There’s quite a discussion going on over at AECM now, centered around whether or not corporate disclosures via XBRL tagged data will be audited, and therefore receive some sort of assurance blessing.
One professor whom I respect a great deal is arguing that it is in the best interest of companies to make the best and most honest disclosures as they seek to raise capital, and it is in the best interest of auditors to associate themselves with only those companies that make the best and most honest disclosures via XBRL (and presumably via financial statements, also).
To which I say: hogwash!
I’ve seen enough corporate reporting shenanigans, and auditor “nod-and-wink” assurance, that I have concluded that there are indeed sufficient incentives in place for corporate agents to try to game the system by mis-reporting financial results. I don’t see why, if there is substantial non-compliance with GAAP, that XBRL tagging would be a refuge of purity. Moreover, there are incentives in place for auditors to fail to object to minor transgressions. Some of the times, the incentives are sufficiently large so that auditors fail to object to major transgressions. I guess I don’t see why assurance on XBRL reporting will be any different.
I certainly don’t trust corporate executives or auditors, as classes, to properly exercise “professional” judgment. Oh, proper judgment may be exercised more than half the time of the time, but given the risk averse nature of many investors, it is enough for a few bad apples to give the rest a bad name. It is the many examples of bad reporting and bad auditing (while admittedly in the minority) that are enough to destroy trust.
A spouse only need go wayward one time in order to destroy any trust the other felt. From that point on, the wayward spouse may be preceived to be untrustworthy even though a majority of days end without an unsanctioned hookup.
I believe it is not always in a company’s best interest to make an honest disclosure, and it is not always in an auditor’s interest to demand proper accounting. That is because many costs to misbehaving are long-term, but the rewards for transgressing are short term in nature. When making certain decisions, sometimes the focus of either corporate executive or auditor can shift to the short-term on a moment’s notice.
Also, I don’t believe in adopting either accounting or auditing standards that rely upon professional judgment, when corporate execs and auditors have shown, time and time again, that their professional judgment has occasional lapses of extreme crappiness.
Right now, the largest auditing firms are too few to fail. This permits them substantial leeway in succumbing to financial incentives to let sloppy financial statements pass. When the next big firm fails, leaving us with the Big 3, it will be even more true than ever. That there are too few audit firms is the biggest threat that currently exists to the audit profession (unless you want to count the decades long history of crappy auditing).
One more illustration of my belief. You’ve heard the phrase, ‘Fool me once, shame on you; fool me twice, shame on me.’ Well, each of the Big 4 have given clean opinions when they weren’t warranted. They’ve each done it more than a few times (and how many financial institutions were issued clean audit opinions when they were weeks away from bankruptcy?). Well shame on me if I trust you enough to exercise professional judgment.
Debit and credit – – David Albrecht