GAO Announces New Rules on Auditor Independence

Allow me to clarify...

Nick, perhaps you could clarify where you believe the weakness lies in the process - On one hand you are inferring that auditors (specifically in the Enron case) did not understand the information they were attesting to. Then, you state that the standards are what are at fault. Which is it?

I my opinion, if an auditor is incapable of comprehending the transactions underlying the fnancial statements, he (they) should resign from the engagement as you stated. However, I do not believe that this fact has been established in the Enron case - and I doubt it will.

Let me expand on my point about the complexity of certain types of transactions - An engineer could give me perfect blueprints to construct a semiconductor, but due to the complexity and the specialized knowledge necessary to fully comprehend the information, I would be better off leaving semiconductor manufacturing to the experts. If I attempt to build one anyway and fail, is it the engineer's fault? Is it the information's fault? No, it is my fault. Likewise, an investor who does not understand the disclosures related to complex financial transactions should not hold the standards at fault if he loses his investment.

I submit that accounting standards are not perfect - they are a work in progress, but to abandon what we have for a more generalized 'reasonableness' standard is, in my opinion, idiotic. Can you imagine if the Congress stated that due to some taxpayers finding loopholes in the current tax law which allowed them to misstate their taxable income, we are going to go to more generalized laws instead of correcting the flaws in the current system. These new tax laws will read - "Pay the amount of taxes that seems reasonable to you." Likewise, if we throw away the standards we have developed, financial reporting would become far less comparable from company to company, throwing the financial markets into chaos, not just the 'confidence gap' we are currently experiencing.

Geez... I think you both just proved my points.

But thanks for pointing out my ignorance. (1) You state 'my opinion that the public has last confidence in the audit profession can be debated.' Really? Take a look at the headlines of the stock market lately? (2) You state derivatives etc. 'have become so complex (as to be) almost impossible to comprehend.' So the solution is... go ahead and issue an unqualified opinion even if you don't understand the business of the company you are auditing?! Hint: if the auditor doesn't 'get it', he/she should excuse themselves from the engagement. (3) You state 'financials... in accordance with GAAP does not (mean the financials are) reasonable.' Great. So we (yes, me too) are in a profession where 'following the rules' (yes, more accurately 'GAAP and FASB pronouncements' if that is the real issue here) and standards do not accomplish the ONE THING that they are suppose to do - assure the users that the financials are accurate and complete. The result? See #1 above. Conclusion? Our standards suck; GAAP doesn't work in certain situaitons. (4) You state 'from judging responses I can see who understands the challenges of auditing a major corporation and who doesn't.' First, then, you are a poor judge. Second, who cares how hard it is? So is brain surgery. And if you are not skilled enough to even understand it, let alone do it, then don't hold yourself out to be one who performs it, or who does it anyway (i.e., I'm talking Anderson here, not you personally.) Ignorance is not an excuse to collect a fee and issue an unqualified (literally - think about it!) opinon.

Bravo Jon!

Jon, I couldn't agree with you more and I am glad you decided to correct perceptions of those who couldn't be farther from the truth.

It seems that everybody but auditors have something to say, but I can't believe that their perceptions are based on experience. Rather, it seems that accountants, and even CPAs who are being critical, are not those who work in auditing a Fortune 500, multi-national, diversified services firm. From judging responses I can see who understands the challenges of auditing a major corporation, and who does not. In hindsight it is easy for an outsider to say, "Duh... Andersen should have caught that!" However, if those who criticize were responsible for passing an opinion on a corporation as complex as Enron, with equally dishonourable and unforthcoming management as Enron, I wonder if the outcome would be even worse.

Re: Attestation has become worthless.

In response to Nick Stanger's Jan 28th post -

Your opinion that the public has lost confidence in the independent audit profession can be debated, however you additional assertion that this loss in confidence is "rightful" highlights a degree of ignorance on your part.

If possibly being forced to declare personal bankruptcy and the loss your license to practice in the case of a negligence lawsuit is no penalty, I would like to know what does constitute a penalty in your opinion.

Secondly, you ARE missing something. You must understand that our society and its underlying financial transactions have become increasingly complex over the past several decades. Even in just the past five to ten years, derivatives and other financial instruments have become so complex that the average MBA student would find them almost impossible to comprehend. Yet, you infer that applying GAAP (which, by the way, extends beyond FASB pronouncements [or as you call them "rules"]) is a simple matter, or that it is the auditor's responsibility to determine some subjective sense 'reasonableness'. An auditor's responsibility is to present an opinion on whether or not the financial statements reflect the company's financial position and results of operations in accordance with GAAP - NOT whether or not the financial statements are REASONABLE. The problem with your 'reasonableness' standard is that to some people, investing a large percentage of their worth in a company they do not understand and that is trading at well over 10x earnings is reasonable. To others, it is irresponsible investing.

From the evidence presented thus far, there seems to have been some negligence on Anderson's part, however, some credit must be given to an industry that has helped to make our capital markets what they are today.

Attestation has become worthless.

The public has rightfully lost confidence in the profession. CPAs (auditors) want to be paid to 'attest' to the material accuracy of the finanacials, but if the company fails and financials (signed off by the CPA for whatever reason, including lack of independence) are found to be materially misstated, the auditor wants to be absolved of any responsibility. No risk, but they still want te credibility and reward. Them days are over.

This process has no teeth! ANYODY could 'attest' if it means nothing and there is no penalty for making a bad call.

Am I missing something? Why isn't it so simple: the FASB rules require certainly things to be done, disclosed, or not disclosed, to be accurate and conservative. But the public has a right to believe that 'reasonableness' will override technicality; the rules should be followed, unless of course the transactions are structured such that following the rules will actually materially misrepresent results! In which case the rules should be followed as closely as possible, but NOT to the detriment of material accuracy. The auditor must then either (a) persuade the client to change the accounting and/or disclose, or (b) resign from the job, inform the SEC of the misrepresentation, and sue the client for the unpaid bill as best they can. This is what the public thinks, and has a right to think, should and (until Enron) does happen.

At BEST, Anderson's senior mangement is incomprehensibly inept. But that's only if you believe the fantasy that they left a local partner solely in charge of their biggest, $100 million fee client, with no oversight or internal control. Of course, if they're found to have had some insight as to what was going on and approved of it, being known forever as incompetent will be the least of their worries...