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I don't know if I have just enough knowledge to be dangerous, but it seems to me that auditors don't really do what people think they do. Auditors seem mainly t

I don't know if I have just enough knowledge to be dangerous, but it seems to me that auditors don't really do what people think they do. Auditors seem mainly to just double check the numbers they're handed. This serves a purpose, it provides some level of guarantee that companies that are acting in good faith are generally reporting correct numbers. Auditors don't do what people seem to think they should do - investigate and uncover fraud. If a company wants to commit fraud, the auditors simply aren't resourced in a way that would allow them to uncover it because there's not really that much incentive to uncover the fraud, the fraudster is extremely motivated, and if you wanted that level of hostile investigative work it would be much more expensive for every company. Also, from a dynamics perspective, this is a lot like the insurance industry. In the insurance industry you can underestimate risk during the good times, take profits, and then go bankrupt in the bad times. In auditing you can spend a lot of money being extremely thorough - you'll lose all your customers because you're expensive and painful. So instead you lower your standards, you're cheap, you're easy to work with, and it's easy for a fraudster to slip through, in the 1 in a 1000 chance that happens the regulator comes down on you like a tonne of bricks. Well ok, but was EY less competent than McKinsey or did they just get unlucky that they're the poor bastards who stepped on the landmine? Well, maybe in this case we should learn from the insurance industry and institute some sort of fund that all auditors pay into that pays out in the case that fraud is discovered.

