
Accountancy used to be boring and safe, but today it’s neither - NN88
https://www.theguardian.com/news/2018/may/29/the-financial-scandal-no-one-is-talking-about-big-four-accountancy-firms
======
bigjimmyk3
Married to an accountant, and her words are echoing in my head (loudly): "The
purpose of an audit is not to discover fraud!" An audit is a written opinion
on the reliability of a company's financial statements (my words this time).
It is not an opinion about the company's business model, ethics, or future
viability. Saying, "the auditors should have caught that" misses the point of
an audit (a financial audit, anyway).

I think people may have conflated these auditors' jobs with that of, say, an
auditor from a government entity like the IRS whose job duties can include
discovering fraud.

~~~
acchow
> reliability of a company's financial statements

I don't really understand the difference.

Can you give an example of accounting fraud in which the company's financial
statements are still reliable?

~~~
Tyrek
The difference is one of scale. For example, a Walmart sized company could
easily have some fraud going on the scale of a couple million dollars - the
financial statements are considered to be _materially_ correct (i.e. in that
investors would not consider numbers off by a couple million to be a big
deal), but there would still be fraud going on.

You have to understand that the underlying concept of audit that a small team
of auditors is responsible for ensuring that a huge (relatively) company is
going about things correctly - there's no way to obtain a 100% assurance with
that scale of manpower, and there's no appetite from companies to
significantly increase the audit fees to obtain that level of assurance.
Instead, a sampling/risk-based approach is taken in order to ensure that there
cannot be a large error within the financials.

~~~
acchow
Ok, I think I understand now. The layers are:

reality -> accounting books -> financial statements

The auditors don't look at the first mapping "reality -> accounting books" but
only at the second one "accounting books -> financial statements"?

And even in the second mapping, they check with a sampling-based approach?

~~~
Tyrek
No, all testing is down all the way down to 'reality'. But testing is
statistically scaled to detect large errors. The threshold for 'large' shifts
with how large the audited company is. i.e. a couple million dollars is a
rounding error at Walmart.

Additionally, pretty much 90% of an audit flows through a limited number of
client contacts. Audits are not designed to defend against a concerted effort
to prevent the auditors from seeing 'reality' (i.e. un-doctored documents),
due to the manpower requirements to validate information at that level.

Conceptually, it's the difference between 'I-trust-you-but-I-need-to-check-
that-you-did-your-homework' and 'Trust no one, everything you see is a lie'.

------
hristov
I think the side consultancy businesses are a big problem. Accounting firms
should be banned from providing any services other than accounting. This is
currently the case in the US for law firms and it is widely accepted that this
rule limits conflicts of interest.

It is just far too easy to make a bribe with consulting services. There is no
good way to measure the real value of consulting services, and their cost can
be massive. If a crooked CEO gives his accountant bags of cash to cook the
books, he may be caught and both the CEO and the accountant can be sent off to
jail. If a smarter crooked CEO instead hires his accountant's accounting
company to a 100 million dollar consulting contract, in exchange for cooking
the books, good luck proving a bribe took place. The accounting firm will
surely put in a hundred of consultants on the contract and they will surely
produce long reports with stacks of technobabble and graphs. Who is to say how
much that is worth.

~~~
chaseha
FWIW I don't think companies are allowed to purchase consulting services from
their auditor, specifically because of this conflict of interest. In my
experience, companies will have one of the big four as their primary auditor,
than use some combination of the other three for consulting (in addition to
MBB or any other firms).

In no way defending the value of these services though - their primary
function is to shift culpability off of the executives IMO

~~~
srhngpr
Currently at a Big 4 on the consulting side, this has been my experience as
well. We cannot touch our audit clients as the rules are very strict.

~~~
121789
Also my experience - there are pretty significant safeguards against this
stuff. It can be really annoying on the consulting side.

------
skywhopper
“Have the ‘big four’ firms become too cosy with the system they’re supposed to
be keeping in check?”

Yes. This was clear in 2001 during the Enron scandal. Which by the way
triggered the collapse of one of the then-“Big Five” and created the “Big
Four”. Nothing has substantially changed.

~~~
simonebrunozzi
You are talking about Andersen / Accenture?

~~~
ams6110
Andersen used to have two main divisions. Arthur Andersen did accounting and
audit, Andersen Consulting did management consulting and professional
services.

After Enron, Arthur Andersen folded. The partners of Andersen Consulting
rebranded their business as Accenture.

~~~
dredmorbius
Your timeline and causality are incorrect.

Arthur Aderson and Anderson Consulting operated separately under Andersen
Worldwide Société Coopérative since 1989. The companies formally separated in
August of 2000, and the Accenture name was announced in January, 2001.

The Enron scandal broke in December, 2001.

Accenture's timing proved fortuitous, but coincidental.

[https://en.wikipedia.org/wiki/Accenture](https://en.wikipedia.org/wiki/Accenture)

[https://en.wikipedia.org/wiki/Enron_scandal](https://en.wikipedia.org/wiki/Enron_scandal)

------
anonymous5133
I have lots of friends who work for the big 4 firms. I think the biggest worry
is that most of the people doing the actual audit procedures are so
inexperienced and have no long-term goal of staying with the firm. When you
talk to them they talk like they're at grad school - "I'm just going to stay
here for three years to get my CPA and experience then I am going to the
private sector".

