An Auditor's Report Investors Can Trust
In the spring of 2001, I heard a poignant requiem pronounced for the ability of the large accounting firms to survive in their present form. A senior managing partner for one of the now-surviving Big Four firms – a man given to neither overstatement nor irony – said to me, with a father's considerable pride, that he had achieved his wish for his two grown children: that neither was electing to follow his footsteps into public accountancy. With hindsight, this statement is extraordinary less for its content than for its timing. This was months before the explosion of Enron and the implosion of Arthur Andersen, before the proclaimed crisis of corporate governance and the legislative overreaction it spawned. Yet even then, the lions of the accounting profession were having grave self-doubts about their own viability.
It was clear to me then, and even clearer now, that the reason for this partner's malaise lies in deep-seated pessimism about the real value of the statutory auditor's statement – a dinosaur of a document that offers neither the reassurance nor the early warning that investors and regulators profess to need.
What is remarkable in this environment is the complete absence of debate or even contemplation of “the day after.” What happens if, or when, the audit report as it has been known since early in the last century is no longer available?
Nothing. And here is why:
Imagine a late-winter morning after the deadline for the filing of annual accounts for the preceding year – perhaps early March 2004. The Big Four have quit or been driven out of the business of issuing auditors' reports under the securities laws of the world.
Of the companies in the FT-SE 100, the Nikkei stock average and the S&P 500, however, a large number – say, 50 percent – offer to their regulators and stock exchanges a report in this form: To: The Members of the Audit Committee of Large Global Company Inc. (the Company) The accompanying statement of financial position, results of operations and changes in financial condition of the Company, as of and for the period ended Dec. 31, 2003 (the financial statements) have been prepared by the Company, with our assistance. So far so good.
In the opinion of the Company and its senior management, the financial statements are free of material error and are fairly stated in accordance with preferred accounting principles. These principles, based upon International Accounting Standards, may or may not be deemed “generally accepted” in the Company's headquarters country or any of the countries in which it has significant operations.
We have performed those audit procedures respecting the financial statements that we reasonably believe necessary, and in accordance with the International Statements on Auditing. On the basis of those procedures, we are of the same opinion. Up to this point there are tweaks in emphasis, mainly for the scholars. But now buckle up. For purposes of our procedures and opinion, items and transactions less than $xyz million, individually and in the aggregate, have been deemed not material.
We are not the Company's statutory auditor, and we are not 'independent' under the rules of the Securities Exchange Commission or any other securities regulator claiming jurisdiction over the Company and its securities. We have designed and built and currently operate the Company's systems for the recording and reporting of its transactions, for which we have been paid $xyz million in the period covered by the financial statements, pursuant to an engagement approved by the audit committee of the Company's board of directors. Signed: Surviving Accounting Firm
And to make plain that this really is a new day, the report carries the following footnotes: This report and opinion are available to interested persons through the Company's Web site. In accordance with the terms of access there provided, persons obtaining access to this report and opinion have agreed that we have no liability with respect thereto except upon a final determination of our knowing and willfully fraudulent conduct. Also note that, in addition to this report and opinion, we also perform certain procedures from time to time with respect to the Company's financial statements and operations, and periodically report to the Company on the results of those procedures.
Persons interested may, subject to certain limitations of liability and other conditions, have access to these reports, through the Company's Web site. This report essentially says: “We've done the best we could, given the time and money allotted us. We're also an interested party, doing work that adds value to our report, and which you should clearly know up front. We can help you to know more. But both our undertakings and our exposure to you are strictly limited.”
What would happen? The world's stock exchanges would open as usual. Oh sure, politicians and regulators would have an apoplectic moment.
However, even in these hypothetical uncharted waters, real-life markets would bump gently and speed along. Because if markets move on information and founder on obscurity, this report has the virtue of providing the first and not the second. Jim Peterson's e-mail address is jrpllc@aol.com. In the spring of 2001, I heard a poignant requiem pronounced for the ability of the large accounting firms to survive in their present form. A senior managing partner for one of the now-surviving Big Four firms – a man given to neither overstatement nor irony – said to me, with a father's considerable pride, that he had achieved his wish for his two grown children: that neither was electing to follow his footsteps into public accountancy. With hindsight, this statement is extraordinary less for its content than for its timing. This was months before the explosion of Enron and the implosion of Arthur Andersen, before the proclaimed crisis of corporate governance and the legislative overreaction it spawned. Yet even then, the lions of the accounting profession were having grave self-doubts about their own viability.
It was clear to me then, and even clearer now, that the reason for this partner's malaise lies in deep-seated pessimism about the real value of the statutory auditor's statement – a dinosaur of a document that offers neither the reassurance nor the early warning that investors and regulators profess to need.
What is remarkable in this environment is the complete absence of debate or even contemplation of “the day after.” What happens if, or when, the audit report as it has been known since early in the last century is no longer available?
Nothing. And here is why:
Imagine a late-winter morning after the deadline for the filing of annual accounts for the preceding year – perhaps early March 2004. The Big Four have quit or been driven out of the business of issuing auditors' reports under the securities laws of the world.
Of the companies in the FT-SE 100, the Nikkei stock average and the S&P 500, however, a large number – say, 50 percent – offer to their regulators and stock exchanges a report in this form: To: The Members of the Audit Committee of Large Global Company Inc. (the Company) The accompanying statement of financial position, results of operations and changes in financial condition of the Company, as of and for the period ended Dec. 31, 2003 (the financial statements) have been prepared by the Company, with our assistance. So far so good.
In the opinion of the Company and its senior management, the financial statements are free of material error and are fairly stated in accordance with preferred accounting principles. These principles, based upon International Accounting Standards, may or may not be deemed “generally accepted” in the Company's headquarters country or any of the countries in which it has significant operations.
