The words of my Dad about auditing.
I thought the interpretation of the Ernst & Young audits in the Nike case by activists and the public was an interesting one. Essentially the feeling was that any audit or report brought about by Nike on supplier labor practices would be tainted if that firm was paid by Nike. My previous understanding of audits was that this was a typical practice, so naturally I had an e-mail conversation with my Dad about it.
Background: he’s a CPA who works in assurance. Here were his two cents:
It is a challenging issue. Does the government, credit agency or banks want to be in the business of hiring auditors? While I would be the first to admit that the current system needs improvement because of restatements and other things the auditor missed, I am not sure it will be a lot better with someone other than the company making the auditor selection. If someone is going to cook the books, they will still do so. The other question is whether auditors are attesting on financial statements or are they really an insurance company to look to blame and make claims against if something goes wrong.
Obviously the point of view is relevant, but I thought the fall guy idea was something that hasn’t been discussed much. It is easy to see that companies could rely on an external voice to claim ignorance. I’m not laying blame off the ‘independent’ credit agencies here, but it feels as if some of the banks have justified actions by saying, “Hey, the agencies rated the securities AAA! How could we not choose to invest in them? Nothing could possibly go wrong here…”
In a perfect world, everything would be completely independent. Companies, credit agencies, auditors, and insurance would all be separate. However, we live with limited information and we just need to do what’s possible to try and ensure transparency and hope everybody acts in good faith. Does anyone think companies shouldn’t select their auditors/reviewers or how else could we do it? Should governments have more say?