Small and Medium Practices (SMP) still a long way to the top of the class
The commercial banks will soon start publishing their abridged audited accounts for the year ended 31 December 2015; in the New Vision and Daily Monitor. What will be evident is that the external auditors will be one of the Top 5 firms (PwC, KPMG, EY, Deloitte and PKF). For purposes of this article, the author has restricted himself to just 2014 and 2015 but a more expensive research will be extended to 20 years back.
In December 2013, the Bank of Uganda (BOU) published a list of 56 auditing firms that had passed the test and were thus considered suitable to audit the financial statements of commercial banks, credit institutions and microfinance deposit taking institutions (Tier 1,2 and 3). The list was compiled by BOU after the auditing firms have submitted their pre-qualifications documents by the due date. The author had not yet established the total number of auditing firms that had submitted their pre-qualifications documents to BOU.
Suffice to know that those 56 firms were all duly authorised firms approved by the Institute of Certified Public Accountants of Uganda (ICPAU). By that time, the total number of auditing firms approved by ICPAU was close to 190, meaning that about one-third had been pre-qualified by BOU.
However, the number of Tier 1-2 financial institutions is limited and not all the firms will get an audit. The table below shows that out of 27 Tier 1-3 financial institutions, only five of the 56 firms got an audit for the year ended 31 December 2014. The top three of PwC, KPMG and EY had the lion’s share auditing 22 of those financial institutions which constituted 97% of the total assets of that population – which stood at UGX 18 trillion (US$ 5,300 million). Compare this to assets of about 90 members of the Association of Microfinance Institutions of Uganda (AMFIU) which added up to between US$300-400million.
Source: Author’s own compilation from published accounts in newspapers
The story of dominance by the top firms may not be very different come 2015.
Of particular interest are the following statistics:
• Out of the 56 auditing firms that were on the pre-qualification list in 2014, a total of 18 were unsuccessful in their bids for 2015. The author will attempt to find out why that was the case. It could be that the audit firm did not pass the BOU requirements or they did not meet the deadline or did not submit a bid altogether; these facts will be established;
• For the year 2015, BOU pre-qualified a total of 64 audit firms. Notably, a total of 26 new audit firms were added onto the list which was a welcome boost to those firms. The author will in due course engage the BOU to find out the criteria for inclusion or exclusion of an audit firm from the pre-qualification list; and
• Out of the 64 audit firms pre-qualified for 2015, a total of 22 of them were sole proprietorships. Originally, there was a view that only audit firms with at least two partners would be eligible for BOU pre-qualification, but that assertion has now been proven incorrect.
Is the situation in Kenya, Tanzania and Rwanda any different?
Kenya has over 500 auditing firms registered with the Institute of Certified Public Accountants of Kenya, but with 56 commercial banks, mortgage financial institutions and microfinance banks. On the other hand, Tanzania has close to 150 auditing firms registered with the National Board for Accountants and Auditors of Tanzania, but with 44 commercial banks, finance leasing companies and other financial institutions. Last but not least, Rwanda has close to 35 auditing firms registered with the Institute of Certified Public Accountants of Rwanda, but with 17 commercial banks.
In Q2 2016, the author will have established whether the financial institutions in Tanzania, Kenya and Rwanda primarily also use appoint the top firms of PwC, KPMG, EY and Deloitte as their external auditors or is it a good mixture of the top firms and SMPs.
Do SMP have a chance on the Tier 1-3 cake?
The author thinks the SMPs have a good chance but one would need to dig deep into the critical success factors why the Tier 1-3 financial institutions continue to prefer PwC, KPMG, EY and Deloitte as their external auditors. In the meantime, the SMP have to be contented with auditing forex bureau which number over 200; non-deposit taking microfinance and SACCOs which could be approaching 2000 in number across Uganda. Should BOU consider regulating these Tier 4 institutions in the future, then the auditor’s pre-qualification list will end up being the same as the ICPAU list in its entirety.
Why you can’t assess auditing software just the same way as accounting software.
As a representative of a popular audit software product, I often get asked by audit practitioners whether I could avail them with a demo copy of the software so that we can ‘play around with it’.
Since financial audit and accounting are related, how different can the respective software be? The self-check procedures accountants use to decide whether an accounting system is working are quite simple and straightforward in their design: You put in a piece of data at one end and check to see if the information that has been crunched through the system and that comes out at the other end meets your expectations. A simple example of such a procedure would be taking a pocket calculator and adding up the column of numbers your assistant gave you to see if it agrees with the total at the bottom of his schedule.
