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Posts Tagged ‘Auditors’

Pic credit – Accounting Today

On Friday, September 7, Accounting Today released its list of “Top 100 Most Influential People” in accounting.  All honorees have risen to a level of leadership and responsibility and all wield some sort of influence.

The editors of Accounting Today describe the list as a work in process.  As the profession changes, whether due to societal, technological or other factors, they claim the list evolves to capture the contemporary stage of the profession.

As technology grows more important in accounting, we include new IT experts; as new regulatory bodies are formed, we add new regulators; as more Millennials and Gen Ys rise to positions of importance, more of them will appear among the Top 100; as the profession explores more new specialities, we’ll add experts from those fields; and as more women and minorities (hopefully) join the profession, we’ll add more women and minorities.

By my count, 75% of the list is male and 95% is Caucasian.  Although the editors mention change, in broad composition the list is similar to last year when it contained auditors, regulators, vendors, etc.  Change has taken place at the individual level, though.  When some previous members retired, they were replaced on the list by their successors.

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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.

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Francine McKenna, author/editor of re: The Auditors and watchdog of the public accounting industry, has scored again with They Weren’t There: Auditors And The Financial Crisis.  Thus she continues to add to her single season scoring record.

U.S. auditing has never been very good.  The auditing of financial statements was voluntary in the U.S. until passage of the Securities Act of 1933 and the Exchange Act of 1934.  The Exchange Act also gave us the Securities and Exchange Commission.  Corporatations had a long history of disobeying accounting rules and publishing whatever.  Auditors were so unsuccessful in getting companies to properly report, that in the 1960s the U.S. explored junking the AICPA’s Accounting Prinicples Board as standard setter and turning to a newsly formed IASC.  Ultimately, it formed the FASB instead.

But companies had little concern for the rules because they could bully auditors.  And bully they did.  Auditor switching was pandemic by the 1970s, and the SEC passed regulation after regulation, hoping that shedding light on it would dry up the nefarious practice of marginalizing auditors.   By the early 90s, auditor switching slowed a bit, but the irrelevance of auditors didn’t change. Arthur Andersen (AA) was able to keep its clients, but it did so by playing ball.  After the 1990s bubble burst in the early 2000s, AA was driven out of business.

There was hope that SOX and its PCAOB would give auditors sufficient backbone to stand up to corporate bullies. There is anecdotal evidence that it worked in some industries.  But it is obvious that auditors were ghosts for banks and other financial statements.  Madoff–where where the auditors.  Banks–where were the auditors.   Frolicking in the wealth of their 404 audit fees.

So where where the auditors?  I’ll close with Francine telling us:

And so when I ask, “Where were the auditors?” and decry the fact that “they weren’t there,” it’s not due to some unreasonable, unfair focus on the most milquetoast of potential culprits.

No.

I bang this drum because the auditors should have been there, as a last stop, where the buck should have stopped, as gatekeepers, watchdogs, advocates, and the last bastion of standards and expected values shareholders can look to.

But they weren’t. (Empahsis added)

You go, girl.

Debit and credit – – David Albrecht

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Note:  this is the final version of this essay.

This is part seven of an eight-part series in which I review the seven International Financial Reporting Standards (IFRS) critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues on regular posting dates, MWF.

In today’s essay, I review the anti-IFRS views of myself, David Albrecht, Ph.D.  An accounting professor at Bowling Green State University in Ohio, I have been a vocal opponent of the proposed switchover in accounting standards for quite a while.  Until starting this blog two months ago, my primary forum was via posts to AECM, the e-mail listserv for accounting professors.

I am opposed to IFRS for the U.S. because (1) the politics of the decision are unwarranted, (2)  I believe it will be bad for the country, and (3) it will not aid the world in creating an integrated financial system. (more…)

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This is part six of an eight-part series in which I review the seven IFRS critics (Sunder, Niemeier, Ball, Ketz, Selling, Jensen & Albrecht) of whom I am aware.  The series continues on regular posting dates, MWF.

Robert E. Jensen

Robert E. Jensen

In today’s essay, I review the anti-IFRS views of Robert E. Jensen, Ph.D., as summarized from his posts to the AECM listserv (Accounting Education Using Computers and and Multimedia) and on his web site page on accounting standard setting controversies.

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SEC pitching GAAP in the trash

SEC pitches GAAP in the trash.

The Securities and Exchange Commission (SEC), charged with the responsibility to regulate all aspects of the American financial markets, has recently announced a tentative road map for the transition from requiring companies to prepare their financial statements under American generally accepted accounting principles (GAAP) to requiring the use of international financial reporting standards (IFRS).  Reactions range along a continuum from enthusiastic acceptance of the plan one end to the opposite end of rejection and shock over having beloved GAAP thrown in the proverbial trash can. Many have observed that the transition is like a frenzied rush.  There has been no opportunity for a consensus to develop that a move from GAAP to IFRS is the right thing to do.  The SEC simply announced its intention of making the switch.  There have been no answers provided to public questions. 

Why now?  Why so fast? Some have commented (I was one of the first) that SEC chairman Christopher Cox hopes to commit irrevocably the U.S. before President Bush leaves office and a new SEC chairman is appointed.  Recognizing the impact of partisan politics provides a reasonable rationale for the SEC push when there are no obvious economic benefits for the U.S. to make the switch.