If that is your mentality, are you really going to try to dig up a bunch of
issues that will cause stress for you?

~~~
121789
I'm on the consulting side at a B4 and what you're saying is true from the
experience of my friends working in audit. The manager level and above should
be checking the work quality, but they also have to balance client
relationship building (which will advance their careers) with reporting
potentially negative results from analysis.

Side note: for anyone looking for a miserable career, choose auditing at a B4.
It's a rare combination of overworked and underpaid that has basically
everyone racing for the door after a year or two.

~~~
cdeez
You forget the multi level sales scheme that has everyone dreaming of becoming
a partner and living the good life. Similar to a startup you are taking lower
pay to build value-less equity in the hope you will get to the top and cash
out.

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sharemywin
The principal/agent problem.

insurance, auditors, government regulation, government backed loans. All have
their own problems with this.

I know in mortgages, appraisers are randomly selected. Where as before they
were selected by the mortgage company for what value they could get for the
house. The problem now is they have no accountability to anyone.

part of the problem in health insurance consumers aren't price sensitive so
prices just keep going up. (obviously they're are more problems that that)

governments have regulator capture issues.

shop your auditor(regulator) is a problem.

~~~
delinka
>I know in mortgages, appraisers are randomly selected.

Not sure about that - the bank that financed my last mortgage employed the
appraiser as full-time member of staff. The appraisal exactly matched the
contract. I do find that fishy, but apparently not against the rules.

~~~
ams6110
The purpose of the appraisal is to determine the loan-to-value ratio. As long
as the appraisal is at least the required number, they're fine. The appraiser
is basically saying, "in my opinion the property is worth at least $X.” Not
that it might be not be worth more.

------
ScottBurson
Here's a thought. I've heard somebody's started a "long-term stock exchange";
ah, here it is: [https://ltse.com/](https://ltse.com/) (more info:
[https://blog.ltse.com/modern-companies-think-long-term-
soon-...](https://blog.ltse.com/modern-companies-think-long-term-soon-the-
market-will-too-e0c9a94f5ef7))

Seems like such an exchange could also insist that the companies listed on it
submit to independent audits paid for by the exchange. Well, the listed
companies would still pay for the audits through the listing fees, but the
auditors would report to the exchange. Seems like this could align the
incentives better: the exchange wants to attract investors, so they want to be
able to provide additional assurance that the companies listed there are
sound.

------
jsmith99
UK financial auditor here. Putting in a low bid for an audit engagement is
considered a breach of professional ethics. You might have an incentive to do
less work and gloss over things if you're on a very tight budget. So it's hard
for competition to bring fees down.

~~~
UK-Al05
I think companies are all too happy to pay high fees if certain things are
overlooked.

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purple-again
>>Just four major global firms – Deloitte, PricewaterhouseCoopers (PwC), Ernst
& Young (EY) and KPMG – audit 97% of US public companies and all

Yeah that'ts not even remotely close to true. The author meant to say Fortune
500 companies not all US public companies.

~~~
h0undawg
What makes you say that? Who are the other auditors?

~~~
ghein
Grant Thornton, BDO, and RSM are the next step down. There are a few other
international firms and then there are a large number of international
alliances.

The second tier firms operate very similarly to the Big 4 but are an order of
magnitude smaller. They'll do audit work for public companies, just not very
big ones. Or they'll do pieces of work for bigger firms. But companies can
still be public with revenues of only a few hundred million and they'll be far
more price sensitive than Google or Goldman.

Just like in cloud computing or AI scale has serious advantages for accounting
firms and it is difficult and expensive to try to make the jump to the top
tier. Better to stay in your target market in terms of client size, geography,
and what price you charge, than to try to drastically change your business.
Far too likely to lose your existing business and not succeed in the new one.

------
toss1
And we're back to the question at least as old as ancient Rome:

Quis custodiet ipsos custodes? ("Who will guard the guards themselves?")

The very structure of large accountancy needs to be overturned, as today, the
primary incentive for the big 4 is to preserve their client relationships --
that is the side on which their bread is buttered. This means applying their
stamp of credibility, not finding and highlighting troubles, especially
fundamental/systemic/existential troubles...

