The audit challenge

The Federal Board of Revenue (FBR) is mulling introducing "Special Audit Panels" which would undertake forensic audit of taxpayers under its new audit policy, says a Business Recorder report. These panels will be assigned cases based on criteria to be approved by the Board. We understand the frustration of the FBR Board as billions in possible tax collection are stuck in courts. However, there is difference between carrying out an audit and an investigation. During a course of auditing an auditor seeks to detect errors or improprieties in case of any specific information that such improprieties exist, while a forensic investigator seeks to discover methods used and the extent of improprieties that are suspected or known. They are important features of fraud detection cycle performed by professionals having different skills, training, education, knowledge and experience. This is an important distinction. Both FBR and the Auditor General of Pakistan do not have the required trained manpower for a forensic audit that the Public Accounts Committee (PAC) of the National Assembly desires. And, it would like corporate scandals be converted from a standard audit into an investigation. However, if normal audit were to take this path the cost of performing audit would increase. There are indeed trained manpower in big auditing firms abroad but not in Pakistan except for a few exceptions such as was employed in the 1990s for Hubco.
There is a distinction between functions and responsibilities of FBR and the National Accountability Bureau (NAB). What FBR needs is to successfully persuade the court that the amount of tax assessed is as per law. Detection of fraud requires evidence gathering and its collation; and these need to be documented in such a way as to withstand challenges that may be brought about by adversely-affected parties. There is indeed some commonality between auditing and forensic accounting; such as: knowledge of the industry and the company, including its business practices and processes; knowledge of generally accepted accounting principles; interpretation of business documents and record; and above all independence and objectivity. And, both the auditor and forensic accounting investigator need to function effectively in a complex and ever-changing business environment.
What FBR needs to avoid at all cost is to become a handmaiden of people in power who love to destroy and decimate all kinds of opposition to them. The functioning of NAB is a strong case in point. All FBR needs is to train its auditors to follow the money trail and endeavour to punch holes in cases that are characterised by bloated expenditure and under-reporting of output, ie, through suppression of sales. Thus, the purpose of forensic audit needs to stand up to any kind of cross-examination in a court of law. The scope has to be nothing more or less. But the question whether or not FBR has the trained manpower for the job has no easy answer. The maximum their officers do is to disallow expenses on an ad hoc basis without proper substantiation. Thus a challenge to their assessment is usually successful in an appellate forum. Their aim is to achieve targets set by Ministry of Finance. The top FBR guns are therefore not afraid to use their administrative clout to pressurise the field force to utilise whatever means possible to achieve the net revenue target for the year. They tend to use fair as well as foul means. The big taxpayers do hire the most knowledgeable tax lawyers to successfully overcome an assessment notice challenge. So unless the tax collector is more knowledgeable than the tax advisor to taxpayers - there will be no change. And, it would end up in raising the cost incurred by both FBR as well as the taxpayer with little or no benefit to the exchequer.