that they audited and approved cannot be relied upon due to subsequent development. In this case we can conclude too much fraudulent occurred in 1MDB which involved significant figure.

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2) Companies Act 2016Companies Act 1965 (mentioned in the article):- Section 174(8) Duty of auditor to report breach and non-observance, fraud and dishonestyCompanies Act 2016 (mentioned in the article):- Section 266(8), (9) and (11) Duty of auditor to report breach and non-observance, fraud and dishonesty.If an auditor, in the course of the performance of his duties as auditor of a company, is satisfied that ;-According to Companies Act 2016;page 1323:Section 266 (8)(a) There has been a breach or non-observance of any of the provisions of this Act. (b)  The circumstances are such that in his opinion the matter has not been or will not be adequately dealt with by comment in his report on the financial statements or consolidated financial statements or by bringing the matter to the notice of the directors of the company or, if the company is a subsidiary, of the directors of its holding company, he shall forthwith report the matter in writing to the Registrar.page 1324:Section 266 (9)In addition, to subsection (8), if an auditor in the course of the performance of his duties as an auditor of a public company or a company controlled by a public company is of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the company or this Act by officers of the company, he shall forthwith report the matter in writing to the Registrar.Section 266(11)(b) “a serious offence involving fraud or dishonesty” means an offence that is punishable by imprisonment for a term that not less than two years or the value of the assets derived or likely to be derived or any loss suffered by the company, member or debenture holder from the commission of such an offence exceeds two hundred and fifty thousand ringgit and includes offences under sections 591, 592, 593, 594 and 595.

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2) Companies Act 2016Companies Act 1965 (mentioned in the article):- Section 174(8) Duty of auditor to report breach and non-observance, fraud and dishonestyCompanies Act 2016 (mentioned in the article):- Section 266(8), (9) and (11) Duty of auditor to report breach and non-observance, fraud and dishonesty.If an auditor, in the course of the performance of his duties as auditor of a company, is satisfied that ;-According to Companies Act 2016;page 1323:Section 266 (8)(a) There has been a breach or non-observance of any of the provisions of this Act. (b)  The circumstances are such that in his opinion the matter has not been or will not be adequately dealt with by comment in his report on the financial statements or consolidated financial statements or by bringing the matter to the notice of the directors of the company or, if the company is a subsidiary, of the directors of its holding company, he shall forthwith report the matter in writing to the Registrar.page 1324:Section 266 (9)In addition, to subsection (8), if an auditor in the course of the performance of his duties as an auditor of a public company or a company controlled by a public company is of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the company or this Act by officers of the company, he shall forthwith report the matter in writing to the Registrar.Section 266(11)(b) “a serious offence involving fraud or dishonesty” means an offence that is punishable by imprisonment for a term that not less than two years or the value of the assets derived or likely to be derived or any loss suffered by the company, member or debenture holder from the commission of such an offence exceeds two hundred and fifty thousand ringgit and includes offences under sections 591, 592, 593, 594 and 595.

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3) Case Study- In 2019, Deloitte was sued over audit of books following Madoff scam. It is claimed that Deloitte failed to apply a properly considered approach to each audit and failed to consider and evaluate the extent to which information produced by the Madoff company could be relied upon. The records prepared by the Madoff firm could not constitute an independent source of evidence for audit purposes. It is further claimed there was failure to test a sample of alleged purchase and sales of securities and equities and/or alleged dividend income. MCAS’ assets comprised US treasury bills, it is alleged. Deloitte, however, denies the claims.- In 2017, KPMG paid $6.2 million fine to the US Securities and Exchange Commission for inadequacies in its audit and financial statements of an oil and gas company, Miller Energy Resources. The company had an overvalued assets by more than 100 times. KPMG failed to take into account the overvaluation of the Alaskans well and to detect that the company’s assets were valued twice. KPMG did not admit or deny the findings but had agreed to pay a $1m penalty as well as $4.7m in all the audit fees including the interest.- In 2014, Sterne Agee Group Inc. filed lawsuit against KPMG for its negligence in its auditing duties relating to the firm’s financial statements. It claims that the auditing firm failed to follow the standard and caused significant monetary damages to the firm  of which material misstatement of Sterne's total stockholders' equity amount.References1.	The Irish Times. (2019, March 26). Deloitte being sued over audit of books following Madoff scam. Retrieved from https://www.irishtimes.com/business/financial-services/deloitte-being-sued-over-audit-of-books-following-madoff-scam-1.38394592.	Murphy, H. (2017, August 15). KPMG slapped with $6.2m fine over oil company audit errors. Retrieved from https://www.ft.com/content/0f0393de-81d9-11e7-a4ce-15b2513cb3ff3.	T. W. (2014, May 23). Sterne Agee files lawsuit against KPMG. Retrieved from https://www.bizjournals.com/birmingham/news/2014/05/23/sterne-agee-files-lawsuit-against-kpmg.html

