Accountancy used to be boring and safe, but today it’s neither
theguardian.com
theguardian.com
I think people may have conflated these auditors' jobs with that of, say, an auditor from a government entity like the IRS whose job duties can include discovering fraud.
I don't really understand the difference.
Can you give an example of accounting fraud in which the company's financial statements are still reliable?
You have to understand that the underlying concept of audit that a small team of auditors is responsible for ensuring that a huge (relatively) company is going about things correctly - there's no way to obtain a 100% assurance with that scale of manpower, and there's no appetite from companies to significantly increase the audit fees to obtain that level of assurance. Instead, a sampling/risk-based approach is taken in order to ensure that there cannot be a large error within the financials.
reality -> accounting books -> financial statements
The auditors don't look at the first mapping "reality -> accounting books" but only at the second one "accounting books -> financial statements"?
And even in the second mapping, they check with a sampling-based approach?
That's not entirely correct. A good portion of SOX audit efforts in the US, for instance, is spent on examining configuration of the various systems on which financial reporting is dependent (e.g. examining exactly how segregation of duty controls are implemented in the ERP system). A good portion of time is also spent examining if human-executed processes (e.g. employee on boarding/off boarding, granting permissions to data and financial system capabilities, manual review of backup job reports, etc) are actually being carried out in a manner that complies with the organization's SOX controls.
Additionally, pretty much 90% of an audit flows through a limited number of client contacts. Audits are not designed to defend against a concerted effort to prevent the auditors from seeing 'reality' (i.e. un-doctored documents), due to the manpower requirements to validate information at that level.
Conceptually, it's the difference between 'I-trust-you-but-I-need-to-check-that-you-did-your-homework' and 'Trust no one, everything you see is a lie'.
Also, I could have phrased it better as "assurance that the company's financial statements accurately portray the activity in their accounting ledger(s)." An audit is about matching the financial statements to "the books" rather than looking for impropriety.
An auditor makes sure that when GE releases financial statements, it's the same kind of thing as when Ford releases financial statements. They're making sure that when a manager at the factory gets equipment on an installment plan that the company is going to report that as debt, rather than pretend its a rental agreement (and when it's one over the other is complicated which is why you need accountants).
If investors and creditors are going to get any use out of financial statements, Ford has to prepare its financial statements in the same way and according to the same principles that GE does. In order to make sure they're doing that, someone (an auditor) has to periodically make sure they're doing that.
What might show up on an audit is if the accounting department is inherently dysfunctional and not keeping proper records. What they're not going to do is figure out if someone is intentionally trying to deceive an auditor. Accountants are experts in how you're supposed to prepare financial statements so that everyone follows the same standard of what should be reported as what. But unless they're specifically forensic accountants, they're not private investigators uncovering crimes.
while financial audits are primarily focused on how good the numbers match up and how well the controls in place help to do that, an audit wouldn't be done if it weren't for the potential for uncovering fraud up and down the hierarchy.
forensic accounting is also a thing, outside of government.
This should have its own TV crime series.
The accounting firms do fraud examination as well, but that is a wholly separate business than audit.
When the economy crashed in 2007, a great many people said the financial industry is all crooked. Many in the industry said that their own branch was honest and responsible,and that when the housing bubble was going on, they had looked at it as an example of the sort of bad finance they themselves would never practice.
But the thing is, if most of the finance people saw the bubble fraud for what it was, why didn't they all speak up and warn the nation? I say it was because they were too focused on making money in their own field, and felt no responsibility to the society as a whole.
That is what is going on in the accounting field. They know there is massive fraud,and many practices that may not be fraud, but are bad for the economy and the world, but they don't explain it because it would get in the way of their making money doing something technically honest.
You know, a society like ours can function well only if everyone looks at the bigger picture, and not at just a narrow definition of what they are being paid to do. Does anyone really disagree?
So if an organization is taking undue risks and not presenting them in the accounts, the auditor should make comment on that. In the example of HBOS, that could have been that they were understating the risk of bad debts and therefore had not provisioned sufficient reserves to address that risk.
The suggestion of the article is that they don't do that due to a cosy relationship with their clients.
It's hard to argue that there is an issue in the general case, auditors are paid by their customers, and therefore have an incentive not to rock the boat.
The counterweight to that is meant to be the personal liability of the partners in question should there be a legal issue resulting from an audit, however I'm not aware of many suits against big-4 partners relating to collapses from the financial crash...
Who is actually going to raise the suit? Not so easy to pull together investors / debtors of very large entities.
