The quality of the audit
- As stated, I have ruled that the registration of payments to growers as an asset on the company's balance sheet does not meet the requirements of the accounting standard that applies on the relevant dates. However, as I noted above regarding the defendant's claims, the same applies to the plaintiffs' claims: not every case in which the registration was incorrect reveals that the auditing accountant was negligent in his duties, since there is a difference between financial accounting and audit accounting. Financial accounting serves as a "language" for presenting business and financial information, and it is implemented by the company, through accountants and financial managers, for the purpose of preparing the balance sheets and reports. On the other hand, the audit function is assigned to an external accountant whose job is to examine the reports prepared by the company, verify the data, and achieve a reasonable degree of confidence that they fully reflect the factual situation (Yitzhak Amit, Confidentiality and Protected Interests - Discovery and Review Proceedings in Civil and Criminal Law 562 (2021)). In the corporate structure, the board of directors and management are responsible for managing the owner's property and approving and signing the financial statements. The auditor acts as an external and independent body designed to enable the shareholders to obtain professional verification that the reports submitted by the board of directors do indeed adequately reflect the company's situation in accordance with accepted accounting rules (Gross, at pp. 757, 759-760).
- The opinions submitted in this case, which relate to the audit accounting, are that of CPA Aviv on behalf of the plaintiffs and that of CPA Morad on behalf of the defendants. On the other hand, contrary to what may be implied by the plaintiffs' arguments, Adv. Ronen's opinion deals with financial accounting, and therefore is not relevant to the issue of audit accounting, as appears from the purposes of the opinion, as stated at the beginning of his opinion (ibid., at p. 3):
"The questions and issues that I have been asked to discuss in the framework of this opinion:
- Whether the members' financial statements for the years 2007-2009 met the accepted accounting rules in Israel and adequately reflected the company's financial situation, the results of its operations and changes in equity.
- Whether the recognition of the special payments (as defined below) as an asset in the framework of the aforementioned reports was in accordance with the accepted accounting rules in Israel.
- Is the said asset measured in accordance with accepted accounting rules in Israel that relate to the measurement of similar assets, the recognition of which is permitted or required?
- Whether the deduction of the special payments from the company's liabilities was in accordance with the accepted accounting rules in Israel.
- Whether the manner in which the special payments are presented in the aforementioned statements, including the offset made in respect of them, is in accordance with the accepted accounting rules in Israel.
- Whether the disclosure given in the aforementioned reports (if any) regarding the special payments, including in the explanation of the company's accounting policy, was in accordance with the accepted accounting rules in Israel."
As stated above, in these questions regarding the manner of registration, I have already decided, as the expert Ronen claimed, that the special payments could not be recognized as an asset. Therefore, the main opinions that are relevant to this section are those of CPA Morad and CPA Aviv.
- In our case, Morad's opinion is the only one of the opinions that was submitted that relates to the audit procedures that were actually taken by the defendant in the years 2008-2010 (in paragraphs 5.1-5.5, pp. 5-8 of the opinion), and not only analyzes them in view of the result they reached. Morad's opinion indicates that:
- The accountants performed a series of structured audit procedures to verify the advances section: receiving detailed lists from management and comparing them with the records in the financial statements, analyzing the advances by industry, and examining the internal processes for determining the payments.
- In 2009, the audit in-depth examined internal reports of the Chief Economist, Mr. Ilan Peretz, and weekly profitability analyses in order to verify the need to reduce advances belonging to the current period.
- The audit was based on quantitative criteria for examining depreciation, and in 2009 Agrexco set a threshold of 10% decline in the marketing of crops as a trigger for examining the need for reduction.
- In 2009, the accountants identified that there had been a decline of 14.7% in the spice industry, i.e., above the threshold, they examined the required amount of reduction, €229,000, and made a reasoned professional decision not to carry out the reduction due to the management's position that indicated stability in the number of growers.
- Although the auditors relied on management's explanations, including regarding the impact of the cold in 2008 or the justification for listing advances as a future asset, they exercised exploratory thinking, which was reflected in an active demand for reductions.
- In 2008, following the auditors' demand, advances of €1.5 million (about ILS 8 million) were reduced, contrary to the management's initial position, and in 2010 it was decided to reduce the full advances for the profit and loss statement.
- The auditors held discussions on the accounting policy and made it clear to management that it must examine at all times the economic justification for presenting the payments as an asset, and that they actively checked whether growers who received advances actually continued to engage with the company in the following year, in order to verify the assumption of the "asset" in the form of a recoverable amount as opposed to an "expense".
- However, out of what exists arises. Thus, with regard to 2007, it was not possible to verify the registration of the payments since there were no working papers at all (Protocol, p. 1035, questions 4-10):
"Q. Let's go one by one. So I want you to confirm once again, that for 2007 you did not see any working paper for examining a refundable amount because you did not see any working papers of 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."
It also appears that with regard to the lack of a decrease in the number of growers, the defendant relied on the statements of the management and did not actually verify whether there had been a decrease in the actual number of growers (Protocol, p. 1042, Q. 25 to P. 1044, S. 7):