Background Information and the Stakeholders
The background for this case is as follows. The company under focus is the investment fund named “GL Beyond Income Fund” (further referred to as the Fund). The management of the Fund was provided by Daniel Thibeault and his registered investment advisory company, GL Capital Partners LLC (further referred to as GL Capital). Another stakeholder is the accounting firm BBD. It is represented by two auditors, Kouser and Dougherty, who were supposed to perform an audit of the Fund for the fiscal year 2014.
By the time of the audit, Kouser was an engagement partner at BBD and was in charge of the Fund’s audit for the 2014 fiscal year. Dougherty was an audit manager at BBD, with responsibilities including executing the audit program, audit planning, and staff supervising within the limits of the audit. A further company involved in the case was TAFT Financial Services (TAFT), which was also under the control of Thibeault.
The key issue that needs to be taken into consideration in the case of this audit was the fact that Thibeault and GL Capital committed fraudulent acts on The Fund and financiers involved in the company. The fraud lasted for at least two years, from 2013 through to late 2014. A minimum of $16 million of the Fund’s money was stolen. During this period, Thibeault was creating fabricated loans and misappropriating the money of the investors. The loans were redirected to his bank accounts. As Thibeault could not use his personal data for fictitious loans, he used those of his friends and acquaintances without informing them and without permission. He marked these loans in the records and books of the Fund with a special code TA, which meant that TAFT was involved with these loans.
The Causes for the AAER
The major reason for the AAER was the violation of auditing standards accepted by the Public Company Accounting Oversight Board. However, there were other causes that led to the problem. First of all, Kouser and Dougherty did not have any experience in auditing funds involved in consumer loans. Also, neither of them had worked with factoring transactions in the LAOH Notes, which were necessary for the audit process.
There were many delays because data about the LAOH Notes could not be confirmed on time. This resulted in further delays in the audit report, which was issued almost four months later than the audit finished. Besides, only Kouser managed to meet Thibeault during the audit; Dougherty never met him.
Still, the failure to follow the auditing standards accepted by the Public Company Accounting Oversight Board (PCAOB) became the main cause for the AAER. PCAOB standards require an understanding of peculiarities of the functioning of the entity which is audited. Also, it presupposes professionalism in planning and performing the audit, as well as report preparation. Moreover, these standards demand evaluation of all the activities performed by an entity and their impact on the financial statements of the company.
However, the auditors failed to understand the presence of TA loans and their significance to the Fund, while there were 22 TA loans during the 2014 fiscal year, amounting up to $8.5 million. The auditors also failed to understand and find proof of information about the LAOH Notes. Some other violations of the PCAOB standards included failure to analyze the internal controls of the Fund and the inability to choose a representative sample of the assets of the Fund.
One more reason for the AAER was that the auditors failed to find meaningful and suitable evidence for the audit. Every opinion and conclusion in the report by the results of the audit is supposed to be supported by evidence from the company’s documentation; the auditors failed to provide this. Finally, the mistake of the auditors was the failure to prepare the audit documentation according to the standards. The audit should have been supported with documentation, which reflects its purposes, sources, and conclusions. However, Kouser and Dougherty did not prepare the necessary documentation on time, and it did not meet the standards.
Possibilities for Auditors to Prevent the AAER
Although there were many violations of the audit procedure, some failures could have been avoided and, as a result, the AAER could have been prevented. First of all, BBD could have appointed more experienced employees to perform an audit in a big Fund. In the case that there were no employees familiar with the peculiarities of the Funds’ activity, Kouser and Dougherty could have done more preparation before the audit. They needed specific knowledge about funds providing consumer loans and peculiarities of their documentation. Secondly, both auditors could have followed the standards accepted by the PCAOB.
They could have been more attentive to the planning process and more careful when studying the Fund’s documentation. Where they were not able to understand the records, they could have consulted more experienced colleagues. Finally, both auditors could have been more responsible and have prepared the necessary documentation on time and within the standards. All these possibilities could have revealed the fraudulent activity and prevented the AAER, which led to significant problems in the professional activity of both auditors.