You are an Audit Manager in the firm Taiplan Chartered Accountants, a firm in public practice registered with the Institute of Chartered Accountants (Ghana) (ICAG). Bank of Ghana (BOG) has appointed your firm to investigate reasons for the failure of DC Microfinance Limited (DCM) and your investigation has revealed the following as some of the reasons for the failure:
Required:
For points (i) to (iv) below, state for each point, and show what would contribute to the failure of the company and make ONE recommendation to ensure that this would not re-occur in DCM or any other microfinance company in Ghana. (12 marks)
i) The board of directors of the company is made up only of Mr. and Mrs. David Commodore;
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- This does not promote sound corporate governance. A company that has public accountability (it holds deposits from the public) should not have only a married couple as its board. (1.5 marks)
Recommendation: - BOG should require that all Microfinance Institutions (MFIs) should have a broad base blend of executive and non-executive directors who are persons respectable in the society.
- Such non-executive outside directors will ensure that decisions taken will take the interest of public depositors into consideration to knowing that their reputation will be at stake if the MFI fails. (1 point for 1.5 marks)
ii) The failure of the Bank of Ghana to examine or detect the non-submission of the fidelity returns submitted to it by the company and monitor the company adequately;
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- This means BOG will not be able to forecast the failure of an MFI and put in measures to pre-empt the failure in full or even minimize its impact on depositors. (1.5 marks)
Recommendation: - BOG will need to open regional and district offices or install software that will alert it of non-submission and of poorly-performing MFIs.
- It is also recommended that all MFI must be made to install Banking software that can automatically send the prescribed fidelity returns to BOG on the pressing of a button. (1 point for 1.5 marks)
iii) The auditors have been the auditors of the company since its incorporation over ten years ago;
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- This leads to familiarity that erodes the independence of the auditors. (1.5 marks)
Recommendation: - MFIs, like all other institutions regulated by BOG, should be made to change their auditors after every five years. (1 point for 1.5 marks)
iv) The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company. This is partly due to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.
The due diligence on the last audited financial statement revealed the following, among others. The balance on the company’s main operating bank account in the trial balance submitted to the auditors showed that the company had a cash balance of GH¢600.22 million which agrees with the bank reconciliation statement. The cash balance on the bank statement was GH¢400.11 million. The reconciling items on the Bank Reconciliation Statements were too many and some had been outstanding in the monthly bank reconciliation statements for as long as five years.
Further investigation however, revealed that the actual cash balance on the bank account and the cash in bank was GH¢400.11 million on the date of the financial statements. The auditors requested for and received a Bank Confirmation from the company’s bank which agreed with the balance in the bank statement. The bank confirmation sent to the auditors was detected to be fake and did not come from the bank. The actual confirmation from the bank by post was intercepted by the company and this has been going on for the past five years.
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The failure of the auditors of the company to spot and question some dubious accounting treatments adopted by the company due in part to the fact that the consulting arm of the audit firm has been performing all the consultancy work needed by the company since its incorporation and particularly at the time of its application for the microfinance operating permit from BOG.
- This is the results of familiarity, and self-review as well as inability of auditors to stand up to management after compromising their independence. (1.5 marks)
Recommendation: - BOG should require that the constitution or articles of association should not allow the auditors of the company to perform non-audit assignments for the company apart from Corporate Tax.
- This will make the auditors aware of the need to maintain their independence avoid conflict of interest situations.
- Auditors found not performing their duties to the level expected of them must be reported to IGAG by BOG. (1 point for 1.5 marks)