We have performed those audit procedures respecting the financial statements that we reasonably believe necessary, and in accordance with the International Statements on Auditing. On the basis of those procedures, we are of the same opinion. Up to this point there are tweaks in emphasis, mainly for the scholars. But now buckle up. For purposes of our procedures and opinion, items and transactions less than $xyz million, individually and in the aggregate, have been deemed not material.
We are not the Company's statutory auditor, and we are not 'independent' under the rules of the Securities Exchange Commission or any other securities regulator claiming jurisdiction over the Company and its securities. We have designed and built and currently operate the Company's systems for the recording and reporting of its transactions, for which we have been paid $xyz million in the period covered by the financial statements, pursuant to an engagement approved by the audit committee of the Company's board of directors. Signed: Surviving Accounting Firm
And to make plain that this really is a new day, the report carries the following footnotes: This report and opinion are available to interested persons through the Company's Web site. In accordance with the terms of access there provided, persons obtaining access to this report and opinion have agreed that we have no liability with respect thereto except upon a final determination of our knowing and willfully fraudulent conduct. Also note that, in addition to this report and opinion, we also perform certain procedures from time to time with respect to the Company's financial statements and operations, and periodically report to the Company on the results of those procedures.
Persons interested may, subject to certain limitations of liability and other conditions, have access to these reports, through the Company's Web site. This report essentially says: “We've done the best we could, given the time and money allotted us. We're also an interested party, doing work that adds value to our report, and which you should clearly know up front. We can help you to know more. But both our undertakings and our exposure to you are strictly limited.”
What would happen? The world's stock exchanges would open as usual. Oh sure, politicians and regulators would have an apoplectic moment.
However, even in these hypothetical uncharted waters, real-life markets would bump gently and speed along. Because if markets move on information and founder on obscurity, this report has the virtue of providing the first and not the second. Jim Peterson's e-mail address is jrpllc@aol.com. In the spring of 2001, I heard a poignant requiem pronounced for the ability of the large accounting firms to survive in their present form. A senior managing partner for one of the now-surviving Big Four firms – a man given to neither overstatement nor irony – said to me, with a father's considerable pride, that he had achieved his wish for his two grown children: that neither was electing to follow his footsteps into public accountancy. With hindsight, this statement is extraordinary less for its content than for its timing. This was months before the explosion of Enron and the implosion of Arthur Andersen, before the proclaimed crisis of corporate governance and the legislative overreaction it spawned. Yet even then, the lions of the accounting profession were having grave self-doubts about their own viability.
It was clear to me then, and even clearer now, that the reason for this partner's malaise lies in deep-seated pessimism about the real value of the statutory auditor's statement – a dinosaur of a document that offers neither the reassurance nor the early warning that investors and regulators profess to need.
What is remarkable in this environment is the complete absence of debate or even contemplation of “the day after.” What happens if, or when, the audit report as it has been known since early in the last century is no longer available?
Nothing. And here is why:
Imagine a late-winter morning after the deadline for the filing of annual accounts for the preceding year – perhaps early March 2004. The Big Four have quit or been driven out of the business of issuing auditors' reports under the securities laws of the world.
Of the companies in the FT-SE 100, the Nikkei stock average and the S&P 500, however, a large number – say, 50 percent – offer to their regulators and stock exchanges a report in this form: To: The Members of the Audit Committee of Large Global Company Inc. (the Company) The accompanying statement of financial position, results of operations and changes in financial condition of the Company, as of and for the period ended Dec. 31, 2003 (the financial statements) have been prepared by the Company, with our assistance. So far so good.
In the opinion of the Company and its senior management, the financial statements are free of material error and are fairly stated in accordance with preferred accounting principles. These principles, based upon International Accounting Standards, may or may not be deemed “generally accepted” in the Company's headquarters country or any of the countries in which it has significant operations.
We have performed those audit procedures respecting the financial statements that we reasonably believe necessary, and in accordance with the International Statements on Auditing. On the basis of those procedures, we are of the same opinion. Up to this point there are tweaks in emphasis, mainly for the scholars. But now buckle up. For purposes of our procedures and opinion, items and transactions less than $xyz million, individually and in the aggregate, have been deemed not material.
We are not the Company's statutory auditor, and we are not 'independent' under the rules of the Securities Exchange Commission or any other securities regulator claiming jurisdiction over the Company and its securities. We have designed and built and currently operate the Company's systems for the recording and reporting of its transactions, for which we have been paid $xyz million in the period covered by the financial statements, pursuant to an engagement approved by the audit committee of the Company's board of directors. Signed: Surviving Accounting Firm
And to make plain that this really is a new day, the report carries the following footnotes: This report and opinion are available to interested persons through the Company's Web site. In accordance with the terms of access there provided, persons obtaining access to this report and opinion have agreed that we have no liability with respect thereto except upon a final determination of our knowing and willfully fraudulent conduct. Also note that, in addition to this report and opinion, we also perform certain procedures from time to time with respect to the Company's financial statements and operations, and periodically report to the Company on the results of those procedures.
Persons interested may, subject to certain limitations of liability and other conditions, have access to these reports, through the Company's Web site. This report essentially says: “We've done the best we could, given the time and money allotted us. We're also an interested party, doing work that adds value to our report, and which you should clearly know up front. We can help you to know more. But both our undertakings and our exposure to you are strictly limited.”
What would happen? The world's stock exchanges would open as usual. Oh sure, politicians and regulators would have an apoplectic moment.
However, even in these hypothetical uncharted waters, real-life markets would bump gently and speed along. Because if markets move on information and founder on obscurity, this report has the virtue of providing the first and not the second.
Jim Peterson's e-mail address is jrpllc@aol.com.
