Bramwell’s Lunch Beat: Are Audits Suffering Due to Data Analysis?

Internal audit: Know when to disclose
In an excerpt from his book, Lessons Learned on the Audit Trail, Institute of Internal Auditors President and CEO Richard F. Chambers said if you analyze enough audit reports, you can begin to see why certain findings resonate with stakeholders and the public in ways that much more important findings do not.

“People’s reaction to findings of waste or inefficiency in an internal audit report have less to do with the amount of money involved or the consequences of the error than they do with how much they identify with the problems, usually in a negative way,” Chambers wrote, according to the excerpt that was published by the Wall Street Journal today.

“So, what’s an internal auditor to do? I learned early on the importance of putting my report observations in perspective,” he continued. “If the amount of money involved is not material and the problem or error cited is not systemic and poses no threat, then the observation may not even warrant inclusion in the report; you can still review such issues with management so they can be addressed without the turbulence of the ‘small-stone effect.’

“If disclosure is appropriate, then the finding should be discussed in a way that clearly places the issue in perspective, especially if you anticipate media coverage or other public scrutiny.”

Regulators fear Big Data threatens audit quality
David M. Katz of CFO wrote that as data analytics becomes a more significant part of the business of big accounting firms, auditors themselves need to acquire new skills that “are not in the natural skill set of the auditor,” Public Company Accounting Oversight Board member Lewis Ferguson, who chairs the International Forum of Independent Audit Regulators (IFIAR), said during a press conference last week about the findings of IFIAR’s 2013 survey of regulators’ inspections of audit firms.

The accounting firms make “a cogent argument” that to attract analysts with data skills, they must boost the services sides of their businesses, according to Ferguson. The point of view of those new people, many of whom are skilled in the analysis of Big Data, differs sharply from that of traditional accountants, Katz wrote.

“Instead of doing testing by sampling, you look at the entire general ledger, at every transaction a company has done, and analyze those by exceptions and by outliers,” Ferguson observed, according to the article.

On the other hand, the influx of such expertise “raises serious questions about differential levels of profitability in these businesses, differential rates of growth, where the economic incentives are, and to what extent audit quality suffers as a result” of such trends, Ferguson noted.

Look beyond the root causes of audit deficiencies
In its survey report, the IFIAR expects the top audit firms around the world to provide information about the results of “root-cause” analysis, so as to gain a clearer understanding of the factors that underlie inspection findings and to take appropriate remedial actions. But as Tom Selling wrote yesterday in his blog, Accounting Onion, fixing the root causes of audit deficiencies is much more than a “Big Four” problem.

“Policy makers need to come to realize that the days where an auditor can reliably report on the financial statements taken as a whole are over,” he noted. “Auditors are good at verifying facts, like what things actually cost, and who owes what to whom. But, as the basis for financial statements has become taken over by ‘critical accounting estimates,’ audit reliability has, understandably, not kept pace.

“The judgments of unknowable future events that are required to produce a set of financial statements diminish the reliability of any audit,” Selling continued. “It is much more the job of financial reporting regulators than the audit firms to fix a problem of this nature. Moreover, audit regulators and accounting standards-setters will have to collaborate close, as the fixes will entail a fundamental shift in both the basis of financial reporting and the scope of the audit.”

Tax havens leave US filers $1,259 tab each, report says
Derek Wallbank of Bloomberg wrote yesterday that US taxpayers would need to pay an average of $1,259 more a year to make up the federal and state taxes lost to corporations and individuals sheltering money in overseas tax havens, according to a report from the US Public Interest Research Group.

“Tax haven abusers benefit from America’s markets, public infrastructure, educated workforce, security, and rule of law – all supported in one way or another by tax dollars – but they avoid paying for these benefits,” the report stated, according to the article. “Instead, ordinary taxpayers end up picking up the tab, either in the form of higher taxes, cuts to public spending priorities, or increases to the federal debt.”

In total, the United States loses $150 billion in federal revenue and another $34 billion in state revenue annually because of money parked in tax havens. That’s almost 5 percent of total federal revenue. The United States is projected to raise $3.032 trillion this year, up from $2.775 trillion for fiscal year 2013, according to the Congressional Budget Office, Wellbank noted.

