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UDC 657.6-051:340:001.895
MAIN APPROACHES TO THE PROCESS OF CORRUPTION RISK ASSESSMENT DURING AUDIT OF BRANCHES OF INDUSTRY AND AGRO INDUSTRIAL COMPLEX
Mamaeva G.N., Candidate of Economical Sciences Financial university at the Government of the Russian Federation, Orel City, Russia E-mail: www.mamaewagalina@yandex.ru, Phone: +7(915) 505-58-20
ABSTRACT
In the article the basic directions of work of the auditors in the field of counteraction of corruption in the course of the audit are examined, emphasis on the special role of auditors in the anti-corruption movement is done. Main stages of assessing the risks of corruption in the process of auditing are differentiated. Within each stage sequentially article describes the main approaches to the study of risks of corruption in the course of the audit. In conclusion the role of auditors in countering corruption offences, the noted shortcomings of modern anticorruption legislation and made recommendations for its improvement are evaluated.
KEY WORDS
Misconduct; Corruption risks; Audit; Evaluation of risks; Corruption; Counteraction.
Today in our country there are many problems connected with corruption. The bribery, wastes and other types of corruption became the reason of deterioration of an economic and political situation and infliction of harm to society as a whole. Real counteraction of corruption is possible only in case it is considered as the system phenomenon mentioning a wide complex of social, economic, organizational and other problems. As D.A.Medvedev declared in The New York Times interview «Corruption turned into a system problem. And we are obliged to oppose to this system problem the system answer».
Therefore besides criminal and legal measures in fight against corruption the measures of preventive character consisting in improvement of state regulation and control in spheres of action, subject to corruption risks have to play an important role.
As a result so far in the Russia territory the set of various mechanisms according to the prevention and counteraction of corruption both in the public and municipal administration, and in non-state sector is created. One of the most important elements of anti-corruption system in Russia is auditor activity. In anti-corruption movement the special part is assigned to auditors. It is caused by the following. First, auditor activity, being one of elements of system of financial and economic control, widely covers various types of the enterprises - on forms of ownership, branches, organizational and legal forms, the sizes, etc. The main consumers of auditor services are the enterprises and the organizations for which obligatory annual audit (banks is legislatively defined, insurance companies, open joint stock companies, the enterprises, cumulative annual which volume of revenue are exceeded by legislatively established minimum, etc.). Secondly, auditors render full range of services to clients, first of all it is obligatory annual audit according to the legislation requirement in this connection, and they get access to information on financial and economic activity of the client, and, using legislative base, can not only establish the corruption facts, but also take the appropriate measures. Thirdly, the wide network of subjects of auditor activity acts on the market of auditor services of Russia: major, medium-sized and small auditor companies, individual auditors, and also foreign and transcontinental firms like «Big Four» coexist.
December 31, 2011 according to registers of auditors and the audit organizations which conduct the self-regulating organizations of auditors, have the right to carry out auditor activity 6,2 thousand subjects, including 5,2 thousand audit organizations and 1,0 thousand individual auditors [2].
Now in system of standard regulation of auditor activity certain mechanisms of quality control of audit, including for corruption counteraction are put. Rules of quality control of auditor services for counteraction of corruption are established according to the Federal law
«About auditor activity» of 30.12.2008 by No. 307-FL (further - the Law No. 307-FZ), the federal standards of auditor activity approved by orders of the Ministry of Finance of the Russian Federation from May 20, 2010 of N 46n, of August 17, 2010 of N 90n and of August 16, 2011 of N 99n, the federal rules (standards) of auditor activity approved by the resolution of the government of the Russian Federation from September 23, 2002 N 696 (with the subsequent changes), the Code of professional ethics of auditors.
The basis of actions of audit organization (the individual auditor) on corruption counteraction when rendering auditor services is made by Federal Standards of Auditor Activity. First of all on corruption extend. FSAA 5/2010 requirements «Duties of the auditor on consideration of unfair actions during audit» (further - FSAA 5/2010) (corruption can be qualified as deliberate unfair action) and FSAA 6/2010 «Duties of the auditor on consideration of observance by the audited person of requirements of regulations during audit» (further - FSAA 6/2010) (regarding observance by the audited person of the legislation on fight against corruption).
