Comments on: What if…there was no audit?

By: Why Limiting Auditor Liability is Wrong : PIGASYS

Why Limiting Auditor Liability is Wrong : PIGASYS — Fri, 18 Jul 2008 01:21:50 +0000

[...] articles by ZemantaWhat if…there was no audit?’Crazy Eddie’ Exec Alleges Fraud at Overstock.comWatchdog fines KPMG for audit of Independent [...]

By: Richard Young

Richard Young — Mon, 07 Jul 2008 09:16:55 +0000

I tend to agree with Dennis that we need more “caveat emptor” in the whole process. If the purpose of an audit for a company is to lower its cost of capital – because investors feel safer placing their money in its shares or handing it over as loans – then there ought to be stiff competition for reliability and depth of opinion on their reported numbers. You go with a shonky audit outfit, your investors raise an eyebrow and demand higher returns, natch. (Although, right now, I’d bet most investors still see the Big Four as “the best” on those counts…)

Of course, that isn’t why companies currently undertake audits – and most investors make their decisions based not on auditable information, but on management views, strategy, market position and their own hunches. So why not make the whole thing optional?

You’d need a pretty good government-sponsored propaganda campaign to make sure smaller investors understood the risk of investing in a company that didn’t provide reliable third-party assurances on its numbers. But it probably wouldn’t change the way things work in bigger businesses very much. Big funds like to see a tick in the audit box – but their decisions are based on presentations of mostly non-audited information in any case.

Check out the discussions around this subject in CIMA’s look at IFAC’s Financial Reporting Supply Chain study: http://snipurl.com/cima_frsc [www2_cimaglobal_com]

By: Krupo

Krupo — Mon, 07 Jul 2008 04:35:07 +0000

If I was a financial auditor I would say “it damn well better”.

Fortunately I get to use the hypothetical cop-out answer in this scenario, but I understand what you’re getting at.

Auditors SHOULD understand the logic behind such math and if the junior staff can’t figure it out it better get kicked up the ranks to someone who does, otherwise you’ve got serious questions to ask about how that derivative is valued, fer sure.

By: Dennis Howlett

Dennis Howlett — Mon, 07 Jul 2008 04:32:27 +0000

@Krupo – there is a basic issue at stake here. As Francine said on our call, most auditors are trained in things like access controls etc. But if I said to you – go audit the methodology behind the Monte Carlo simulation that defines this derivative in Argentinian Beef futures, what would you do? That’s an example of the kind of thing with which the auditors of the future not only have to be savvy but capable of asking the tough questions. We’re now in a process control world where Dr/Cr fall out rather than ARE the basis upon which business is done. Are you honestly telling me that your training equips you to handle that?

By: Krupo

Krupo — Mon, 07 Jul 2008 04:19:33 +0000

One thing U of T did teach me was audit history, and in that respect, one of the problems may be that audits haven’t evolved sufficiently to keep with the times.

The original goal was to make sure the financial statements are based on reality and not make-believe.

I’d be more interested to find out if the ‘proper’ audit methodologies used for most audits WERE in fact being followed when the major fraud-detection failures occurred (leading to the doom and gloom point of view) or whether it was in fact negligence.

If the process is at fault, like with any audit, you have a fundamental DESIGN failure, and we really need to rip it up and start over.

If on the other hand, the problem is the PEOPLE not following the proper process, then clearly the mechanisms (I’ll say it… “CONTROLS”) need work. Controls are WAY easier to fix or set up, all things held equal, compared setting up a new process from scratch.

I haven’t followed the big failures in sufficient details to know if we’re worried about design vs. operation. Is this publicly available knowledge?

By: Dennis Howlett

Dennis Howlett — Mon, 07 Jul 2008 04:04:57 +0000

@Krupo – so what is an audit designed to achieve? That we know how to put debits on the left and credits on the right? If that’s it then we’re looking at a colossal waste of money for any interested party.

My discussion with Francine was a genuine ‘head exploded/ah-ha’ moment. There are no clear answers but then government is clueless on this issue. That’s why the prospect of another major failure is so tantalising. What might emerge from those ashes?