Listen to the ‘largest ever’ phone scam involving IRS impersonators
The Washington Post’s Federal Eye blog obtained a recording from Pindrop Security of a phone call in which a scammer contacted a company representative who posed as a victim.

According to Josh Hicks of the Washington Post, the full recording is followed by shorter excerpts showing that the caller used much of the scripted tricks the IRS and Treasury Inspector General for Tax Administration J. Russell George have warned about in recent months regarding a sophisticated nationwide phone scam. The scam involves callers who impersonate IRS representatives and demand immediate payments with pre-paid debit cards and wire transfers.

[Click here and here for AccountingWEB articles about the phone scam.]

Meet the tax defiers
Around this time each year, the IRS confronts thousands of Americans who refuse to pay their taxes. As Brian Faler of Politico noted in an article yesterday, they are not interested in arguing over taxing the rich or whether the poor pay enough. Many reject the entire premise that the government has the power to tax them at all, with elaborate, sometimes paranoid theories about why April 15 does not apply to them.

“Some say the 16th Amendment to the Constitution, which authorizes Congress to impose an income tax, was never properly adopted by the states,” he wrote. “Some say lawmakers never passed a law specifically requiring the public to pay or that taxes are voluntary.

“Their bottom line is the same: that the income tax is nothing more than a long-running hoax.”

Peter Hendrickson, a longtime tax protester who has spent time in jail, told Faler: “There are a lot of folks who unfortunately continue to be taken by what really is a generations-long exploitation of misunderstanding of the nature of the tax code.”

Is the tax code really 70,000 pages long?
According to an article written by Andrew L. Grossman for Slate, not even close.

“I’m an attorney at Congress’ Joint Committee on Taxation, and I have the tax code sitting next to me as I write this,” he wrote. “This particular version, published by Thomson Reuters, is a big book, but it is only one volume. American Public Media’s Marketplace Morning Report has reported that the tax code is 70,000 pages long. The New York Times thinks so too. A Google search will find this number repeated again and again in the popular press. I have never seen a book that is 70,000 pages long, and I seriously doubt that such a book exists. So please be assured that the tax code is not 70,000 pages long.”

So how long is it? In the 2013 edition, the last page is numbered 4,037, according to Grossman.

“Now, that’s not exactly right either, for two reasons: The book starts at page 100, and then skips 500 pages in its numbering (don’t ask me why), and this volume (like all other volumes I’ve ever seen) contains both the present-day tax laws and prior versions of the tax law,” he continued. “That is because tax lawyers like me often find it useful to refer to prior versions of the law. But the compilation of those old laws isn’t really the ‘tax code’ – it’s just a resource for lawyers. I’d estimate that the old law takes up about 800 pages. So let’s say the tax code is about 2,600 pages long. It’s like 2 1/2 times the length of Stephen King’s It – except you replace ‘scary clown’ with ‘accounting methods.’”

Quick Links:

  • “The New IRS” lets you allocate your tax dollars your way (Going Concern)
  • GOP marks Tax Day with challenge to IRS (The Hill)
  • Camp could punch ‘golden ticket’ to K St. (The Hill)
  • Republicans talk Tax Day on Twitter (Politico)
  • The spending bender also known as the ‘tax extender’ (Wall Street Journal)
  • Senate clears path for corporate tax giveaways (MSNBC)
  • Sending money on an overseas round trip to avoid taxes (NPR)
  • The elusive dream of never having to file your tax returns (Washington Post)
  • What America’s 15 most profitable companies pay in taxes (Forbes)
  • Don’t write a tax check that your bank account can’t cash: Payment options are available (Forbes)
  • Tax Court views ballpark guesstimates as fields of dreams (Forbes)
  • Extended tax filing deadlines for certain Colorado, Washington state, and Massachusetts taxpayers (Don’t Mess With Taxes)
  • Man threatens clerk with submachine gun over 22-cent tax (Gawker)

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