The CEO of Satyam Computer in India just resigned after admitting he and others had been fraudulently inflating revenue for years. Satyam stock lost 90% of its value and the India stock market dropped 7%. This is a serious big deal, maybe of Enron proportions.
Pricewaterhouse, one of the big four international accounting firms, was their auditor, and somehow managed to just miss the whole thing, darn it.
PWC, how are you going to explain this Satyam thing? How is it possible for two people to produce enough documentation to hide personal transfers of $1 billion of cash into company accounts, along with massive faked revenues and expenses?
They suggest a workable solution, given the obvious corruption and incompetence involved.
1) Nuke the SEC. It’s worse than worthless.
2) Stop allowing companies hire their own auditors. This is akin to a defendant in court being able to hire and pay the judge. An outside entity should hire and pay the auditors. Then they will be more genuinely independent.
3) Make companies pay a fee to an independent auditing organization that funds the audits.
Sue, a CPA and Certified Fraud Examiner who will soon have a Masters in Taxation, agrees completely, saying a plan like this is best way to avoid the glaring conflicts of interest and obvious systemic corruption inherent in the current system.
No – no – no. I didn’t agree with “nuke the SEC.” A course of steroids and body building (i.e. beefing up, staffing, training, funding, etc.) is in order.
But yes, good idea to remove the hiring and paying of auditors from a company’s management to an independent body. An auditor should have to worry about only professional liability.
One CPA I work with (also a CFE with a Masters in Taxation) suggests that if audits were performed by a public agency, they’d be more like IRS audits– adversarial but not very effective. The Final Four firms have the budget to hire the best and the brightest. The IRS gets people who can’t get something better. Depending on the auditor, it’s not that hard for a good tax pro to outsmart them.
OTOH, if a public agency assigned firms to do audits, passing the fee through from the client, who would determine which firm got which client? And how long would it be before audits went to the lowest bidder? Why pay PWC $150,000 for an audit when Fast Freddy can do it for only $20,000?
I’m not saying the current auditing system is ideal– it smacks of self-regulation– but I don’t think we’ve got a better answer just yet.