Only special or forensic audit could’ve uncovered SSL fraud – expert

The Financial Services Commission’s (FSC) request for Stocks and Securities Limited (SSL) to commission an independent audit of its on- and off-balance sheet portfolios in 2019 would not have been enough to uncover a multibillion-dollar fraud, a senior Jamaican auditor has said.

Trevor Francis, managing partner at FIACG – Chartered Accountants, said that unless a special or forensic audit was requested, auditors would not conduct a full-scale examination.

“We’re not auditing 100 per cent. People might say, ‘So how the auditors come in and missed it’? It will happen, because when we go in to audit, we say what areas we’re looking at. For the auditors to miss blatant fraud, it takes management to lie,” Francis said, adding that fraudulent activities are usually missed when there is an “organised collusion”.

He told The Gleaner on Tuesday that auditing firms protect themselves by issuing a management representation letter.

The management representation letter is addressed to a federal entity’s external auditor and signed by senior management. The letter attests to the accuracy of the financial information that the federal entity has submitted to the auditors for their analysis.

The FSC, which regulates non-deposit-taking financial institutions, requested, in an October 2019 letter to SSL, evidence of the value of client assets and liabilities within the off-balance sheet portfolio as at September 30, 2019; the value of on-balance sheet client liabilities; and the value of assets (including liquid assets effectively segregated) assigned to on-balance sheet client liabilities.

In that letter, it directed SSL to commission and execute an independent audit.

The audit report, which was seen by The Gleaner, indicated that SSL’s assets and client liabilities within the off-balance sheet portfolio reflected $34.8 billion.

The equity-adjusted portfolio balances reflected $31 billion in assets.

Auditors said that proper accounting records were maintained “so far as appears” from their examination of records.

But Finance Minister Dr Nigel Clarke raised concerns Wednesday about audits conducted at SSL, which was labelled a “problem institution” by the FSC.

SSL is at the centre of a multibillion-dollar alleged fraud that has impacted the accounts of retired track star Usain Bolt and dozens of other clients.

Clarke said that there are questions to be answered as to why the approximately $3-billion fraud was not detected by external, special, and internal auditors over a long period.

Financial and management challenges at the investment firm date back to 2010.

Francis said that even with preliminary risk assessments, frauds sometimes still go undetected in carefully executed audits.

“However, if we were to come across any suspicious transactions during the performance of our various audit procedures, we would automatically expand the scope of our substantive audit procedures to satisfy ourselves as to the nature of said transactions.

“As external auditors, we do have a responsibility to consider fraud and to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by fraud or error,” said Francis.

In the meantime, Minister of National Security Dr Horace Chang told The Gleaner Thursday that investigating organisations in the SSL scandal will be unfettered. The United States-based Federal Bureau of Investigation has joined the probe.

“This is a fraud, and the police and the FID, MOCA, and others who have the skills have been given a free hand to get in there and find the criminals ... . It’s a small organisation but a big fraud,” he said.

FID, or the Financial Investigations Division, operates out of the finance ministry, while the Major Organised Crime & Anti-Corruption Agency is independent.

SSL accounts for two per cent, or $29 billion, of Jamaica’s $1.45-trillion securities industry.