However procedures like these only tell you whether the accounting softwareis able to properly process information that has been fed into it according to the rules that you specify. It’s the sort of procedure where because you know in advance, what the results should be, you can test it quite easily using that input vs. output model.
The real job of an accountant however, is not merely entering a transaction in the records but rather of knowing how to classify transactions. For example, which engineering items are repairs and which ones should be treated as new fixed assets instead? Is the value of the motor car as shown in the accounts still valid or does it need to be marked down – or even up? The accountant is also responsible for summarising the transactions in the way that most suits the people who need the information and presenting it in a way that makes sense. Seen in this light, it is not possible to create “accounting” software as these accounting judgement roles cannot be played by a computer program. What we refer to as accounting software should really be referred to as bookkeeping software.
Auditing, on the other hand, is the checking process. Confirming that data going in at one end of the system comes out the way it should at the other end, is just one audit objective and frankly, it isn’t even the most important one. The most important objectives of audit are to determine whether the financial statements (a) contain all the information they should contain, (b) contain only the information they should contain and (c) are reported in a way that conforms to a pre-agreed standard.
It does involve the arithmetical accuracy checking that most accountants do in the first place. However it also involves checking that the basis of classifying and summarising information was properly done – a test of judgement(because so-called accounting programs will execute incorrect instructionsto summarise or classify information just as faithfully as they will correct ones.)It also involves checking that there is no information missing - another judgement test.It also involves checking that the information is not overstated – also a matter of judgement. That’s not all however. International Standards on Auditing now actually pay attention to the process that was used to evaluate the accountant and it requires certain mandatory steps to be taken and documented, no matter how certain the auditor may be of the correct situation.
This leads to an interesting question then; is it possible to create software that can meet all of these requirements of the audit? Data interrogation and sample selection software could go through the accounting information and try to extract information that makes sense but could it tell if the classification method used by the accountant was wrong? How would it decide if the evidence provided was acceptable? This is a trickier proposition and indeed, nobody has yet been able to design software that actually “audits”, much in the same way that nobody has been able to design software that does “accounting.”
What does this mean for a practitioner thinking about buying audit software? Audit software doesn’t have transactions that you can insert at one end and click to see if they have been properly classified at the other end. Instead it provides what amounts to very a long and sophisticated checklist (or series of checklists) of the all the procedures an auditor needs to carry out to determine the three objectives and comply with the mandatory procedures mentioned above. These are extensive and run, at present to nearly 800 separate mandatory procedures in the International Standards on Auditing. And that’s not counting the steps in the audit programmes in each section of the audit file. There is only one way to tell if this collection of checklistsworks properly; carry out an audit with it and submit the results of the audit to an independent quality reviewer to determine if the work was done properly.
People who aren’t skilled enough to know how to use the checklist will not be able to gauge whether they failed or passed the quality review due to an inadequacy of their checklist or due to their failure to use it properly.
Also, although the ISAs prescribe the approach to the audit to which all auditors should conform and in some instances even stipulate the exact tests to be carried out, they are not precise enough about how to do it. For example, there are more than a dozen ways to develop a sampling frame that produces a truly random sample. Which one is most appropriate? What’s a reasonable maximum or minimum sample size? If your sample contains an error, by how much should you extend your tests if at all? What’s the best way to calculate materiality? How many levels of review should there be in a particular assignment? The ISAs just don’t say.
Audit software helps by providing handy computation tools for sample design and selection and guidance on developing materiality. They even provide specific program steps for various areas of the audit. They also nudge you, (by blocking access to particular file areas and questionnaires), into using the work flow sequence that is most efficient or effective. These features, in the aggregate, comprise the methodology of particular audit software.
Without training by a person with proper experience on the specific methodology of a particular piece of audit software, it could be difficult to understand how all the questionnaires, computing tools and checklists work together to achieve efficient compliance with the ISAs.
For these reasons, taking a demo copy of audit software to try it out is unlikely to be helpful unless you are also willing to undergo not just “demo” training in the methodology but also a “demo” quality review – all lengthy and costly steps.
I would suggest that a more reassuring route would be to work through a presentation with an experienced user and ask to be shown all the features that you consider to be key in your existing methodology to ensure that they are present. Another, perhaps more important source of reassurance would be to look at the number of other practitioners relying on the same software to carry out their work successfully. The more there are, the more likely that it is the right product for you.
“Anybody can succeed if they discover their talent and purpose for living, go ahead to develop it and take a step to deploy it. The 3 Ds (Discover, Develop and Deploy) have shaped my life and, it is a personal success model that can positively affect other people’s lives”.
