Do the sums: Auditors are simply too boring to be crooks
Auditors don’t write the exams, they mark them – the trouble is they don’t get to set the questions
Auditors are simply too boring to be crooks. Most of them also have a limited sense of humour, so I’ll probably get into trouble for saying that. Not as much trouble as they’re in, though, for not saying things they should have.
It’s not simple.
Auditors don’t make the pictures, they take them. They take the photographs of what management have done, or at least have said they’ve done. Auditors don’t write the exams, they mark them – the trouble is they don’t get to set the questions.
It has become increasingly onerous to work through the accounting policies and audit opinions expressed in the financial statements of major firms. Even if you get through all the notes to the financials, how much wiser are you to the basket of risks facing a company, particularly one operating in a multi-jursidictional global economy? The truth is, we’ve stopped reading.I have sat on many an audit committee, and chaired a few. Beyond compliance and accurate reporting, I have always sought to discover and distill the economic essence of the figures and ensure that the numbers, as far as possible, tell the real story.
As simple as that may sound, it isn’t always.
Contingencies, provisions, present values, future obligations, choice of WACC, IFRS changes, King IV guidelines, Companies Act … compounded by multi-currency reporting and tax effects, make for a complex arena of judgment calls, to get to an answer that serves all those masters. There are a lot of balancing acts and predictable trends to be monitored.
Is the experience of a long-standing auditor appointment an asset or does the familiarity compromise objectivity? Continuity of understanding and institutional knowledge are valuable, but only for so long as they don’t lead to complacency. As long as the answers are still being rigorously interrogated. That questioning, that testing, must be the role of the audit committee, which has the responsibility of assurance, second only to full board sign-off. It is self-evident therefore that the audit committee members must be independent, but also informed and competent, to exercise judgment over the output prepared and signed off by management and the audit team.Over time, those audit firms that demonstrate the ability to get things done, get more work to do: such is the nature of things. It should therefore come as no surprise that we end up with a big four, or six, or eight – wherever you want to stop counting. They’re likely to get even bigger as the resources (technology and people) keep having to grow to keep pace with developments in global commerce.
When it goes wrong, as we’ve seen it do quite a lot recently, should we fire the auditors? I don’t think so. We should fire the management.
Unless auditor collusion or incentives to intentionally mislead or deceive can be proven, it will be the management that will be found to be the source of wrongdoing, whether they get away with it or not. It is management who design and authorise the structures that lead to economic subterfuge. It is they who authorise the payments, the transfers, the special purpose vehicles, the cross-border loan structures, and what have you, to either obscure the path to the truth or even deliberately misstate it. It is management who participate in the share incentive schemes and profit-driven bonuses, not the auditors.
The auditors get paid a fee, high as it may be, that is not a function of the declared profit or loss, or the share price. Any such participation would disqualify their independence.There may be some rotten apples in the basket of auditors. Get rid of them, for sure. But let’s be careful not to jump on the bandwagon of fashionably dismissing good auditors, guilty by association only. What will we be left with? Demand exceeds supply. Splinter groups will just form to provide the same service under a different banner. Maybe that’s one of the agendas?
Where is this sorry state of affairs taking us? More compliance, but also more caveats, for sure. Far from providing deeper clarity and insight to the well-being of the firm, this trend could obscure even further the relationship between the reported numbers and the economic truth.
As individuals and investors, we need to follow simple advice. Use your own judgment, never invest in something you don’t understand, and if it looks too good to be true, stop wanting to believe it; just get out.
Mark Barnes is CEO of the Post Office.