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March 03, 2016


Herb Chain


I respectfully disagree with you. You may be blaming the victim here. Munger apparently did not believe that appropriate controls were important, so he fired those doing the right, ethical thing at the risk of losing what might have been a profitable client. And he not only did it once, but did it twice...moving to a small firm that he probably will have more leverage with and where he would be one of its bigger clients.

As for the investor reaction, that is not a function of a "pass/fail" report on the financial statements (the subject as you know of a PCAOB proposal for enhanced language). The investors clearly did not believe that a material weakness is important for their investment decision. (A decision to hold is a decision.)

There are many reasons to question the language of an auditor's report (language that is in part driven by legal considerations), but I don't think that this is an example of one.

Jim Peterson

Hi Herb and thanks -- and I suspect we're more aligned than you might think; covering a multi-faceted topic thoroughly in 700 words can present a challenge. I certainly intend no blame on the auditors here, nor would anyone consider Munger a "victim."As for his leverage going forward, time will tell. As for the standard report's "pass/fail" language, I've written elsewhere on the "small change" nature of the PCAOB (and IAASB) proposals - meanwhile this observation of stock price indifference to an auditor change is only one among many indications of the diminished value to investors of the product at the heart of the current Big Audit model.

Herb Chain

Jim, thanks for the response. We do tend to be in sync....one point to consider, though, I don't think the PCAOB's proposal on the audit report is "small change." Adding context and discussion of "critical audit matters" is a very big change. It would require the auditor to discuss the judgments and other considerations that framed the audit (e.g., risks, estimates, etc) - matters that many in the profession believe should be discussed by management. And as in many of these situations, there is a perceived risk on the legal front.

I don't disagree that communications by definition should add value and do understand the objective of the proposal. But it is a big step that needs to be thoroughly vetted. The report will change I believe-the tide seems to be flowing in that direction.

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