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Wednesday, 10 May 2017

Auditors not raising questions

A 4 May 2017 FT article, about auditors not raising questions, reminded me of a situation in the early 2000's. The corporate controller entered my room and said, full of surprise, that the auditors were not asking him any question. I told him that I, as CFO, had a similar experience even while my door is always - and deliberately - open. His complaint made me visit the audit room. They told me that they were all good and that I shouldn't worry about them not asking questions.

Several days ago, I received an audit newsletter stating that 98% of Dutch auditors have registered their professional oath. I belong to the 2%. Frankly, I wasn't even aware that this requirement was also applicable to auditors in business. I do have some sympathy for applying this requirement to auditors who are still auditing.

The email also raised the warning of "consequences" for people who are overdue in registering their professional oath. From a nuisance point of view, I might still state my oath. An oath doesn't bother me as I consider my own standards higher than theirs. The warrior inside me has an issue with this oath. I am curious which side in me will win: nuisance or principle.

An oath will not prevent auditing scandals. Another 4 May 2017 FT article concludes: "Opening up the ownership of auditing firms may yet be the only way to restore the sector’s reputation." I think, feel and believe that the situation in auditing is far more complicated. It's a toxic combination of business, competition, culture, profits, supervision, and testing.

Auditors are experts (see my 8 May blog on experts) and not very good in running a commercial business. Opening up the ownership of audit firms might indeed help. The audit profession has a culture of arrogance. Auditors generally think they are smarter than Finance people. That opinion might be true but arrogance seldom benefits an audit job. Audit and Finance people have become like Tom and Jerry, or a cat-and-mouse game.

Former accounting and auditing scandals have resulted in increased regulation by supervisory bodies. Small audit firms have difficulty in retaining their license to audit. Hence, small(er) firms are merging into medium-sized audit firms. So far, the Big 4 still maintain their oligopoly while the Game Theory requires a minimum of 5 parties to prevent (price) collusion (eg, example).

Over the years, Auditing downgraded from a professional service to a commodity. Its focus went from Product to Price. Extensive marketing did not impress its buyers. The numbers of available audit hours per assignment declined each year based on the outcome of Price (-) / Average hourly rate (+). The resulting - and still declining - budget of hours does not support (human) substantive testing - or asking questions.

Relying on the proper operation of a company's system of Administrative Organization and Internal Control used to be an audit assumption, which application also needed verification. This reliance has since become a prerequisite to perform audit jobs. Hence, the lack of (human) substantive testing, including asking questions, will continue to allow accounting and auditing scandals. An oath is an insult to the audit profession.

Question (1970) by The Moody Blues - artists, lyrics, video, Wiki-1, Wiki-2

Why do we never get an answer
When we're knocking at the door