Who is Moses Kasakya?
Moses Kasakya was born in Budaka district in Eastern Uganda. It is also here in Budaka that he got his Primary and O-Level education. He later moved to Masaba senior secondary school for his A-level where he undertook Mathematics, Economics and Geography. From there, Moses went to Makerere University for a Bachelor of Commerce Degree where he graduated in January 1994. Moses is also a member of the Institute of Certified Public Accountants of Uganda. Moses has a Post Graduate Diploma in Financial Management and Post Graduate Diploma in Revenue & Tax Administration. Moses has over the years undertaken specialised trainings in Leadership, Fraud Risk Management, Corporate Integrity and Internal Audit. He is also a member of the Institute of Internal Auditors, USA.
With such education background (which he terms simple education), Moses is so much more than what the eyes see. Within him lays a wealth of knowledge and determination, within him a clear conscience exits, and when you chat with him, his words scintillate with a lot of remarkable brilliance.
Moses’ professional journey has been a steady and progressive affair. In his own words, Moses says that “God has blessed him where he has been able to move from glory to glory as far as his professional career is concerned”.
Moses started working when he was still a student at Makerere University as a Research Assistant at Uganda Bus Company. As a Research Assistant, his role was to collect relevant information that would enable the management of the bus company devise means of competing in the transport market. At that time tax commuter vans (matatu) were posing a direct competition especially for shorter around-town trips like Gayaza, Lugazi and Kayunga. Moses also taught Economics in Butebo S.S, Palisa District.
Immediately after completing his studies at Makerere University, Moses joined Kyagalanyi Coffee Limited as an Accounts Clerk. In 1996 he joined J. Lutta Coffee Limited (defunct) as an Accountant. In September 1997 he joined Uganda Revenue Authority (URA) where he began as Assistant Revenue Officer in Customs for 3 months. In 1998, Moses was posted to Jinja as Head of VAT Audit for two years. In 2000, he was posted to Tororo as the District Revenue Officer for two years. In 2002 he was posted back to Kampala to work in the Commissioner’s Office as a Tax Inspector where he was tasked with responsibility of advising the commissioner on Compliance matters at districts.
In 2004, he was appointed as Senior Revenue Officer, Internal Audit. Towards the end of 2004, URA commenced a restructuring program following results of the commission of inquiry. Following the restructuring exercise, Moses was appointed as a Supervisor, Tax Investigations in May 2005.
Towards the end of 2007, Moses took leave to go ponder and pray about his stay in URA as a “tax collector”. Being a Christian, the phrases like “tax collectors will not go to heaven” had started to affect him. During this break he learnt that tax collection is biblical and that those that won’t go to heaven are those that either cheat the taxpayers or cheat the government as advised by John the Baptist when tax collectors sought him out (Luke 3:12-13). Further appreciating that tax was to enable government administrators provide public services where individuals cannot afford on their own like construction of roads and other infrastructures; and that everybody must pay their debts including tax as biblically advised by Paul (Romans 13:5-7). Most satisfying was when he affirmed that even Jesus paid tax (Mathew 17:27). Moses’ conclusion was that if the process of tax collection that ends with tax payment was evil, Jesus would not have accepted to participate in it.
While still on leave where he had gone to ponder on his stay in URA, where he made interesting discoveries, Moses was recalled by his Commissioner and asked to manage a new project, the Compliance & Integrity Enhancement Project. As Manager, Compliance & Integrity Enhancement, Moses was to advise management on best practices in Compliance and Corporate Integrity and also coordinate implementation of Integrity Enhancement Initiatives.
The objective was to develop integrity driven workforce to enable the Authority accomplish majorly four outcomes i.e. Increased revenue yield, Reduction in costs of fraud, Improvement in Client satisfaction and attain Positive Reputation for the organisation and individual staff. To Moses, this was an exciting opportunity to positively impact the values of his fellow workmates. “This was and is an engagement I am so proud of” he said, with his eyes glowing with contentment. In light of the integrity enhancement program, and with support and involvement of the URA top management, the URA Integrity Perception index made a drastic gain from 51% at the time to about 80% in five years.
After 5 years in that position, Moses felt it was time for a move. He got an opportunity, Umeme Ltd as Integrity Manager responsible for forensic auditing, internal policy compliance, corporate integrity and physical security. This move to Umeme Ltd helped him to advance his exposure to a publicly listed organisation.