This is incorrect. Financial statements are prepared on a 'going concern' basis, except where management is planning to liquidate the company's assets. When these accounts are audited, the auditors consider whether the company is likely to be able to continue on its current path (i.e. without becoming insolvent, or raising additional capital beyond that already committed). If that future looks like it will be less than a year, then the auditor will include a 'going concern note' in the audit opinion.
So they definitely look at future viability.
Sources:
- Am an accountant and have engaged external auditors
- https://www.icaew.com/-/media/corporate/archive/files/about-...
It is just far too easy to make a bribe with consulting services. There is no good way to measure the real value of consulting services, and their cost can be massive. If a crooked CEO gives his accountant bags of cash to cook the books, he may be caught and both the CEO and the accountant can be sent off to jail. If a smarter crooked CEO instead hires his accountant's accounting company to a 100 million dollar consulting contract, in exchange for cooking the books, good luck proving a bribe took place. The accounting firm will surely put in a hundred of consultants on the contract and they will surely produce long reports with stacks of technobabble and graphs. Who is to say how much that is worth.
[0] https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act [1] https://en.wikipedia.org/wiki/Keeping_the_Promise_for_a_Stro...
In no way defending the value of these services though - their primary function is to shift culpability off of the executives IMO
I worked at a Big 4 firm almost 10 years ago and I remember the rules being so strict that our firm had to choose if consulting or audit engagements were more valuable to a particular firm because they could only choose one. Also, when you hit Manager level at a firm, you would have to enter all of your public stock holdings into a system so they could make sure you don’t get stuck on a project with a client where you hold your stock. On top of all that there was very extensive annual compliance certification every year that everybody at all levels had to complete.
The Big 4 doesn’t joke around with this stuff. If an employee or partner went anywhere near the conflict of interest you suggested, they’d promptly be shown the door and probably face other repercussions.
Yes. This was clear in 2001 during the Enron scandal. Which by the way triggered the collapse of one of the then-“Big Five” and created the “Big Four”. Nothing has substantially changed.
After Enron, Arthur Andersen folded. The partners of Andersen Consulting rebranded their business as Accenture.
Arthur Aderson and Anderson Consulting operated separately under Andersen Worldwide Société Coopérative since 1989. The companies formally separated in August of 2000, and the Accenture name was announced in January, 2001.
The Enron scandal broke in December, 2001.
Accenture's timing proved fortuitous, but coincidental.
And I don't know why you say nothing substantially changed, Sarbanes-Oxley came out of that and accounting students are beat over the head with the lessons from Enron and what changed.
Plus, Arthur Andersen Consulting still exists as Accenture, but they were separate companies at that point. (Accenture was actually pretty psyched because they had nothing to do with Enron, but when AA accounting and AA Consulting broke up they had a deal where the more profitable business would send a cut of their profits to the other company. Since consulting is always more profitable, AA Consulting was looking for a way out of that deal when AA accounting imploded.)
If that is your mentality, are you really going to try to dig up a bunch of issues that will cause stress for you?
Side note: for anyone looking for a miserable career, choose auditing at a B4. It's a rare combination of overworked and underpaid that has basically everyone racing for the door after a year or two.
insurance, auditors, government regulation, government backed loans. All have their own problems with this.
I know in mortgages, appraisers are randomly selected. Where as before they were selected by the mortgage company for what value they could get for the house. The problem now is they have no accountability to anyone.
part of the problem in health insurance consumers aren't price sensitive so prices just keep going up. (obviously they're are more problems that that)
governments have regulator capture issues.
shop your auditor(regulator) is a problem.
Depending on the noted 'why' the differing reviews had different outcomes either further investigation (focusing on missed details) or followup for a bad or under-trained reviewer would occur. The reviews reflecting the reality of the appraised item would be mean-averaged to find a 'typical market value'.
Not sure about that - the bank that financed my last mortgage employed the appraiser as full-time member of staff. The appraisal exactly matched the contract. I do find that fishy, but apparently not against the rules.
The prices are essentially unknowable until you've received care, provided you even have the luxury of trying to do comparisons.
Seems like such an exchange could also insist that the companies listed on it submit to independent audits paid for by the exchange. Well, the listed companies would still pay for the audits through the listing fees, but the auditors would report to the exchange. Seems like this could align the incentives better: the exchange wants to attract investors, so they want to be able to provide additional assurance that the companies listed there are sound.
