So, how would you like being an auditor?
First, Arthur Andersen was prosecuted out of business by the Justice Department in an ill-advised prosecution.
Next, KPMG almost melted down in the face of a criminal investigation into its promotion of tax shelters, and still might not be out of the woods, yet.
Meanwhile, the other largest US accounting firms — PriceWaterhouseCoopers, Deloitte Touche, Ernst & Young and Grant Thornton — all have had problems of their own.
In such an intensely adverse environment, one can only speculate on how many of these firms have been propped up with the infusion of revenue that has been generated over the past couple of years from the gravy train of the Sarbones-Oxley legislation.
But even the benefits of Sarbones-Oxley are not without another swift kick in the rear. The Public Company Accounting Oversight Board — created under Sarbones-Oxley “to oversee the auditors of public companies in order to protect the interests of investors” — has been issuing inspection reports this year in which it has been evaluating the Big Four and other auditing firms’ audits of several undisclosed publicly-traded companies.
In the PCAOB’s most recent reports, PricewaterhouseCoopers and Ernst & Young were criticized for their audits of several public companies, and those findings come on the heels of similar reports earlier in the year in which the PCAOB levied similar criticism toward several public company audits of KPMG and Deloitte & Touche. The PCAOB used identical language as it used in the earlier reports in concluding that, in some cases, the audits it inspected at PricewaterhouseCoopers and Ernst were marked by deficiencies “of such significance that it appeared to the inspection team that the firm had not, at the time it issued its audit report, obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”
And just for good measure, the PCOAB also issued its inspection report on BDO Seidman LLP, one of the larger US accounting firms outside of the Big Four. The conclusion? The same as for the other firms.
Swallowing hard, PricewaterhouseCoopers responded publicly by stating that the firm took the PCAOB’s findings “seriously” and “will incorporate these findings into our ongoing audit quality-improvement efforts.” Similarly, Ernst announced that the PCAOB’s inspections “assist us in identifying areas where we can continue to improve our performance.” In chorus, BDO also announced that it takes the findings seriously and that “we are committed to improving our performance wherever possible.”
In the meantime, plaintiffs’ lawyers are busily taking note of the PCOAB’s inspection reports and the firms’ sheepish replies.
Does anyone else get the impression that a career in auditing is a tough sell these days?
Tom,
There is a flaw in public accounting that runs to its core and until corrected the problems you hi-lite will continue.
People believe that accountants count cash. The actual situation could not be further from this “truth.” Public accounting is all about manipulation of accrual accounting to “target” reported income.
Accrual accounting is not about counting it is about estimating. For example, one doesn’t count loan loss reserves; one estimates future losses for bad loans and comes up with a guess.
Driving all this is the fundamental flaw in accrual accounting–any reserve does nothing for the performance of a company, but it does convert current shareholder’s equity into future income. If one does not reserve for an item but instead “expenses” such later when the loss actually occurs, income falls but shareholders equity remains unaffected.
Accordingly, executives compensated for “income” constantly want to over reserve and over accelerate earnings (do we count a sale when shipped or when paid).
Before the emphasis on quarterly earnings became the craze , when we had a smaller group investing in public companies, the players all knew this truth. Adam Smith wrote in his columns, Money Games, and other similar books that accounting was not a statement that company X had earnings Z, according to GAAP. Rather, the true representation was that company X kept its books pretty much the same way as everyone else in the industry and that therefore you could compare the performance of X relative to A, B, and C who were also in the industry.
This was once done in a very organized fashion. The industry that I know, banking, had a yearly fall meeting between the major federal banking regulators, the SEC, and the major accounting firms in banking. At this meeting it was decided, much like baseball, football, and basketball do at the start of each season, what the “rules” were going to be for bank accounting for that year. The job of the accountants was to make sure that everyone in the league play by the same “rules.”
In 1987 this “peace” blew-up when John Reed of Citicorp decided in May 1987 to write-down his institutionís Third World loans to their actual value and simply absorb the loss. He then increased Citicorpís debt-to-reserve ratio. Reedís actions were coming, but by June 1987, 43 of the 50 largest U.S. bank holding companies had engaged in similar measures.
This action let the “cat out of the bag” (the Street realized that the books were all cooked) resulting in the loss of confidence in the market through that summer that resulted in the September 1987 crash.
Since this was all implicitly a “fraud” (ie., paying people to lie)(see my earlier note), for years the accountants demanded that their engagement not include the discovery of fraud (but the public was lead to believe that this is what the accountants were doing)
Accountants dream constantly of returning to the old days, where they were umpires without any duty to find fraud. My 2 cents is that they should have an unhappy job.
Tom:
On the contrary, interest is at an all time high for both auditing courses and jobs. In part this is in response to the continuous relevations of accounting abuse. Entry level applicants believe they can make a difference. The socialization process of the profession (i.e., the weeding out) is quite strong however, so don’t expect any real change. JLD is absolutely correct – it is not that accounting fraud is impossible to detect. It is rather that the profession makes more money by the wink and the nod.