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Accountancy used to be boring and safe, but today it’s neither
- sharemywin 8y agoThe 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.
- pmiller2 8y agoAppraisers are a bad example. I think most people would be shocked at exactly how many appraisals come in exactly at the contract price. You can't tell me something's not influencing them, even if it isn't direct pressure from a lender.
- ams6110 8y agoReal estate appraisals are mostly on the basis of what other similar houses have sold for. This is the same process that the realtor uses to determine an asking price. Not surprising they are generally pretty close. The last thing a realtor wants is for a sale to fail to close because the appraisal is too low.
- pmiller2 8y agoI didn't say anything about asking prices. I said "contract prices," which is the final agreed-upon price for the house after an offer is accepted. Even if the asking price is higher or lower than the contract price, it's typical for the appraisal to come in right at the contract price. The appraiser knows this value going in, and it's pretty typical for the appraised value to be exactly the contract price. This is, at least, a very interesting coincidence.
- mjevans 8y agoFor appraising anything of serious value a better algorithm would be to have an odd number greater than 2 write up detailed appraisals including 'why' for decision points. Then any values deviating greatly from the norm would be reviewed. Depending on the noted 'why' the differing reviews had different outcomes either further investigation (focusing on missed details) or followup for a bad or under-trained reviewer would occur. The reviews reflecting the reality of the appraised item would be mean-averaged to find a 'typical market value'.
- emodendroket 8y agoIf all the appraisals are skewed then that does no good
- delinka 8y ago>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 8y agoThe 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.
- rconti 8y agoAt least in the SF Bay Area, appraiser selection was random. Perhaps this is a state law though.
- emodendroket 8y ago> 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) The prices are essentially unknowable until you've received care, provided you even have the luxury of trying to do comparisons.
- hprotagonist 8y agois it still irrepressibly drab and awful? https://www.youtube.com/watch?v=azkFz1ZbXyU https://www.youtube.com/watch?v=azkFz1ZbXyU
- heisenbit 8y agoI 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 8y agoIt'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!
- purple-again 8y ago>>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 8y agoWhat makes you say that? Who are the other auditors?
- ghein 8y agoGrant 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.
- kaycebasques 8y agoArticle 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?
- danharaj 8y agoBoring is one step away from predictable. So is safe.
- usea 8y agoAny 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 8y agoBy definition stability (low volatility) is safety and implies low risk (not no risk), please offer counter examples.
- lbotos 8y agoI 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 8y agoWell nothing is truly 0 risk given the nature of opportunity cost, inflation, etc.
- w_t_payne 8y agoAn industry that needs to be 'disrupted'?
- jimnotgym 8y agoIf 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 8y agoThe automation is already happening. Massive deployment of AI to wipe out low level work in next 5-10 years, just like with law.
- anonymous5133 8y agoI 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.
- toss1 8y agoAnd 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 8y agoIt's great to find problems, just share them over a golf game and not an official report.
- toss1 8y agoAnd 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.
- Spooky23 8y agoDon't forget the accountancy-created problems, like the various exotic means used to avoid taxation. It had always seemed odd to me that a company providing advice about essentially laundering money at scale also is the arbiter of truth for accounting principles!
- duncan_bayne 8y agoHow are exotic tax reduction schemes caused by accountants? That's like saying fires are caused by firefighters. They're a consequence of compulsory taxation.
- toss1 8y agoNo, they are not a necessary consequence of compulsory taxation. There is no necessity to create any exotic tax reduction scheme. They are created by over-financialized MBAs trying to evade their company's obligations to society. If you have a real plan for to effectively run a complex society without compulsory taxation to implement necessary collective goods (roads, policing, schools, defense, etc., etc, etc), I'm all ears, and I'm sure so are many others. Until then, your comment is purely specious.
- matchagaucho 8y agoJust 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.
- skywhopper 8y ago“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.
- dralley 8y agoArthur Anderson also did accounting for WorldCom
- simonebrunozzi 8y agoYou are talking about Andersen / Accenture?
- ams6110 8y agoAndersen 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 8y agoYour 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
- StClaire 8y agoIf anyone should have known about Enron, it was McKinsey. They were all through that place, Arthur Andersen just looked at the financial reports. AA collapsed and the government went after them, but the Supreme Court vacated AA's conviction on the grounds that the instructions given to the jury were so vague the jury could have believed AA thought they were doing everything right but still voted to convict. Since the firm was destroyed, no one bothered to retry the case. And I don't know why you say nothing substantially changed, Sarbanes-Oxley came out of that and accounting students are beat over the head with the lessons from Enron and what changed. Plus, Arthur Andersen Consulting still exists as Accenture, but they were separate companies at that point. (Accenture was actually pretty psyched because they had nothing to do with Enron, but when AA accounting and AA Consulting broke up they had a deal where the more profitable business would send a cut of their profits to the other company. Since consulting is always more profitable, AA Consulting was looking for a way out of that deal when AA accounting imploded.)
- anonymous5133 8y agoI 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 8y agoI'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.
- anonymous5133 8y agolol yup. Seems like they start racing for the door 6 months in then are forced to stick around for 2-3 years to get enough experience.
- StClaire 8y agoI've known a couple consultants at Accenture who started their careers in audit, but I don't know how common switching is
- cdeez 8y agoYou 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.
- jimnotgym 8y agoIt 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 8y agoUK 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 8y agoI think companies are all too happy to pay high fees if certain things are overlooked.
- hristov 8y agoI 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.
- srhngpr 8y agoIn the US, the Sarbanes-Oxley Act [0] is in place to prevent just that and maintain independence between conducting an audit or providing consulting services. Similar other regulations exist in Canada [1] and other nations. The Big Four and other firms that are subject to these regulations often do one or the other with clients. It is not common for a firm to be the financial auditors and the provider of consulting services to the clients. [0] https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act [1] https://en.wikipedia.org/wiki/Keeping_the_Promise_for_a_Strong_Economy_Act_(Budget_Measures),_2002 https://en.wikipedia.org/wiki/Keeping_the_Promise_for_a_Stro...
- chaseha 8y agoFWIW 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
- 8y ago
- bigjimmyk3 8y agoMarried 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.
- UK-Al05 8y agoThe reliability of accounts surely covers a huge subsection of financial fraud.
- bigjimmyk3 8y agoI knew that phrase was going to bite me! See my reply above, where I clarify that "reliability" is better said as "reliability as a summary representation of our books."
- acchow 8y ago> 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 8y agoThe 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.
- neaden 8y agoIt 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 8y agoI 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.
- kochthesecond 8y agoThank you, that sounds like a pretty good idea. Also realized, this is a bit analogous to how Bitcoin works. In Bitcoin _every_ other node in the network will validate (audit) some proposed work. If at least 51% of the nodes in the network agree that some piece of work is valid, it has a good chance of becoming part of the permanent history (next block on the chain).
- ScottBurson 8y agoHere'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-the-market-will-too-e0c9a94f5ef7 https://blog.ltse.com/modern-companies-think-long-term-soon-...) 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.
- srhngpr 8y agoMy 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.
- skookumchuck 8y agoI'd rather be a Lion Tamer (yes, I do have the hat!).