Proceeding from provisions FSAA 6/2010, during audit of accounting reports the auditor is obliged to consider (to consider) observance by the audited person of regulations of the Russian Federation, including the Federal law «About corruption counteraction». Besides, according to FSAA 5/2010 an obligation of audit organization, the individual auditor is consideration during audit of accounting (financial) reports of unfair actions, i.e. the actions made fraudulently by one or several persons from among representatives of the owner, the management, workers of the audited person and (or) other persons for extraction of illegal benefits. Nevertheless, according to FPSAA N 1 «The purpose and the basic principles of audit of financial (accounting) statements» the purpose of audit is not identification of the facts of the organization, preparation and commission from a name or in interests of the audited person of corruption offenses or the offenses creating conditions for commission of such offenses. However during the planning and implementation of audit such auditor procedures which allow obtaining sufficient competent auditor evidences of observance by the audited person of the legislation on corruption counteraction have to be provided and executed.
The auditor considers during audit unfair actions (including corruption character) which were at the bottom of significant distortions of accounting reports, namely: the distortions which have resulted unfair drawing up accounting reports, and the distortions which have resulted assignment of assets. At different stages of an audit inspection various auditor procedures which allow obtaining sufficient competent auditor evidences of observance by the audited person of the legislation on corruption counteraction are applied. The auditor has to receive sufficient confidence that accounting reports of the audited person as a whole do not contain the significant distortions which have resulted unfair actions, including actions of corruption character.
Unfair actions are, as a rule, based on the difficult and carefully organized schemes developed for the purpose of concealment of such actions. In FSAA 5/2010 it is emphasized that the risk of nondetection of the facts of unfair actions of the management is much higher in comparison with risk of nondetection of unfair actions of employees of the audited person or the third parties. It is rather difficult to establish and prove the facts of unfair actions of the management during audit. It is connected with such circumstances, as: complexity of establishment of intention, especially regarding subjective judgments of the guide of the audited person; possibility of concealment of unfair actions, including with application of falsification of documents; circumvention of formally established procedures of control by the management or representatives of the owner of the audited person; possibility of arrangement of persons, representatives of the management, the owner, employees of the audited person or the third parties [4].
For identification and an assessment of risk of corruption manifestations within a main objective of audit - expression of opinion on reliability of accounting (financial) reports of the audited person - auditors need to solve the following main problems: identification of risk of corruption manifestations at acceptance on service of the new client and/or continuation of cooperation with the client; identification of risk of corruption manifestations at acquaintance
with activity of the audited person; reflection of questions and the auditor procedures connected with check of observance by the audited person of the Federal law «About corruption counteraction» and other regulations in the field of corruption counteraction in the plan and the audit program; carrying out auditor procedures for detection of transactions and financial operations which can be connected with corruption; documenting of corruption cases; interaction with the guide of the audited person concerning corruption; informing of representatives of the owner concerning cases of corruption or risk of emergence of corruption; information transfer about the revealed cases of corruption in authorized bodyl; refusal of an auditor task.
Identification of risk of corruption manifestations is the continuous procedure which is carried out by auditors at all stages of audit and rendering by audit organization (the individual auditor) other services.
Process of an audit inspection consists of the following main stages: preparatory (acquisition of preliminary knowledge of activity of the audited person, coordination of conditions of the arrangement on audit); basic (an assessment of auditor risks, studying of system of internal control of the client, audit planning, collecting auditor proofs, including with use of work of the third parties, ensuring performance of conditions of contracts); final (formation of conclusions, registration of the conclusions and reports).
Therefore, assessment stages of risks of corruption in the course of an audit inspection are: assessment of preliminary conditions; direct assessment of risks of corruption; taking measures to reporting of information on the probable facts of corruption.
The self-regulating organizations of auditors, audit organizations (individual auditors) must in the firm standards (internal normative documents) develop a concrete technique of risks assessment of the significant distortion resulting unfair actions, including actions of corruption character.
ASSESSMENT OF PRELIMINARY CONDITIONS
The assessment of preliminary conditions assumes identification and an assessment of factors which promote or can promote corruption, at a stage of collecting data on the potential client and the conclusions of the contract with him. At this stage of an audit inspection the auditor, considering possibilities of rendering auditor services of the organization, must be ready to that the accounting (financial) report of the audited person is subjected to risks of corruption.
