I have read some of the comments in the papers challenging the manner of reporting by PwC and the inclusion of the caveat. I had initially dismissed some of these articles as being largely pedestrian and lacking in depth until I realized that some the writers have quoted “reliable sources” including in some cases senior partners in small and medium firms of auditors (SMP's). Could these partners in some of these small and medium firms of accountants then be this ignorant or was this a deliberate attempt to misinform the public? We know that the big four firms are sometimes seen as unequal competition. Either way, these comments are capable of undermining our noble profession that we have worked so hard to build. Hence as a seasoned accountant having trained with PwC myself years back and now running my own practice, I feel constrained to educate the public as well as my fellow accountants on certain basic reporting concepts provided by the International Federation of Accountants in its various publications.
What PwC stated in its report
PwC stated in its report that “the procedures we performed did not constitute an examination or a review in accordance with generally accepted auditing standards or attestation standards. Accordingly, we provide no opinion, attestation or other form of assurance with respect to our work or the information upon which our work was based.”
What is an Opinion, Attestation, Assurance?
According to the International Framework for Assurance Engagements contained in the International Federation of Accountants (IFAC) Handbook of International Quality Control, Auditing, Review, Volume II 2014 Edition Volume II (which is available to all accountants) an assurance engagement is one where a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject against criteria. The framework specifies that five elements exhibited by assurance engagements as three party relationship, a subject matter, criteria, evidence and an assurance report. There are two forms of assurance engagements based on the form of conclusions. Firstly a limited assurance engagement in which the accountant expresses his conclusion in the negative form for example “Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria”. Limited assurance is used for example in review engagements such as review of interim financial information. The second form is a reasonable assurance engagement in which the accountant asserts his conclusion in a positive form for example “In our opinion internal control is effective, in all material respects, based on XYZ criteria..” The Audit opinion is included in an Audit report.
IFACs Assurance Engagements other than Audits or Reviews of Historical Financial Information, defines Attestation engagements as an assurance engagement in which a party other than the practitioner measures or evaluates the underlying subject matter against the criteria.
Why I think NNPC did not contract PwC to provide Assurance
An accountant cannot provide assurance until all five elements that I have enumerated above are present. From just a casual review of the report, I can conclude that a three party relationship (1.Practitioner:PwC, 2. Responsible party:NNPC, 3. Intended user:Auditor General's office), existed and that there is a definite subject matter (Crude Oil revenues generated by the NNPC). I’m certain though that NNPC would have struggled to provide a clear criteria to PwC. For engagements reporting on compliance, relevant criteria would be things like applicable laws, regulations and contracts, those criteria have to exhibit all characteristics of; relevance, completeness, reliability, neutrality and understandability. From the PwC report, I can see NPDC did not provide access neither was Kerosene subsidy regulation clearly available. Limitations around access to NPDC would have limited the ability to generate complete reliable evidence so I can readily see why NNPC could not have contracted an Assurance engagement with PwC as they could not guarantee the presence of all five elements of Assurance engagements.
Why structuring the investigation as Forensic Audit makes sense
The free online business dictionary that I regularly use defines Forensic Audit as “The application of accounting methods to the tracking and collection of forensic evidence, usually for use in the investigation and prosecution of criminal acts such as embezzlement or fraud. It is also called forensic accounting.
I found that the US Public Company Accounting Oversight Board (PCAOB) Strategic Advisory Group panel discussion observed in 2007 that “Although forensic audits may examine financial reporting and internal control matters, the objective of a forensic audit is not expressly articulated in an established set of standards. Rather, users of forensic audits (e.g., audit or special investigative committees, management, and regulators) establish their objectives on a case-by-case basis.”
It therefore makes sense to me that the probable reason the engagement was structured by the Auditor General as a Forensic Audit which is a type of Non assurance engagement was to give NNPC the flexibility to establish its objectives for the PwC Forensic Accountants as is expected in an investigation of this nature.
What were PwCs Terms of reference?
The report quotes the terms of reference per their engagement letter of 5th June 2014 as follows:
a) Analyse and comment on submissions made by various parties in respect of alleged remittance shortfalls.
b) Analyse all submissions made by key stakeholders in relation to these unaccounted funds
c) Produce an independent forensic investigation report
Given the enormous findings by PwC in this report despite obvious constraints, my personal view is that PwC adequately discharged their duties under the terms of reference given to them. This exercise should not be a one- off, but should be done regularly by them every few years and at least once during every administration perhaps targeting other areas not investigated in the current exercise. Indeed a Public Company Accounting Oversight Board (PCAOB) in the US November 2006 paper posited the idea of regular forensic audit as a way to improve detection of fraud at public companies and enterprises. Indeed the new administration should re-engage PwC with wider terms of reference and with unlimited access and if so desired commission an “assurance” engagement.
Fuss over the Caveat …Much ado over absolutely nothing…
Accountants are in fact required to include such caveats when reporting on non assurance engagements. International Framework for Assurance Engagements paragraph 15 on 'reports on non-assurance engagements', states that a practitioner reporting on an engagement that is not an assurance engagement within the scope of this Framework, clearly distinguishes that report from an assurance report. So as not to confuse users, a report that is not an assurance report avoids, for example:
- Implying compliance with the International Framework for Assurance Engagements, International Standards on Auditing, International Standards on Review Engagements and International Standards on Assurance Engagements.
- Inappropriately using the words “assurance,” “audit” or “review.”
- Including a statement that could reasonably be mistaken for a conclusion designed to enhance the degree of confidence of intended users about the outcome of the evaluation or measurement of a subject matter against criteria.
I am convinced that all responsible Accountants worldwide producing forensic audit reports or any other type of non assurance report are expected to (and presently actually do) include similar caveats so as not to misinform the public. This does not take anything away from the content, value and applicability of the report themselves but only protects users in compliance with IFAC provisions.
Conclusion
In conclusion and in line with the terms of reference, readers of the report should be asking
a) Did PwC analyse and comment on submissions made by various parties in respect of alleged remittance shortfalls? The answer is an obvious “Yes”
b) Did PwC analyse all submissions made by key stakeholders in relation to these unaccounted funds? The answer is an obvious “Yes”
c) Did PwC produce an independent forensic investigation report? The answer is an obvious “Yes”
Given the views communicated by some senior audit partners in some of these SMP's, I think this underscores the need for continuous education on accounting, auditing and reporting and I have cause to thank God once again for my quality training and background.
I believe this piece lays to rest the matter of the caveat which is in my view, probably a deliberate, needless diversion of the unassuming public away from the core issues raised in the PwC report - Issues that along with the passage of the Petroleum Industry Bill (PIB) should be on the fore-front of everyone’s mind at this time of dwindling revenues.
By Ijeoma Rita Obu (FCA)
Managing Partner
IRO & Partners Chartered Accountants
Lagos
www.iro-accountants.com
