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Friday, December 14, 2012

GRUMPY ENOUGH TO RETIRE » Grumpy Old Accountants

GRUMPY ENOUGH TO RETIRE » Grumpy Old Accountants:

 " It does not take a rocket scientist to figure out that managers have incentives to lie in financial statements.  Over 75 years ago (yes, even back then), Congress and the SEC thought it valuable enough to require that independent accountants audit manager financial statement assertions to make sure that they are telling the truth.  Otherwise, potential investors might decide to protect themselves by simply not participating in Wall Street at all, thus depriving corporate America of the funds needed to meet capital requirements. Just to be clear, auditors are not required to and do not assess the worthiness of investing in the firm.  Instead, they assure the investing community that evidence exists to back up the claims made by management in the financial statements.  In other words, the Certified Public Accountant verifies that management is telling the truth in the financial reports. "

It is within this context that we have often decried the movement seemingly away from the auditor as professional skeptic to the complicit accomplice.  Auditors are responsible for the flotsam and jetsam produced by the banking fiasco as seen in the reports by Lehman Brothers, Citigroup, and others.  And audit quality seems to be in a continued decline as evidenced by Michael Rapoport’s recent article citing the PCAOB’s discovery of insufficient audit work by major accounting firms. Without good audits by truly independent and competent persons, investors will protect themselves by the only two choices they have: either they will leave the market altogether, or they will raise the cost of capital by what one might term the “accounting risk” component.

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