In November 2015, Moses got another opportunity with the Uganda National Roads Authority (UNRA) as the Director Internal Audit. He is part of the top management team tasked with the responsibility of transforming UNRA’s performance following the public scandals around its operations.
Also worthy noting is that in between all his assignments in the different organizations Moses continued teaching on professional accountancy courses, particularly Advanced Financial Accounting, Taxation and Audit. He believes teaching is one of his purposes for living. He contemplates progressing this calling through publishing articles or books that will be relevant even to people in places he can’t reach or long after he is gone.
On how he achieves objectives
As a Director, my role is to identify the “end in mind” in line with the company strategy. Then sell that “end in mind” to key stakeholders while accommodating prudent adjustments. In my case the key stakeholders are the Board Audit committee, Audit clients/ management and my staff.
With clear sight of the “end in mind”, I put my controls on majorly two things. One is the plan plus resources to achieve the “end in mind” and the other is to ensure quality of the final product of our services. In this case the quality of findings in the report and advise therein. I normally do not entertain results of “excited” auditors. I entertain results with sufficient evidence and those that address risks which make a boss lose sleep. In between the plan and final product I let employees deploy their creativity as this boosts their morale and interest in their work.
Both by law and company policy, UNRA employs CPAs i.e. Members of ICPAU across the various directorates and specifically in Finance and Audit. In internal audit department we also have other major professionals such as engineers and IT professionals.
On Staff training and knowledge enhancement
“The management team at UNRA led by Mrs. Allen C. Kagina believes that the foundation of success of any institution lies in the quality of the employees. At UNRA we assess quality of staff on four fronts; we review whichever staff are competent, productive, motivated and are of integrity” Explained Moses. To this end we dedicate sufficient resources to improving the quality of our staff including training.
On the role of ICPAU in promoting the accountancy profession in Uganda and beyond
I remember when ICPAU came in as the national accountancy body. It came in with a massive and aggressive program of encouraging people to study accountancy and it continues to do so. Secondly, it developed the curriculum to guide trainers of the profession. It also enforces the quality of the final products (we accountants) to be released to the public through administering examinations
The Institute enforces quality of the accountants through mandatory continuous development programs or else some would become stale and an embarrassment to the profession. It further maintains up-to-date articles via the website. It also registers and publishes a list of members on the website to make it easy for interested parties to confirm who is a CPA and who is not.
The lobbying for the Accountants Act, 2013 was a milestone for the accountancy profession as a whole. Unlike before, masquerading as an accountant has become a crime. The institute also lobbied government to sponsor candidates especially those working with government entities and this boosted the numbers of accountants in Uganda.
However, I believe that the Institute should do a little more on fighting fraud in the country. He therefore calls upon ICPAU to be more proactive take initiatives to investigate into media reports; The Institute will not only enforce its public interest but also save the country’s resources for the benefit of all of us and for generations to come.
OnRole of Government in promoting accountability
I believe Government always means well. It has put in place infrastructures that enable accountability and ensure standards are followed. Some of these include the enactment of the relevant laws like the Accountants Act, 2013, Public Finance Management Act, 2015, Leadership code administered by IGG, Anti-Corruption Act and setting up the Anti-corruption court.
The Government also put in place services of Auditor General to check and advise on compliance, effectiveness of controls and value for money. It also set up respective Committees of Parliament to review accountabilities of Government votes. The Government has also invested in automated information management system (IFMS) that boosts efficiency in accountability and continuously institutes commissions of inquiry where things go wrong.
To that end it is objective and fair to say that government means well on matters of accountability. However, it still comes back to us the professionals in our respective industries to ensure that we live up to our codes of conduct.
A word to Accountants
First and foremost, it’s a privilege to qualify and enroll as an accountant. It is only accountants that are most likely to be found in every entity including spiritual entities given that all entities have money matters.
Accountants should position themselves as strategic business advisors and not gain comfort in being book keepers or just producing financial reports. In addition to analyzing the financial data and hopefully its implications, the accountants should go ahead and advise on viable business opportunities or better still use the accounting knowledge and skill to start business ventures to boost the economy.
I also encourage accountants to explore the political platform in Uganda, specifically the Parliament of Uganda to help law makers on matters of finance.
I call upon all accountants to uphold integrity; acting with integrity minimizes some risks and illnesses associated with stress. People whose wealth is through fraudulent means never gain complete joy in life as the fraud element always comes back to haunt them, say when a child or friend inquires into how they made money even when the inquest is innocent. People would rather develop the potential of someone with integrity and let go of a competent product that is fraudulent.