Before getting to the meat of today’s post (reviewing important remarks by Robert E. Jensen), let me provide some background to this regulatory issue. The U.S. financial system is based on the bedrock principle that investors can make the best decisions and are best protected if all have equal access to accurate financial disclosures.  The result of applying this principle has been the creation of financial markets that are the unbridled envy of the world.  Compared to financial markets in other parts of the world (i.e., Europe), U.S. investors experience the highest rates of return and U.S. companies incur the lowest costs of raising capital.  A key reason for such success is GAAP.  The U.S.  has made and continues to make expensive investments in the creation of its GAAP.  It has evolved over time to a set of uniform rules with embedded bright lines.  Why so?  Precise rules are needed by the legal system as regulators seek to enforce corporate obedience to disclosure requirements. IFRS, created by the International Accounting Standards Board, differs from GAAP in several important regards.  First, IFRS is created to make it easier for companies to raise capital across national lines.  IFRS is not intended to assist investors in making decisions, it is intended to assist companies in raising capital.  Second, IFRS permit companies to use judgment in reporting results from operations.  Investors are not secure in knowing that all companies followed IFRS in the same manner.  Third, much less money has been invested in the creation of IFRS.  There is an adage that reminds, you get what you pay for

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Robert E. Jensen

Robert E. Jensen

Enter Robert E. Jensen, Trinity University emeritus professor and American Accounting Association 2002 Outstanding Accounting Educator.  A prolific commentator on financial reporting and its regulation, derivatives and all matters related to accounting professors, Bob has been a leading critic not only of the S.E.C.-led rush to adopt IFRS, but also of adopting IFRS in at all.  Retirement to a New Hampshire mountain does not seem to have slowed him.

Does this issue pass the smell test?

It doesn't for Robert E. Jensen.

In a landmark post to AECM (the international listserv for accounting professors) on Monday, September 14, Jensen states clearly and unequivacably, “For me the IFRS transition just does not pass the smell test.” Jensen starts his post with a poignant history of the U.S. audit industry.  He summarizes;

The poor [quality of] services of auditing firms became a focal point in the U.S. Congress when equity markets appeared of the verge of collapse due to fear and distrust of the financial reporting of corporations dependent upon equity markets for capital. The Roaring 1990s burned and crashed. In a desperation move Congress passed the Sarbanes-Oxley Act (SOX) of 2002.

SOX was a shot in the arm for the auditing industry.  SOX forced the auditing industry to upgrade services with SOX legal backing that doubled or even tripled or quadrupled fees for such services. Clients continue to grumble about the soaring costs of audits, but in my opinion SOX was a small price to pay for saving our equity capital markets.

He then introduces a new development:

In 2007 and 2008, the international auditing firms commenced to lobby intensively for worldwide adoption of the “IFRS” international accounting standards of the International Accounting Standards Board (IASB).

Jensen convincingly explains that IFRS cover the same topics as GAAP, but leave out many of the “bright line” rules.  Hence [IFRS] generated a reputation for principles-based standards instead of rules-based standards”.  He then points out:

Many of the nations, especially in Europe, that adopted IFRS do not have strong equity capital markets given their historic traditions of raising corporate capital via banks instead of individual investors buying and selling shares of common stock.  Protection of investors has not had the same priorities for these nations as it has in the U.S. where faith in equity capital market integrity is vital to our market-based capitalism.

The bottom line is that IFRS is a weaker set of equity capital market accounting standards than the present FASB standards in the United States.

To summarize.  Jensen started with a history that leads to a conclusion that the large U.S. auditing firms have a poor track record of influencing corporations in the United States to make honest financial disclosures.  This explanable in part because there was more financial reward for providing consulting services than auditing.  So auditing was deemphasized.  He then contrasts how the needs of American financial markets have led to creation of strong accounting standards.  Because European financial markets are different in many ways, Europe has accepted a weaker set of accounting rules. He then observes that the large auditing firms are strongly in favor of moving the U.S. toward weaker accounting standards and have a willing accomplice in SEC chairman Christopher Cox.

This begs the question of why the large auditing firms are lobbying so hard for IFRS standards to replace FASB standards? There are legitimate reasons given the complexity of auditing international firms having operations subject to varying domestic and international accounting standards.  And there may be less litigation risk when bright line rules are replaced by principles-based standards that give auditors and clients much more flexibility in accounting for transactions.

But for me there are also smell test concerns here.  Auditing firms love the soaring revenues from SOX, but they will love even more the soaring revenues from clients having to transition from FASB standards to IFRS international standards.  Firstly, auditing firm clients will not understand IFRS such that auditing firms will make fortunes educating and training each of their clients about IFRS.  Secondly, accounting systems, including enormous databases and software systems, will have to be overhauled.  For example, all the firms in the U.S. who use LIFO inventory valuation will have to be changed to something else since IFRS does not allow LIFO. Walla — the consulting service revenue surge becomes remindful of the Roaring 1990s.

The added auditing firm revenue from the IFRS transition may be as much or more than the added revenue from SOX.  … But to me this whole IFRS transition in the U.S. and the race to lock it in place just does not pass the smell test.

So there you have it.  The entire issue of transitioning to IFRS is about money.  Great, big, heaping, towering mountains and mountains of money. Eventually the large firms will donate a fraction of this wealth to university accounting programs, and I will be much less than thrilled. Coincidentally, Floyd Norris has blogged that the Big Four are intensely lobbying Christopher Cox to appoint a Big Four accountant to replace Charlie Niemeier on the PCAOB.  No decision has yet been made, but for some reason I’m worried about what it will be.  I leave you with an image that expresses my concern.

Over and out – – David Albrecht


Just in–Tom Selling published a post on the top 10 reasons not to adopt IFRS in the U.S.  It is well written and compelling.

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