On going concern

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Francine McKenna’s post about hiding bad news is timley but not surprising and won’t change a thing. She says:

…given that it’s annual report and quarterly report season for those with a December 31 year end, we will see these opinions come in bunches.  But how to count them?  How to know how big an increase we are now seeing versus last two years, for example? How to know whether auditors are taking the PCAOB’s admonition to heart? How to know whether opinions are disproportionately issued by one particular auditor and their problem child clients?

In raising the questions, Francine is pointing to exactly why financial analysts rarely bother to read audit reports. They’ve become meaningless.

The fact life is a lot tougher and that auditors will likely see much more by way of litigation leveled against them makes no difference. As always, the problem is one of toxic relationships between management and audit partners. This is a special problem in the US but is something that is increasingly coming under scrutiny in the UK with debates around audit partner tenure in large public company audits.

In my opinion, the only way to make sense of an adverse opinion is where the auditor steps beyond the recommended wording and spells out exactly the problem they encountered. Usually, this is in the form of a letter of representation to management but why can this not be made public if it leads to a qualified report? If we’re going down the road of transparency then that surely should be the least of anyone’s concerns? And if anyone from the regulatory bodies happens to be scanning this – please don’t fall for the ol’ ‘confidentiality’ routine. It’s stakeholders’ money we’re talking about. Not the CEO’s pay packet.

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Tagged as: Audit, PCAOB