Homepage / Currency / What is an audit for?
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election


What is an audit for?

AUDITS get noticed only when things go wrong. Last week British MPs issued a scathing attack on KPMG, an auditor, for failing to avert the collapse of Carillion, a contracting company. South African authorities are looking into Deloitte’s audit of Steinhoff, a retailer. PwC, another auditor, could face a court-damages verdict for hundreds of millions of dollars for not spotting fraud at Colonial Bank, a failed American lender. It is also fighting a $3bn lawsuit in Ukraine and a two-year ban in India.

Investors are also waking up to audits. They almost never vote against management’s choice of auditor. But last month over a third of shareholders at General Electric, an industrial conglomerate, voted against the reappointment of KPMG. Investors in Steinhoff are suing the company and Deloitte for $5bn for their losses.

  • “Heavenly Bodies” mixes metaphors at the Met

  • Olga Tokarczuk has finally found major recognition in English

  • Jordan Peterson on modern liberalism

  • Does the screen image of women need to change?

  • Retail sales, producer prices, wages and exchange rates

  • How California could split up

These actions challenge an industry dominated by four big firms: Deloitte, EY, KPMG and PwC. Between them they earned $47bn from auditing most of the world’s largest firms in 2017, and $87bn more from selling consulting and tax advice. Regulators have tried to increase competition and limit conflicts of interest. But auditors argue that another problem is being ignored: that lawmakers, investors and courts all disagree about what an audit should be. They worry that they are being seen as providing insurance against corporate failure. Repeated large payouts could erode quality, they say, and even threaten the viability of the big firms.

Developments in auditing have always been driven by corporate scandals. Until the mid-19th century investors used to look over the books themselves, checking that directors were not frittering away their capital. After a spate of accounting fraud during Britain’s railway mania, investors turned to professional accountants to do the job. The stockmarket crash in 1929 led to laws requiring listed firms in America to be audited. Scandals in the 2000s took down Enron, WorldCom and their auditor, Arthur Andersen. That led to more regulation intended to protect auditors’ objectivity, which comes under pressure because of limited competition and because they are paid by the firms they scrutinise, rather than the investors they serve. The tighter rules have had some success: measures of audit quality are improving.

But as Carillion shows, things can still go badly wrong. Incensed British MPs have called for a competition review to consider whether the Big Four in Britain should be broken up. The firms are braced for trouble. But they also argue that they cannot always get things right. People think of auditors as charged with seeking out fraud and failure, says Andrew Gambier from the Association of Chartered Certified Accountants, a trade body. But today’s professional standards set out a more limited role. Auditors give an opinion on whether the accounts are a “true and fair” representation of reality; they consider the risk of fraud, but do not hunt it down.

Robin Litjens from Tilburg University says there are several good reasons why failures may not always be detected. For one, a company’s books are so vast that audits can only realistically assess a sample of transactions in selected markets. Auditors hope that better data-analysis techniques should allow for larger samples and better anomaly detection. But for now, for large firms, looking at less than 5% of transactions is not unusual.

Similarly, auditors look only for errors that are “material” compared with profits or assets. The threshold is often in the range of 0.5% to 10%. These limitations might help explain why, according to the Association of Certified Fraud Examiners, auditors picked up only 4% of occupational fraud in 2017. Although some firms offer more forensic audits, they cost so much in time and money that companies choose them only if they already suspect wrongdoing.

Below the line

Another reason audits cannot offer any guarantees is that, despite involving numbers and spreadsheets, they are subjective. Accounts contain plenty of assumptions, for example concerning provisions for uncertain future payments. Auditors must use their judgment to decide if those assumptions are reasonable. They could be wrong, sometimes because of information that emerges after the audit is complete.

Other parts of the expectations gap are, however, in their power to close. Auditors complain that they are judged solely on the few audits that go wrong. Of the 93,000 done in Britain alone each year, they say, most are uneventful. In a handful, they may even have spotted fraud or mismanagement. These are shared with regulators, but not widely publicised, says David Sproul of Deloitte, because auditors are reluctant to provoke stockmarket volatility. “They are not equity analysts.”

Yet investors are clamouring for just such information. Rules in many countries, which also come into force in America next year, require auditors to elaborate on the main risks to their audit opinion. That helps, says Liz Murrall from the Investment Association, a trade body for British asset managers. Many investors would like also to hear how auditors challenged the management’s judgments. Others want auditors to go beyond financial statements to assess companies’ projections for sales and profits.

Natasha Landell-Mills from Sarasin & Partners, an investment firm, compares the audit to a homebuyers’ survey. It may not guarantee there will never be a leak, but it should give reasonable assurance that there are none. She wonders if some auditors are skipping the most basic checks. According to the International Forum of Independent Audit Regulators (IFIAR), a group of national authorities, two-fifths of audits worldwide that are inspected are found to be flawed. Some auditors are not even sure about their responsibility to consider fraud. On top of that, they have been given free rein over their professional standards.

Reconciling all these views requires rethinking the purpose and scope of statutory audit. Brian Hunt, the head of IFIAR, agrees that audits need modernising so that they stay relevant to investors and help align expectations. But getting everyone involved, including regulators, standard-setting bodies, investors, companies and auditors themselves, to agree on what needs to be done is so complex that no one expects speedy progress.

As long as misconceptions regarding audits exist, confrontations with angry investors and lawmakers seem likely. And the courts could side against auditors. Jim Peterson, who was an in-house lawyer for Arthur Andersen and has represented many of the large firms, points out that professional and legal standards differ. Auditors could have done what they see as their job, but still be found liable.

Critics scoff that bringing a case against auditors is so hard that this is not a real risk: federal courts in America are increasingly likely to throw out claims against auditors. But PwC’s Colonial Bank case shows that firms can still be on the hook for large amounts. Mr Peterson reckons that penalties totalling more than $3bn in a year could sink one of the Big Four, with disruption spilling over to the surviving three, and to capital markets.

With litigation and reputational risks hanging over the sector, investing in the profession becomes less attractive. Competitors continue to find it extremely hard to dislodge the Big Four: on March 29th Grant Thornton, the fifth-largest audit firm in Britain, said it would cease bidding for audit work at FTSE 350 firms until there is a “shift in the competitive landscape”. Some British firms have already seen a rise in the number of senior partners fleeing for the safety of consulting and finance jobs, or even early retirement. If talent drains away, the bar set by public expectations will be even harder for auditors to reach.

Source: economist
What is an audit for?

Comments are closed.