Yeah that'ts not even remotely close to true. The author meant to say Fortune 500 companies not all US public companies.
The second tier firms operate very similarly to the Big 4 but are an order of magnitude smaller. They'll do audit work for public companies, just not very big ones. Or they'll do pieces of work for bigger firms. But companies can still be public with revenues of only a few hundred million and they'll be far more price sensitive than Google or Goldman.
Just like in cloud computing or AI scale has serious advantages for accounting firms and it is difficult and expensive to try to make the jump to the top tier. Better to stay in your target market in terms of client size, geography, and what price you charge, than to try to drastically change your business. Far too likely to lose your existing business and not succeed in the new one.
Quis custodiet ipsos custodes? ("Who will guard the guards themselves?")
The very structure of large accountancy needs to be overturned, as today, the primary incentive for the big 4 is to preserve their client relationships -- that is the side on which their bread is buttered. This means applying their stamp of credibility, not finding and highlighting troubles, especially fundamental/systemic/existential troubles...
This was the point of the article -- accountancy was supposed to provide a guard function -- checks and balances. Now, it is merely a compromised credentialing service.
It had always seemed odd to me that a company providing advice about essentially laundering money at scale also is the arbiter of truth for accounting principles!
They're a consequence of compulsory taxation.
They are created by over-financialized MBAs trying to evade their company's obligations to society.
If you have a real plan for to effectively run a complex society without compulsory taxation to implement necessary collective goods (roads, policing, schools, defense, etc., etc, etc), I'm all ears, and I'm sure so are many others.
Until then, your comment is purely specious.
Also, many people have proposed alternatives for funding legitimate Government functions without coercion, and relying on charity for the rest (like education) in cases where people can't afford them.
In what country has a modern complex society been actually run without actual coersive tax?
In what society have complex and costly ventures like an entire modern education, defense road system been done with it? Any real, hard examples?
Abstract ideology is lovely, but is not a practical govt that manages to build the basis for an advanced and advancing society
Coming back to the Objectivist angle, there's a great passage from Atlas Shrugged that covers this:
=====
"Then what on earth do you know about Rearden Metal?"
"That it's the greatest thing ever put on the market."
"Why?"
"Because it's tougher than steel, cheaper than steel and will outlast any hunk of metal in existence."
"But who says so?"
"Jim, I studied engineering in college. When I see things, I see them."
"What did you see?"
"Rearden's formula and the tests he showed me."
"Well, if it were any good, somebody would have used it, and nobody has." He saw the flash of anger, and went on nervously: "How can you know it's good? How can you be sure? How can you decide?"
"Somebody decides such things, Jim. Who?"
"Well, I don't see why we have to be the first ones. I don't see it at all."
"Do you want to save the Rio Norte Line or not?" He did not answer, "If the road could afford it, I would scrap every piece of rail over the whole system and replace it with Rearden Metal. All of it needs replacing. None of it will last much longer. But we can't afford it. We have to get out of a bad hole, first. Do you want us to pull through or not?"
"We're still the best railroad in the country. The others are doing much worse."
====
In general this feels like a class of logical fallacy, of the form "no-one has attempted to achieve X, so X must be undesirable" but I can't find it in any lists.
edit: To make it clearer, take your post, and substitute slavery for coercive taxation. Your argument immediately appears specious, because with the benefit of hindsight we know that large, complex, modern societies did just fine after abandoning slavery. But people argued against emancipation in just that way at the time.
It is NOT impossible for people to make progress.
It just takes more than a set of half-baked ideas.
The ideas must be fully thought through to their consequences, with second- and third-order consequences, adjusted so that they will actually work with real human nature factored in, tested, adjusted, then rolled out.
In this sense, although I am strongly attracted to Libertarianism and often use it as my default starting point, I recognize that it is like Communism in that it is completely impractical and won't happen in a real world (actually, communism has a better chance with modern tech solcing central planning, blockchain micropayments, smart contracts allocating resources, LOL, bs...).
Ayn Rand's description sounded great when I was a teenager.
Living it for real, I know it is utter bullshit.
Carbon Fiber Composites are far stronger, stiffer, and lighter than any steel, and less expensive in small volumes. It's more expensive in large volumes, but R&D is mitigating that.
Yes, managers and even engineers have a bias against it because it is new and untested, takes more work to include in designs.
Yet, it is being steadily adopted.