~~~
Retric
It's great to find problems, just share them over a golf game and not an
official report.

~~~
toss1
And when the problems have systemic implications, and are the result of
policies/actions from those at the top, with whom the accountants are golfing?

This was the point of the article -- accountancy was supposed to provide a
guard function -- checks and balances. Now, it is merely a compromised
credentialing service.

------
hprotagonist
is it still irrepressibly drab and awful?

[https://www.youtube.com/watch?v=azkFz1ZbXyU](https://www.youtube.com/watch?v=azkFz1ZbXyU)

~~~
heisenbit
I would like to add

The Crimson Permanent Assurance
[https://www.youtube.com/watch?v=aSO9OFJNMBA](https://www.youtube.com/watch?v=aSO9OFJNMBA)

and their humble beginning and dramatic end:
[https://www.youtube.com/watch?v=7YUiBBltOg4](https://www.youtube.com/watch?v=7YUiBBltOg4)

As one can see proper Accountancy is exciting, adventurous and associated with
big risks for life and limb.

~~~
nkrisc
It's fun to charter an accountant

and sail the wide accountancy,

to find, explore the funds offshore

and skirt the shoals of bankruptcy!

It can be manly in insurance.

We'll up your premium semi-annually.

It's all tax deductible.

We're fairly incorruptible,

we're sailing on the wide accountancy!

------
srhngpr
My personal prediction is that audit in its current form will cease to exist
within the next 10 years. Already at Big Four firms, there is a shift towards
risk management, especially when more and more clients are adopting technology
to manage all of their financials. What used to take many hours/days for
auditors to manually reconcile and "audit", now can be automated using
technology and instead, the focus will be on assessing risk and controls that
are in place in those technology solutions. This is evident by current
downward trend of audit revenue (even in Big Four) and an increase in revenue
coming from Risk Advisory service lines instead.

------
jimnotgym
It is quite simple, the big 4 have the UK and US top companies sewn up. We
need a cap on how long a form can audit one company as a start. This would
take away the incentive to keep the client ahead of making good judgements

~~~
jsmith99
In the UK firms are meant to rotate auditors.

~~~
jimnotgym
They don't though, they rotate audit partners

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neaden
It seems like the relatively simple solution here would be to nationalize
these firms, or at least their auditing aspect. A public company could handle
that and remain more independent and less susceptible to greed than the big
four. Have any countries tried doing this?

~~~
tialaramex
I believe that the appropriate model is the one chosen for the Paris MOU and
copycat Port State Control authorities.

* Ports can't afford to inspect every vessel that enters

* Inspections are annoying and costly for owners even if their vessel passes

* But, left to their own devices the Flag States may skimp on inspections, causing a Race to the Bottom where ships registered with Flags of Convenience are mostly awful and the port states end up absorbing the cost (atrocious labour conditions, deaths and injuries, pollution)

So the Paris MOU randomly inspects ships, but it has an intelligent and
adaptive model controlling the probability of any particular ship being
inspected when it arrives in a port.

If (say) Panamanian flagged vessels all keep passing their Paris MOU
inspections, the rate at which vessels with a Panamanian flag are inspected
falls.

On the other hand if, say, Venezuelan flagged vessels keep failing inspection,
rates of inspection for that flag go up.

This encourages owners interested in an "Open registry" (Flag of convenience)
to pick one that's doing a good enough job at inspecting vessels to attract
the lowest rate of Paris MOU inspections. Which in turn pressures the flag
states to either do good quality inspections of their own, or get out of the
"Open registry" game instead, either of which suits the Paris MOU signatories
just fine.

So, governments should have their own small number of specialist auditors, and
they should randomly re-audit some fraction of public companies, with the
chance depending on which Audit firm that company hired and how many re-audits
of other firms audited by that company found problems. The cost of doing all
this would be paid by the audit firms, as both a fixed levy AND fines whenever
something is wrong.

~~~
prteja11
That is exactly what a PCAOB does except it is private.

The Public Company Accounting Oversight Board is a private-sector, nonprofit
corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of
public companies and other issuers in order to protect the interests of
investors and further the public interest in the preparation of informative,
accurate and independent audit reports.

------
kaycebasques
Article aside, the title interests me. There does seem to be some general
relationship between boring and safe (or interesting and risky) in our
psychology, or mine at least. I wonder why that is?

~~~
usea
Any new experience is interesting. People will often feel compelled to get a
glimpse at an event they haven't seen before, or that is rare. New stimuli is
sought-after.

People also derive their perception of safety from past experience. If you've
driven in a car hundreds of times, you will think it much safer than doing
something you've never done before. To many people, stability = safety.

~~~
antishatter
By definition stability (low volatility) is safety and implies low risk (not
no risk), please offer counter examples.

~~~
lbotos
I would always tell my younger brother there is a difference between dangerous
and reckless. I think we are still saying the same things, but I'm not sure.

~~~
antishatter
Well nothing is truly 0 risk given the nature of opportunity cost, inflation,
etc.

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matchagaucho
Just like a zero-day vulnerability waiting to be exploited, the cause of the
next major economic recession is currently being synthesized, audited, and
approved by the big 4.

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skookumchuck
I'd rather be a Lion Tamer (yes, I do have the hat!).

------
w_t_payne
An industry that needs to be 'disrupted'?

~~~
jimnotgym
If you have seen the work junior auditors do, it is begging to be automated.
It will be a question of which company is first to get it past the standards
bodies...

~~~
ghein
The automation is already happening. Massive deployment of AI to wipe out low
level work in next 5-10 years, just like with law.

~~~
anonymous5133
I work in accounting and have been seeing this for years. Most people are
completely delusional because they think they have "professional skills" that
will make them immune to automation. I've given up warning others and now I
focus on just improving my IT skills.