According to FSAA 5/2010 the auditor before the conclusion of the contract on carrying out audit at the preliminary acquaintance stage with the economic subject activity can receive information useful to identification of risks of significant distortion, resulting from unfair actions, including actions of corruption character. The stage of preliminary understanding of the client activity represents the analysis of a number of factors, information about which is not closed and is available at a precontractual stage of the relations with the client. At repeating throughout a row of years audit inspections of this economic subject the auditor updates and anew estimates information collected earlier, including data from briefs for previous years. The auditor has to reveal also the considerable changes which were taken place after the financial audit for the previous years. This stage of auditor work is conducted by the head of the organization and/or the persons authorized on implementation of specified actions by the head of audit organization, whose qualification, knowledge and experience allow executing this assignment qualitatively.
Fact-finding process has to begin with the detailed analysis of the current legislation, provisions, rules and standards for the purpose of auditor understanding the activity, mission, the purpose and the main operations of the potential client.
At an assessment of legislative base the special attention is paid to the legislative provisions concerning vulnerable kinds of activity of the potential client. Vulnerable kinds of activity are understood as kinds of the economic subject activity which on the specifics assume the increased risk of corruption. Vulnerable kinds of activity can be as the types concerning the internal organization of the potential client, and the kinds of activity
concerning his functions (external tasks). At a preparatory stage the auditor also can receive information about organizationally-administrative structure of the potential client. The auditor has to understand spheres and the principles of activity of the potential client. Detailed acquaintance with features of structure and functioning of the organization allows estimating degree of corruption risk more precisely. The assessment of organizational structure of the potential client is made on the base of the following criteria: compliance level of organizationally - administrative structure considering tasks, competence, the rights and obligations of the organization; efficiency level of organizationally - administrative structure considering tasks, competence, the rights and obligations of the organization.
Whenever possible it is necessary to estimate reputation of the alleged client in a business community, durability of its financial position and its relationship with the previous auditor firm. Carrying out the specified procedures, the auditor must remain vigilant to existence of potential opportunities for corruption. At identification of factors which promote or can promote corruption, the auditor has to estimate relevancy of threats to observance of the fundamental principles of audit. If the importance of threats is high and it is not possible to reduce them to acceptable level, the auditor firm has to refuse acceptance of the client on service.
At achievement of consent on the conditions of carrying out the audit, the coordinated conditions need to be reflected in the contract on carrying out an audit inspection. Signing the contract, the audit organization has to inform the client that at identification of the facts of non-compliance by the audited person of the requirements established by the legislation on counteraction of corruption, the auditor is obliged to take the measures provided by this legislation, and also FSAA 5/2010 and FSAA 6/2010. In particular, in the cases provided by the legislation, the auditor has to give information on the found facts of the organization, preparation and commission from a name or in interests of the audited person of corruption offenses or the offenses creating conditions for commission of such offenses to authorized government bodies of the power [1].
DIRECT ASSESSMENT OF RISKS OF CORRUPTION
The direct assessment of risks of corruption assumes identification, research and bribery and corruption risk analysis at all stages of audit: when studying system of internal control of the client (SIC), planning audit, collecting and an assessment of auditor proofs, documenting of an audit inspection and preparation of an audit report. Definition of risk indicates certain problem areas where the auditor can face risk of bribery and corruption, and allows it to estimate and reduce this risk better. For this reason in FSAA 5/2010 examples of risk factors of the unfair actions connected with unfair drawing up the reporting and assignment of assets are given. These risk factors are subdivided into three types depending on the reasons which are allegedly in their basis: motive or pressure; available opportunity for commission of unfair action; ability to veil unfair action, finding it logical justification.
Decrease in risks of corruption emergence and fraud in the organizations is promoted by well organized systems of internal control therefore on the basis of an assessment of system effectiveness of internal control, including accounting system, collection of information about real and potential risks of corruption in the organization is made. This is reflected in PSAA N 8 “Understanding of activity of the audited person, the medium in which it is done, and an assessment of risks of significant distortion of audited financial (accounting) statements" So, the standard establishes that the auditor has to study system of internal control in amount, sufficient for identification and an assessment of risks of essential distortion of financial statements as a result of unfair actions.
Practice shows that in the most effective way of identification of unfair actions testing of system of internal control at the enterprise (or risks control system) is represented [5].