--------------- In terms of govt, sure, a small govt with voluntary contributions sounds great. Until you realize (which you haven't) that this is setting up EXACTLY the commons problem: it is in everyone's interest too support the government, but in every individual's interest to freeload or over-use and under-pay. Eventually even the goodest of the do-gooders will be sick & tired of being mooched off of, and you're back to anarchy. If you doubt this, go look at the population of any commercially viable fish; ask how they're doing.
The fact of the matter is that if you ACTUALLY think through any of these ideas, they are hollow. That is the reason they have never been implemented.
They also leave no room for "cheap" campaign promises and new initiatives that politicians can announce and display to the media (repeatedly). We'll give a tax credit for low emissions vehicles to save your children's lungs and the planet! An incentive to finance homes for nurses!
Tax is just code. Poorly architected code with lots of documentation that obfuscates rather than illuminates.
Politicians love to nudge through the tax system as it seems cheap, costs are obscured as, and there's no project to fail like there is if you try to build something. You end up with perpetual scope creep and "minor" additions.
Then you get people politicizing the outcomes - "bad people" are taking advantage of a good program, or a "bad company" isn't paying as much as someone thinks they should in an ideal world. If you are going to live in a nation of laws rather than the whim of some functionary you need to let everyone do what is legal, rather than just preferred individuals or classes.
Yet, it does not follow that similarly elaborate non-payment near-scams (& felonious schemes) are a necessary feature.
An overly complex tax code is a necessary prerequisite, but not a sufficient condition. for that, you also need scheming MBAs & accountants.
You, an accountant or tax lawyer or more likely firm employing both, come up with a scheme for avoiding tax that you think might be legal. You can charge people money for teaching them this scheme and helping execute it. Now, you tell the government about the scheme. The tax man can say "Yup, that's legal, all good" (and maybe tell the government the tax laws need changing if it wants to stop this next year) or they can take your clients to court and if a court agrees, require them to pay the extra taxes. You don't care, you got paid either way - the law doesn't chase you so long as you report the clever scheme.
The Crimson Permanent Assurance https://www.youtube.com/watch?v=aSO9OFJNMBA
and their humble beginning and dramatic end: https://www.youtube.com/watch?v=7YUiBBltOg4
As one can see proper Accountancy is exciting, adventurous and associated with big risks for life and limb.
and sail the wide accountancy,
to find, explore the funds offshore
and skirt the shoals of bankruptcy!
It can be manly in insurance.
We'll up your premium semi-annually.
It's all tax deductible.
We're fairly incorruptible,
we're sailing on the wide accountancy!
* Ports can't afford to inspect every vessel that enters
* Inspections are annoying and costly for owners even if their vessel passes
* But, left to their own devices the Flag States may skimp on inspections, causing a Race to the Bottom where ships registered with Flags of Convenience are mostly awful and the port states end up absorbing the cost (atrocious labour conditions, deaths and injuries, pollution)
So the Paris MOU randomly inspects ships, but it has an intelligent and adaptive model controlling the probability of any particular ship being inspected when it arrives in a port.
If (say) Panamanian flagged vessels all keep passing their Paris MOU inspections, the rate at which vessels with a Panamanian flag are inspected falls.
On the other hand if, say, Venezuelan flagged vessels keep failing inspection, rates of inspection for that flag go up.
This encourages owners interested in an "Open registry" (Flag of convenience) to pick one that's doing a good enough job at inspecting vessels to attract the lowest rate of Paris MOU inspections. Which in turn pressures the flag states to either do good quality inspections of their own, or get out of the "Open registry" game instead, either of which suits the Paris MOU signatories just fine.
So, governments should have their own small number of specialist auditors, and they should randomly re-audit some fraction of public companies, with the chance depending on which Audit firm that company hired and how many re-audits of other firms audited by that company found problems. The cost of doing all this would be paid by the audit firms, as both a fixed levy AND fines whenever something is wrong.
Also realized, this is a bit analogous to how Bitcoin works. In Bitcoin _every_ other node in the network will validate (audit) some proposed work. If at least 51% of the nodes in the network agree that some piece of work is valid, it has a good chance of becoming part of the permanent history (next block on the chain).
The Public Company Accounting Oversight Board is a private-sector, nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.
- Auditing is for compliance with state regulations, so the state should do it.
- With fines as a revenue source, it should be in the state's interest to catch mistakes and fines could/should be set to fund the state auditing apparatus
- any private organization paid by the auditee is necessarily in a conflict of interest
People also derive their perception of safety from past experience. If you've driven in a car hundreds of times, you will think it much safer than doing something you've never done before. To many people, stability = safety.