Four audit firms fined GHc2.2m for roles in banks collapse

The Institute of Chartered Accountants (ICAG) has sanctioned four audit firms for shortfalls in their professional duties to comply with the required International Auditing Standards.

ICAG has therefore fined the four auditing firms a total over GH¢2.2 million. The breakdown includes Deloitte & Touche  – GH¢1,150,000, PKF Chartered Accountants – GH¢550,000, J. Mills Lamptey & Co. – GH¢150,000 and Morrison & Associates – GH¢350,000

PKF CHARTERED ACCOUNTANT – CAPITAL BANK
The Disciplinary Committee identified that:
The Firm did not obtain sufficient appropriate audit evidence about the appropriateness of Management's use of the going concern assumption in the preparation of financial statements and to conclude whether there is a material uncertainty about the entity's ability to continue as a going concern.

For example, the Firm failed to assess the impact of the nonexistent Investments totalling GH¢482 million and impaired loans of GH¢423 million which had been ring-fenced to be written off within a period of five (5) years on the financial statements and on the opinion. Both amounts were fully impaired at the reporting date and should have been written off to profit and loss in full.

Aggregate uncorrected misstatements in the Financial Statements were not evaluated and not taken into consideration in the overall conclusion in forming the audit opinion.

The firm ignored the risk of potential misstatements of related party transactions, despite the materiality of the transactions involved. For example, Capital Bank disclosed a list of related party transactions amounting to GH¢18.9 million (Loans & Advances) and GH¢102.7 million (Investments).

The Management Letter from the Firm dated 26th May 2017 mentioned that the Auditor could not perform any audit procedures on these related party transactions, because they did not receive the information on time.

The Council of ICAG therefore, approve the recommendations of the Disciplinary Committee, and sanctions PKF Chartered Accountant and its Engagement Partner with a fine of GHC 550,000.00 with respect to the audit of Capital Bank's Financial Statements for the year ended 31st December 2015.

J. MILLS LAMPTEY & CO. – CONSTRUCTION BANK
The Disciplinary Committee identified that:
In the absence of an appropriate alternative test, there was no evidence that the Firm obtained sufficient appropriate audit evidence on bank balances prior to issuing the audit opinion.

For example, the Firm did not perform alternative procedures to address the risk relating to the existence of bank balances of GH¢100 million when the external confirmations had not been received at the date of the audit opinion.

ii) The Firm did not obtain sufficient appropriate audit evidence about the appropriateness of Management's use of the going concern assumption in the preparation of the financial statements.

For example, as at 31st December 2017, stated capital of GH¢120 million required by the Regulator, Bank of Ghana (BOG) was not met. There was an outstanding amount of GH¢30,520,215.57 (amount due from a shareholder). There is no documentation on the audit file to support the firm's evaluation of the impact of the capital shortfall on the going concern of the entity.

The Firm did not perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the Auditor's report that may require adjustment of or disclosure in, the financial statements had been identified.

For example, on Wednesday 21st February 2018, the bank received GH¢34 million from a shareholder as consideration for shares. The treatment of this as a post-balance sheet adjusting event was incorrect and inconsistent with the basis of recognising stated capital in accordance with section 66 of the Companies Act, 1963, (Act 179).

iv) There was no documentation on the audit file to demonstrate that the required procedures were performed to identify related party relationships. The Council of ICAG therefore, approve the recommendations of the Disciplinary Committee, and sanctions J. Mills Lamptey & Co. and its Engagement Partner with a fine of GHC 150,000.00 with respect to the audit of Construction Bank's Financial Statements for the year ended 31st December,2017.

MORRISON & ASSOCIATES – BEIGE BANK The Disciplinary Committee identified that:

Among other observations, the Firm's documentation of audit evidence was not adequate. For example, there was no evidence on the audit file to show the alternative procedures performed by the Auditor to address the risk relating to the existence of an amount of GH¢20 million borrowed from short-term and Institutional Lenders, long-term Institutional Borrowing amounting to GH¢4 million, bank balances amounting to GH¢115.7 million and Investments amounting to GH¢390.5 million.

The Firm's disclosure of related parties and their transactions in the financial statements were inadequate. For example, Beige Bank had placed about 35.7% of its investments in a related party investment company (Beige Capital Assets Company) contrary to BOG regulatory requirement limit of 10%.

