Recognition should be given where deserved. Mainstream media reporting on the grave challenges to the viability of the Big Audit model is typically so uneven and ill-informed that generosity favors freely extended tips of the hat.
Perhaps especially to express appreciation for the pick-up of a few choice words of my own.
So please do read the piece in the current issue of the Economist – “Accounting scandals - The dozy watchdogs”.
I had spoken at length with its author, Dan Rosenheck – with whom I am in considerable alignment, especially on our shared view that the historical “pass-fail” auditors’ opinion is sadly deficient to provide value to the complexity of today’s demanding capital markets.
Rosenheck quotes me thus:
“An auditor’s opinion really says, ‘This financial information is more or less OK, in general, so far as we can tell, most of the time’, says Jim Peterson, a former lawyer for Arthur Andersen, the now-defunct accounting firm that audited Enron. 'Nobody has paid any attention or put real value on it for about 30 years.'"
Where next? With the “expectations gap” so glaringly wide, and the perception of inadequate auditor performance so widely expressed, where does the dialog need to go?
Regular readers here will know my attention to the unachievable nature of the “magic bullet” solutions put forward by those who combine their passion for the subject with their ignorance of how Big Audit actually operates – for examples of which, see the reader comments reacting to the Economist piece as representative.
In this, I admit lack of success in calling off Rosenheck from two glaring examples:
- Selection or actual performance of audits by agencies of government – suggested by the New York Times but which I have discussed (August 20, 2014) as being so impractical as to attract and deserve nothing but howls of derision.
- And the fantasy of “audit insurance” – a long-discredited notion from academia that not only fails both the basic principles of insurability and the capacity of the market to provide coverage for the multi-billion dollar failures that threaten the lives of the Big Four accounting firms, but which is conclusively shown to be impractical by the simple fact that if realistic, it would already have been put in place by the insurance industry itself (see my posts going back to May 5, 2008, and July 15, 2008).
Which does not take away from this central point:
If the dialog on the survivability of Big Audit is not treated as important and worthy of candid engagement by all the interested players, then its very viability is threatened by the kind of “Black Swan” event that would require re-design of large-company audit out of the wreckage after a catastrophic collapse.
And that threat should be appreciated as far too disruptive to be tolerable.
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