When testing control devices the auditor is interested not mostly in search of specific unfair actions, but identification of shortcomings of systems of the account and the control, urged to interfere with their appearance, timely to reveal and to correct them, that as a result will increase efficiency of SIC. Subject of the tests revealing significant distortions in the
result of unfair actions of the audited person can be for example, not observing the measures of internal control by the authorities, the order of drawing up financial statements, risk factors of corruption [5]. In the course of understanding of activity of the audited person and medium in which it is carried out, including system of internal control, when performing auditor procedures of an assessment of risks of bribery and corruption and the related actions the auditor according to FSAA 5/2010 it is necessary to use such well-known measures, as inquiries within the audited person, inquiries to his contractors, supervision and inspection, analytical procedures, discussion in auditor group of susceptibility of the organization to risks of corruption. Within the audited person inquiries can be sent to the address of the directorship of the audited person, officials of the audited person, service of internal audit, representatives of the owner of the audited person, to find out the presence of data: about any actually done or suspected unfair actions; about risk factors of unfair actions.
Supervision and inspection can become a basis for the direction of inquiries and a source of information on activity of the audited person and medium in which it is carried out.
Analytical procedures can help to reveal unusual or unexpected interrelations which can testify to existence of risks of essential distortion as a result of unfair actions. Thus it must be kept in mind that at establishment of susceptibility of accounting reports of the audited person to significant distortion as a result of unfair actions the big role is played by discussion of a course of audit by participants of auditor group. Such discussion gives the chance to reach better understanding of that, as well as in what areas accounting reports are subjected to the significant distortion resulting unfair actions and corruption.
By the plan and the program of audit of financial (accounting) statements, questions and the auditor procedures connected with check of observance by the audited person of the Federal law "About corruption counteraction" and other regulations in the field of corruption counteraction have to be provided. Depending on what assessment reliability of systems of accounting and internal control received, a fraud and corruption risk level, the auditor changes structure and the content of planned auditor procedures. It means that when planning an audit inspection the auditor should define nature of counteractions concerning the estimated risks of significant distortion as a result of unfair actions and corruption. Thus the auditor has to show professional skepticism. Owing to professional skepticism the auditor considers the accounts presented to it and documents original until it does not have bases to hold opposite opinion.
Great help is rendered to the auditor with the list of special auditor procedures which are applied in reply to the estimated risks of significant distortion in case of unfair drawing up accounting (financial) reports and in case of assignment of assets, and also examples of circumstances which indicate possibility of existence of such actions, presented to FSAA 5/2010. According to FSAA 5/2010 the choice of character, a temporary framework and volume of auditor procedures has to be carried out taking into account an element of surprise that promotes decrease in opportunities of workers of the audited person to suppress the fact of unfair drawing up accounting reports.
The auditor can consider an element of surprise, in particular, by means of: performance of check procedures in essence concerning the selected accounts of accounting and preconditions of preparation of accounting reports, instead of their testing owing to their importance or risk; corrections of a temporary framework of auditor procedures performance in comparison with the earlier approved; usage of different methods of selective inspection; performance of auditor procedures in the segments of the audited person having a different site, or without the preliminary prevention [3].
As for selection of registration and corrective records for the subsequent check, the auditor has to analyse: assessment of risks of significant distortion of accounting reports as a result of unfair actions which can help the auditor to choose concrete groups of the same registration and corrective records for the subsequent testing; control devices which were applied to control of registration and corrective records which can reduce the volume of check procedures in essence provided that the auditor tested operational efficiency of such control devices; process of preparation of accounting reports of the audited person and how corrective records are done and what trace they leave; special distinctive features of
misleading registration or corrective records; it is a question of the accounts including accounts of accounting, having no relation to certain economic operations or seldom used; introduction of records by persons which, as a rule, do not do it; introduction of accounts at the end of the reporting period or when closing accounts of accounting after the termination of fiscal year without accurate justification; absence in records of numbers of corresponding accounts of accounting; inclusion in record of the rounded values or existence of a row of the sums terminating on the same figures; character and complexity of accounts of accounting, means the analysis of accounts in which significant estimates and the adjustments which are carried out for the end of the reporting period are reflected; accounts in which in last reporting periods already there were distortions or timely verifications of accounts in which intraeconomic operations are reflected were not carried out; accounts which are somehow connected with the revealed risk of essential distortion of accounting reports as a result of unfair actions; accounts and the other corrections which are carried out at processing of economic operations, not relating to primary activity as concerning non-standard accounts the same control devices, as concerning the accounts brought on a regular basis at reflection of standard economic operations (for example cannot be applied, at reflection of monthly sales, purchases and payments of money) [3].
