"Q. Confirm that for 2007 you did not see any working paper for the examination of a recoverable amount because you did not see any working papers for 2007 at all.
- than you, I just want to add that my assumption at least is that the tests they did on the 8th, 9th, and 10th were also the tests they did years ago."
- In addition, the defendant did not present working papers indicating such an examination, despite its obligation to keep working papers for seven years (paragraphs 1-3 of the Institute of Certified Public Accountants' Briefing for Document Preservation). This is what emerges from CPA Morad's investigation (Transcript, p. 1024, questions 21-25; p. 1026, question 1):
"Q. Is it true that you, as an accountant, have been keeping working papers for 7 years since you completed the audit?
- That's right.
- Because that's how it should be?
- Because there is a directive from the Institute of Certified Public Accountants regarding the preservation of documents, and they said that it is worthwhile to keep them for seven years."
- Failure to present tests and testimonies for a specific depreciation examination for each property indicates that the required examination was not carried out properly. Moreover, in 2008, the accountants admitted that it was not possible to examine the recoverable amount due to an unusual climatic event, the "cold", which damaged the produce. Thus in the testimony of CPA Morad (Transcript, p. 37, questions 8-10):
- It was not possible to check the decline in the value of the advances because in 2008 there was a cold case that caused a large decline in the marketed produce, and therefore it is impossible to know whether there was a decrease in the number of growers who received advances."
- I accept the plaintiffs' argument that this state of affairs raises concern. According to the conceptual framework of standardization, an asset will be recognized on the balance sheet only if its value can be measured reliably. Section 89 of the conceptual framework does indeed state that one of the conditions for recognition is that "its cost or value can be reliably measured." Therefore, if, due to weather damage, it was not possible to reliably estimate the value of the advances to the growers, and the benefit that is expected to grow from them, then the essential condition for recognizing them as an asset on the balance sheet was not met. Therefore, the auditing accountants should have considered recording an immediate expense for these payments, rather than continuing to present them as an asset.
- With regard to the reliability of management's representations vis-à-vis the obligation to independently examine, the testimonies indicate that in this case the accountants relied on management's representation that there was no decline in the number of growers, a representation intended to imply that business relationships are continuing and therefore there may be an expectation of future benefits, without independently verifying the representation. In practice, the number of active growers in each and every industry was not examined, and it was not examined whether the continuation of the engagement actually yields profitability that would justify the value of the advances. In doing so, the accountants were satisfied with a general statement by management, instead of conducting an in-depth and independent audit as required.
- Unsubstantiated management statements are not enough. Standardization requires a professional and skeptical assessment by the accountant, especially when we are dealing with material items that affect equity and solvency. In such a situation, the standard requires a careful examination of the impairment and the estimation of the recoverable amount for each asset, while the accountants refrained from contacting the company to make the necessary reductions and made do with an optimistic management forecast that was not supported by evidence. Standard 15 requires a specific test for a recoverable amount, and in any event, the "continuation of engagement" examination does not answer the question of whether the advances are indeed refundable at their full value. Added to this is the damage to the evidence (the death of the "key man" in the matter, the late CPA Sagi), which prevents the defendant from pointing out any support for the retrospective examinations, but the duty to document and preserve the documents was imposed on the defendant, as stated above.
- 00In summary, it is clear that the defendant approved the reports without the required individual examinations and relied on management's representations instead of an individual objective examination, all in contravention of the principles of accounting standardization in Israel in the relevant years.
0Legality of Offset and Presentation in Reports
- The general principle in the accounting rules is that an asset should not be offset from an obligation unless there is an explicit exception that permits it. This is what emerges from Section 32 of IAS 1 regarding the presentation of financial statements (hereinafter: "IAS 1):
" 32. An entity shall not offset between assets and liabilities or between accounts and expenses, unless required or permitted by an international financial reporting standard."