Management override leads to hindsight analysis
What could management override mean? I recently discovered it in the Key Audit Matters as part of the 2022 annual report of Associated British Foods.
The auditors consider that there could be ‘pressure on management to manipulate revenue recognition’. And they go on: “There is a risk that management may override controls intentionally to misstate revenue transactions.”
These are strong statements: management may intentionally misstate, even manipulate revenues. Wow! And then the auditors did something which surprised me. They decided not to test the internal controls around revenue recognition: “we did not test the operating effectiveness of these controls.” I thought auditors always checked internal control.
However, and I guess this is the important part, they then list the audit work they did perform to make sure that management didn’t manipulate revenues, They, for instance, obtained third party confirmations and performed ‘hindsight analysis’ whatever this might be. An interesting if unusual audit test, one I had never heard of.
I checked on the ICAEW site to see if it existed. Perhaps I am ignorant, I thought. I was relieved when the message came up “Sorry no results found.” But the site surprised me suggesting I check my spelling and asked if wanted to find a Chartered accountant to help me out. I did check my spelling, but did not take up their offer to look for a Chartered accountant.
To continue, the auditors made these audit tests, including no doubt multiple hindsight analyses, in 82 locations covering ‘85% of the Group’s revenue’ and satisfied themselves that management wasn’t dishonest. They concluded:
“…we did not identify any evidence of management override or material misstatement in the revenue recognised.”
Having satisfied themselves that all was well, why I wonder, did the auditors bring up the problem in the first place and make it a scathing Key Audit Matter? A problem which no longer exists.
We will never know. An auditor’s judgement issue, I suppose.