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October 24, 2008

Comments

Charles H. Green

Fascinating. I know I too do not automatically think of the auditors when I think of the list of culprits.

More interesting of course is your central point--that irrelevance is a far greater threat to the profession, or at least to the business of the profession.

Your claim has an echo in the work of Robert Gottman on marriage; the enemy of relationships is not conflict, but disengagement. If you're not in the debate, you're marginalized.

It also reminds me of the old 60s radical theorist, Herbert Marcuse, who wrote "Critique of Pure Tolerance." Basically, if you have all the power, and choose tolerate your enemy's ideas rather than attack them, then you ultimately defeat them more strongly. In his case, he was saying if society absorbs leftist thinking and treats it as just another Time magazine object for curiosity, then you defeat it by trivializing it. In the same way, you're suggesting, mainstream business trivializes accounting.

I like to think I don't completely buy your thesis, that somehow there is still value to be had by looking at concepts of valuation. But I have to confess I don't see anyone leading the charge. Where are the firms themselves? Where is the leadership of a Big 4 firm aggressively pointing out that when mark-to-take-your-pick produces massive P/E multiples for entire market indices, something is wrong, and it's the P not the E?

Victor N.

I was alarmed to hear while watching CSPAN footage of Mr. Waxman's congressional committee that the SEC had one person in their risk management / review position for a period of time.

It does not matter how many auditors or audit entities we have if laws are administratively subverted.

Also, I may have it wrong now, but I believe AIG did make disclosures to the SEC appropriately and Lehman had a very strongly written opinion from PWC?

By and large I agree with your post but it sounds like one issue may be that while at least partial disclosures were made, the signifigance of them was lost on people who should have been concerned. We should tackle the issue of technical and reporting complexity so it cannot be used as a smokescreen.

I propose we empower audit firms by requiring them to post alerts about significant findings directly into the EDGAR database with 24 hours of issuing findings. It doesn't seem like this type of reporting is integrated into EDGAR. This would serve the public by bypassing administrative bottlenecks in the SEC (whatever their source).

I would also like to see these entities develop an additional review mechanism that would force independent review the quality of the work peformed by the auditors themselves. This could serve to enforce best practice standards independent of government mandate (see Mr. Snow's semi-silly / semi-valid comments via CSPAN footage).

Lastly, the self-definitional nature of SOX should be sorted out. The ability of external auditors to shape audit controls can be somewhat limited. Companies define their controls and auditors evaluate that companies meet those self-defined standards. The fact Lehman had dumped about 200b in bad paper before going under suggests there may be controls they made business decisions on and controls they audited on. Pure speculation but that was my impression from hearing Mr. Furd testify to Congress.

In any event, as long as we ask audit firms to get paid by the companies for whom they attest, we get what we get. This doesn't mean there is a problem with auditors perse though. I don't think nationalizing the audit function is the answer either. Let's face it, the government failed horribly in its oversight responsibilities. Transparency is lost in the government.

Kpo Kponsu

This very interesting perspective about where the auditors were brings the following point to mind. PwC and E&Y have been put in charge to oversee the $700B bailout program. Given that AIG which is in a mess happens to be PwC's audit client. Shouldn't this raise some eyebrows?

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  • © 2007-2018 James R Peterson Special thanks: Francine McKenna. Always with love: Kat and Julie. In memory: Bob White, Stuart Kadison