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Were the Liberal Party's finances "audited"? (part 2)

The PWC Engagement

Continued from part 1 (below)


I finally got around to looking at the PriceWaterhouseCoopers (PwC) ‘audit’ which is available on the Liberals website (see part 1 for link) once again it’s not an audit but a specified procedures report (SPR). An SPR is simply a request by the client (Liberals) asking the accountant to look at specified parts of their financials, nothing more. Therefore, the onus is on the Liberal party (client) to provide data that relates to the work that they want done. Furthermore, a SPR does not express an opinion on the party’s finances but it is prepared and analyzed using generally accepted accounting principles.

Firstly, it should be noted that audits and special procedures reports are not explicitly meant to detect fraud. Although most investors and public opinion believe that audits are meant to detect fraud, really they are meant to detect material misstatements and errors. The reason for this is because fraud by nature is deceitful and often fraudulent activity is not apparent in an accounting system. From an accountant’s perspective, it is nearly impossible to hide fraudulent activity unless it’s ‘off the books.’ So for the Liberal party to claim that these reports would detect fraud is misleading.

Likewise, on a forensic audit which would likely detect fraud, an accountant would have to have access to all parts of the financials; however, this is not the case with the Liberals financials. In the report, the accountant states that the “procedures only included the review of those funds received by ad agencies and recorded in FLAC’s accounting system.” Therefore, if there was fraudulent activity that was ‘off the books’ this SPR likely wouldn’t find anything fraudulent because they weren’t even looking there in the first place.

However, on the cover letter of the report, the Firm makes it explicitly clear that this procedure is not an audit. The letter states that “because the procedures set out in Appendix A do not constitute an audit of amounts received from and paid to the Named Parties by FLAC (Federal Liberals) during the period January 1, 1996 to December 31, 2003, we express no opinion on these amounts.” As I said in part one of this topic, an audit is an independent accountant's review of the statements and footnotes to ensure compliance with generally accepted accounting principles and to render an opinion on the fairness of the financial statements.

Since PWC explicitly states that they do not express an opinion on these amounts, they are not held accountable to the findings in this report nor are they providing an opinion on the fairness of these financials. Not rendering an opinion on a partial audit (SPR) is very common because the accountant is only looking at a small part of the financials and because of this, they cannot guarantee that the rest of the financials are fair because they do not have access to these areas of the books.

What concerns me, and what should concern PWC (and Deloitte), is how the Liberals are flaunting to the media that their financials have been ‘audited’ by the two firms. If the Liberals are found out to have manipulated their books, the reputations of these accounting firms will be unfairly tarnished because they did not perform audits; but the Liberals are re-assuring the Canadians that they did. Hopefully the firms notice this misstatement and correct it in the media.

The PwC SPR focused on the Federal Liberal Agency of Canada (FLAC) while the Deloitte focused on the Quebec wing of the party (see part 1 for analysis). In this report they analyzed the list of named advertising agencies, accounted for the funds received and spent, as well as analyzing the pattern of payments and contracting process.

With regards to the contracting process, the report does state that “there was no tendering process to select media companies in either election year” because they were selected based on their prior experience with the FLAC. This is often the case with company’s who have relationships with one another; it’s easier to use past suppliers because of past experience. However, it does show some bias but its no smoking gun. The report states that it identified one significant contract whose timing was not consistent with previous expenditures: the Liberals paid 523,000 for their website in 2000 according to the report. Also, out of the total revenue collected, $169,905 could not be accounted for due to receipts that were misfiled or destroyed as a part of the FLAC shredding policy.

According to the Elections Canada database, since 1993 PwC has donated $424,084.44 to the Liberal party of Canada. However, the Ottawa office of PwC that prepared this analysis only has donated a total of $2,961.52 toward the Liberal party. In contrast, the Quebec Deloitte office that prepared the Quebec SPR had donated over $100,000; this certainly questions their impartiality. However, the PwC Ottawa offices' donation is an immaterial amount, and in my opinion, doesn’t question the Ottawa office’s independence and judgment nor should it be required to be disclosed in the report. However, the large amount of the total donation does seem awfully high and it may bring into question the Liberal party’s choice of auditors. Also, the firm has donated 290,469.68 to the former Progressive Conservative party since 1993.

In conclusion, this report is not broad enough to actively seek for fraudulent activity on the Liberals books. As stated above, even a full audit may not detect fraud, though there would be a higher probability of detection if it were completed as opposed to the SPR that was prepared. It does seem very dishonest for the Liberals to claim that their books have been audited. The Liberals should not be misleading the public regarding the extent that they had their finances audited because if there is fraudulent activity occurring, the two accounting firms could be inappropriately blamed. I would not recommend anyone to conclude that the Liberals books are prepared in fairness because neither Deloitte nor PWC has provided an opinion on this. Once the Liberals perform a full audit, then a decision on the fairness can be made.

Written by:
M.K. Braaten
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