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3) Case Study- In 2019, Deloitte was sued over audit of books following Madoff scam. It is claimed that Deloitte failed to apply a properly considered approach to each audit and failed to consider and evaluate the extent to which information produced by the Madoff company could be relied upon. The records prepared by the Madoff firm could not constitute an independent source of evidence for audit purposes. It is further claimed there was failure to test a sample of alleged purchase and sales of securities and equities and/or alleged dividend income. MCAS’ assets comprised US treasury bills, it is alleged. Deloitte, however, denies the claims.- In 2017, KPMG paid $6.2 million fine to the US Securities and Exchange Commission for inadequacies in its audit and financial statements of an oil and gas company, Miller Energy Resources. The company had an overvalued assets by more than 100 times. KPMG failed to take into account the overvaluation of the Alaskans well and to detect that the company’s assets were valued twice. KPMG did not admit or deny the findings but had agreed to pay a $1m penalty as well as $4.7m in all the audit fees including the interest.- In 2014, Sterne Agee Group Inc. filed lawsuit against KPMG for its negligence in its auditing duties relating to the firm’s financial statements. It claims that the auditing firm failed to follow the standard and caused significant monetary damages to the firm  of which material misstatement of Sterne's total stockholders' equity amount.References1.	The Irish Times. (2019, March 26). Deloitte being sued over audit of books following Madoff scam. Retrieved from https://www.irishtimes.com/business/financial-services/deloitte-being-sued-over-audit-of-books-following-madoff-scam-1.38394592.	Murphy, H. (2017, August 15). KPMG slapped with $6.2m fine over oil company audit errors. Retrieved from https://www.ft.com/content/0f0393de-81d9-11e7-a4ce-15b2513cb3ff3.	T. W. (2014, May 23). Sterne Agee files lawsuit against KPMG. Retrieved from https://www.bizjournals.com/birmingham/news/2014/05/23/sterne-agee-files-lawsuit-against-kpmg.html

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1. The Financial Reporting Council has fined and reprimanded KPMG  and Michael Francis Barradell, Senior Statutory Auditor and Audit Engagement Partner, following their admission of Misconduct in relation to their audits of the financial statements of Ted Baker Plc and No Ordinary Designer Label Limited (together “Ted Baker”) for the financial years ended 25 January 2014.

2.The Misconduct arose from KPMG providing expert witness services to Ted Baker in a Commercial Court claim.  This was in breach of the Ethical Standards and led to the loss of KPMG’s independence in respect of the Audits. There was a risk, which occurred, that the audit team would review the work of the expert when auditing Ted Baker’s treatment of the claim in its accounts and this posed an unacceptable self-review threat.
3. In addition, there was a self-interest threat arising from the fact that the fees for the expert engagement significantly exceeded the audit fees in the relevant years, which KPMG and Mr Barradell also failed properly to consider. The Executive Counsel did not allege that KPMG or Mr Barradell in fact lacked objectivity or integrity.
KPMG and Mr Barradell, members of the Institute of Chartered Accountants in England and Wales (ICAEW), have admitted that their conduct fell significantly short of the standards reasonably to be expected of a Member and a Member Firm and that they failed to act in accordance with the ICAEW’s Fundamental Principle of Professional Competence and Due Care.

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