This was clearly conspicuous in the Bank's investment portfolio but was not highlighted by the Firm during the audit. The Council of ICAG therefore, approve the recommendations of the Disciplinary Committee, and sanctions Morrison & Associates and its Engagement Partner with a fine of GHC 350,000.00 with respect to the audit of Beige Bank's Financial Statements for the year ended 31st December 2017.

DELOITTE & TOUCHE – UNIBANK, UT BANK AND THE ROYAL BANK

The Disciplinary Committee identified that:
The definition of cash & cash equivalents in the financial statements of all the three banks audited by the firm include, among others, “liquid assets with maturities of less than three months”.

However, the cash and cash equivalents in the cash flow statement in all the three (3) banks included “Placements with other banks” with maturities of more than three months. This is inconsistent with the provisions in all the three bank's own accounting policy; IAS 7 and Section 2.12(3(j)) of Guide for Financial Publication for Banks and Bank of Ghana Licensed Financial Institutions (2016).

Deferred Tax assets of GH¢9,563,313 was recognized in the Royal Bank's Financial Statements. However, there was no documentary evidence in the working papers that the recognition was done in accordance with the provisions of IAS 12 (revised)

The financial statements of all the three (3) banks audited by Deloitte contained errors that suggested a weak quality control over-reporting.

The following are examples of significant errors:
a) A review of UT Bank's financial statements for the year ended 31st December 2014 indicated that an amount on the face of the statement of financial position for total liabilities is GH¢1,489,991 whiles the amount in the notes was GH¢1,513,377.

Additionally, the comparative amounts on the face of the statement of profit or loss for interest expenses, net interest expense, fees and commission income, taxation did not agree to the amounts in the notes.

b) A review of The Royal Bank's financial statements for the year ended 31st December 2016 indicates that the comparative for other expenses figure on the face of the statement of profit or loss was GH¢30,446,862, whiles the amount in the note was GH¢73,430,364.

In addition to the above, the comparative for deferred income figure on the face of the statement of financial position was GH¢605,434 whiles the amount in the note was GH¢605,437.

The Council of ICAG therefore, approve the recommendations of the Disciplinary Committee, and sanctions Deloitte & Touche and its Engagement Partners with a fine of GHC 1,150,000.00 with respect to the audit of UniBank's Financial Statements for the year ended 31st December, 2016, UT Bank's Financial Statements for the year ended 31st December, 2014, and The Royal Bank's Financial Statements for the year ended 31st December,2016.

Last year, Bank of Ghana (BoG) announced the formation of Consolidated Bank Ghana Limited (CBG) to take over the good assets and the operations of Five (5) local Banks that were placed under receivership by Bank of Ghana.

In August 2017, Bank of Ghana approved GCB Bank Limited's acquisition of the good assets of UT Bank and Capital Bank, through a Purchase and Assumption Agreement.

The Council of the Institute of Chartered Accountants (Ghana)-(ICAG) took note of these developments in the banking industry in Ghana, particularly, the question of the Auditors' work relative to the Seven (7) banks that were placed under receivership.

After a meeting held on Monday, 13th August 2018 with the Auditors of these banks, the Council of the ICAG decided to set up a Fact-Finding Committee to:

a) Review the audit files prepared by the Audit firms on the said banks to determine whether audit work done supported the opinion issued by the Auditors.

b) Review the specific circumstance of each bank under receivership and determine whether or not there were sufficient grounds to initiate disciplinary action against the Statutory Auditors.

The Fact-Finding Committee completed its work and presented its final report on Friday, 12th April 2019 to the Council of ICAG.

Subsequently, the Council in accordance with Section 16 (2) of the Chartered Accountants Act, 1963, (Act 170), set up a Disciplinary Committee for the purpose of holding an inquiry into the conduct of Auditors of the Seven (7) banks that were placed under receivership.

The Disciplinary Committee granted hearing to the Auditors of the Banks placed under receivership. The Representatives were given the opportunity to respond both in writing and orally to the infractions raised by the Disciplinary Committee.

The following firms appeared before the Disciplinary Committee: EY Chartered Accountants, PKF Chartered Accountants, J. Mills Lamptey & Co., Morrison & Associates and Deloitte & Touche.

The Disciplinary Committee reported to the Council of the ICAG their findings and recommendations.