In case the auditor finds distortion of accounting reports, he has to establish, whether this distortion is a feature of unfair actions, including actions of corruption character. In the presence of such feature the auditor has to receive additional data on such distortion nature and circumstances under which it took place, and also other sufficient information necessary for an assessment of influence of such distortion on accounting reports, the possible financial consequences (sanctions), the compelled termination of activity (license deprivation, suspension of operations) are thus taken into account. Also the auditor has to reconsider an assessment of risk of significant distortion as a result of unfair actions of corruption character and, respectively, reconsider its influence on character, volume and a temporary framework of the auditor procedures which are carried out in reply to estimated risks. At identification of each unfair action, even insignificant, the auditor has to understand that it can be not single one. This circumstance can demand from the auditor of revision of the planned approach to audit, including concerning selection of divisions of the audited person which is subject to more detailed inspection.
The auditor can call into question opportunity to continue carrying out audit if during carrying out auditor procedures it faces the exceptional circumstances indicating significant distortions, resulting from corruption actions. In case of refusal from an auditor task the auditor has to: discuss with the directorship of the audited person and representatives of the owner of the audited person refusal of an auditor task and the reason of this refusal; consider, whether there is a duty to report about refusal of an auditor task and the reasons for his face (faces) which has appointed the auditor, and in the established cases - to authorized government bodies [3].
All information on auditor procedures, their results and the conclusions drawn during audit by consideration of questions, connected with observance of the Federal law «About corruption counteraction» and other regulations in the field of corruption counteraction, the auditor has to reflect in the briefs.
TAKING MEASURES ON REPORTING THE INFORMATION ON THE PROBABLE FACTS OF CORRUPTION
The final stage of an assessment of corruption risks is taking measures on reporting the information on the probable facts of corruption offenses elicited during audit. Duties of the auditor do not include legal qualification whether action of corruption character really took place, as the auditor does not possess the corresponding competence [4]. According to the Criminal code of the Russian Federation corruption is one of types of criminal offenses. In this connection only the court or judicial scrutiny can qualify act as corruption instead of the auditor. Thus the auditor also cannot judge premeditation of distortions. Therefore in FSAA 5/2010 there repeated recommendations to the auditor to address for consultation to the
lawyer. It is important to know that auditors, relying on the professional judgment, can point only to existence of opportunities for corruption, however they should not conduct specially search of the factors indicating existence of signs of corruption offenses. The measures undertaken by the auditor at identification during audit of the probable facts of corruption offenses are provided by FSAA 5/2010. Applying regulations of the specified standard, it should be noted that if the auditor elicits the facts of corruption offenses or receives information indicating their existence, he has to bring this information to the attention of the directorship of the audited person of an appropriate level first of all. The question of what level of the directorship of the audited person has to be informed of such cases, is a subject of professional judgment of the auditor [3].
The auditor has to give also specified information to representatives of the owner of the audited person in case of identification of participation in corruption offenses: persons from the directorship of the audited person; the workers who are carrying out key functions in system of internal control; other persons which activity is capable to have essential impact on accounting reports.
In the presence at the auditor of any bases to believe that transactions or financial operations of the client have corruption character, he has to define, whether he is obliged to report to the party about a case or suspicions, external in relation to the audited person, including authorized government body.
Coming to the conclusion we note that the modern legislation on audit allows auditors to elicit easily the facts of corruption offenses and auditors reveal them. However, if they elicited the specified facts and, especially, they reported to authorized government bodies about the specified facts: first, can not receive payment for the work, and, secondly, can subject itself to real physical and/or property risk. Therefore, in our opinion, cases in which auditors are obliged to report to authorized government bodies about the specified facts have to be accurately stated in the Law on audit, and responsibility for non-execution of this duty is provided.
REFERENCES
1. Recommendations to audit organizations, individual auditors, auditors on carrying out audit of annual accounting reports of the organization for 2011: Letter of Ministry of Finance of the Russian Federation from January 27, 2012 N 07-02-18/01
2. Condition of the market of auditor services in the Russian Federation in 2011. Report of Ministry of Finance of the Russian Federation. - URL: http:// www.audit-it.ru .
3. FSAA 5/2010 «Duties of the auditor on consideration of unfair actions during audit»: Order of Ministry of Finance of the Russian Federation from August 17, 2010 N 90n
4. Zhmin’ko S. I., Byirdina P. V. Actions of auditors at disclosure of the facts of unfair
actions in economic activity // International Audit. - 2011. - №43
5. Byichkova S. M., Ityigilova E. J. Risks of distortion of registration information: identification in the course of audit // Auditor sheets. - 2010. - №12