krn 4y ago
> Well ok, but was EY less competent than McKinsey or did they just get unlucky that they're the poor bastards who stepped on the landmine? I have asked myself the same question, before I noticed that EY is basically the Credit Suisse and the SoftBank of the audit world[1]: > EY has been involved in many accounting scandals: Bank of Credit and Commerce International (1991), Informix Corporation (1996), Sybase (1997), Cendant (1998), One.Tel (2001), AOL (2002), HealthSouth Corporation (2003), Chiquita Brands International (2004), Lehman Brothers (2010), Sino-Forest Corporation (2011), Olympus Corporation (2011), Stagecoach Group (2017), Wirecard (2020), Luckin Coffee (2020) and NMC Health (2020). In fact, Wirecard managed to partner with EY, Credit Suisse, and SoftBank simultaneously just before going bankrupt. Maybe because no reputable companies wanted to touch it? [1] https://en.wikipedia.org/wiki/Ernst_%26_Young#Accounting_scandals https://en.wikipedia.org/wiki/Ernst_%26_Young#Accounting_sca...
- hef19898 4y ago
  Well, EY started as part of Andressen (?) and was as such part of the Enron scandal. We shouldn't ignore the scandal of the century. EY so is a very reputable accounting firm. Unreputable would be the Metaverse headquartered shop FTX used.
  - deleted 4y ago
    [deleted]
  - tim-- 4y ago
    You might be thinking of Accenture, which was founded from the ashes of Andersen Consulting. Andressen is one half of Andreessen Horowitz (a16z) which (I think?) doesn't have any connection to Enron.
    - Zafira 4y ago
      Accenture is Andersen Consulting. It left and changed its name to Accenture because of internal infighting and politics prior to the Enron scandal that took down Andersen entirely.
      - bayouborne 4y ago
        The name Accenture was also chosen because they were able to keep using Andersen Consulting's existing ac.com domain w/o interruption.
    - er4hn 4y ago
      The OP is thinking of "Arthur Andersen", the accounting firm that serviced both Enron and Worldcom. The first paragraph of Wikipedia cites the scandals as factors in enacting SOX (src: https://en.wikipedia.org/wiki/Arthur_Andersen https://en.wikipedia.org/wiki/Arthur_Andersen)
    - cgeier 4y ago
      It wasn't, it was spun out before Enron.
hef19898 4y ago
The auditing arm of EY is in a completely different industry than McK and similar firms. That EY's auditing track record is, well, checkered is a different problem. By throwing those two into the same bucket, so, shows some lack of understanding of auditing, accounting and consulting. EY also does, sometimes legally required "consulting" work for in the accounting space. That work is completely different from stragoc management consulting ala McK and BCG. And it also a different beast than the lower level outsourcing consulting ala Accenture.
AniseAbyss 4y ago
[dead]
andrewjl 4y ago
> The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.1 Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.2 https://pcaobus.org/oversight/standards/auditing-standards/details/AS1001 https://pcaobus.org/oversight/standards/auditing-standards/d...
lordnacho 4y ago
What never made any sense to me was the incentives. Is the company supposed to hire people to write a public report saying the company committed fraud? It doesn't really seem like it makes sense for anyone. If anything, you'd just do some minimal performative work to say you had a good look in the company, and then you pick up more work next year. If you write a critical report, how many companies will want to hire you? I'll pick the easy going auditor who doesn't give me a hard time, thanks. Contrast that with say an HMRC tax audit. They're not there to be your friend and it actually makes sense for them to investigate certain firms. It would be interesting to read a history of the industry to see how we ended up here.
- jsmith99 4y ago
  The auditors are appointed by the audit committee which consists of board members who are non executive directors i.e. they are not involved in the day to day running of the company and so theoretically should be independent and interested in uncovering any wrongdoing by management.
  - Jolter 4y ago
    Exactly — the auditor is appointed to represent the interests of the shareholders, not the executives. At least, that’s the way it is supposed to work.
    - lordnacho 4y ago
      If some fraud is uncovered, the shareholders will lose a bunch of money. So how does that align incentives?
      - Jolter 4y ago
        Presumably, any undiscovered fraud against the company is more expensive to shareholders than the discovered fraud.
remus 4y ago
> Auditors seem mainly to just double check the numbers they're handed. This serves a purpose, it provides some level of guarantee that companies that are acting in good faith are generally reporting correct numbers. Auditors don't do what people seem to think they should do - investigate and uncover fraud. If a company wants to commit fraud, the auditors simply aren't resourced in a way that would allow them to uncover it because there's not really that much incentive to uncover the fraud, the fraudster is extremely motivated, and if you wanted that level of hostile investigative work it would be much more expensive for every company. While I agree audit is a hard job auditors should not just rubber stamp what the company gives them. They should ask probing questions like "where did this sale come from?", "how did you calculate this figure?" and "why are you doing this? It is unusual." A consequence of this is that they may pick up on suspicious signs within a set of accounts and choose not to sign them off, but I wouldn't say theeir job is to identify fraud per se. What is clear from cases such as wirecard is that EY have failed to ask these probing questions on several occasions, and subsequent audits (by other firms) have shown it is entirely possible to ask appropriate questions and uncover dodgy practices.
IG_Semmelweiss 4y ago
1) auditors do uncover errors. sometimes those errors leaad to firings and restatements. An entire company does not need to be complicit with fraud, for there to be fraud. key employees commit fraud to enrich themselves or make their numbers look better. from that perspective, the board does benefit from existing audits. Also audit is highly regulated. If the standards are too loose the PCAOB can come in and punish you severely. Its the pervasive cases, the wirecards, that are hard. Those are the frauds that are pervasive and go to the top, and include auditors that are not pushing back. These are the true landmines. How are they addressed? Many ways: A) There is a layer of prevention, where audit firms will force rotation of their lead audit partners on an audit every 2-3 years to prevent cozy relationships. B) And theres Also the "audit the auditor" where another partner has the sole job of reviewing the work done. He's the landmine hound looking for explosives. 2) the insurance business actually rakes in profits typically after a large disaster, when premiums are sky high and customers are are hyper aware of the risks (and Boards unforgiving with CEOs that fail to mitigate the risks.

krn 4y ago

> Well ok, but was EY less competent than McKinsey or did they just get unlucky that they're the poor bastards who stepped on the landmine? I have asked myself the same question, before I noticed that EY is basically the Credit Suisse and the SoftBank of the audit world[1]: > EY has been involved in many accounting scandals: Bank of Credit and Commerce International (1991), Informix Corporation (1996), Sybase (1997), Cendant (1998), One.Tel (2001), AOL (2002), HealthSouth Corporation (2003), Chiquita Brands International (2004), Lehman Brothers (2010), Sino-Forest Corporation (2011), Olympus Corporation (2011), Stagecoach Group (2017), Wirecard (2020), Luckin Coffee (2020) and NMC Health (2020). In fact, Wirecard managed to partner with EY, Credit Suisse, and SoftBank simultaneously just before going bankrupt. Maybe because no reputable companies wanted to touch it? [1] https://en.wikipedia.org/wiki/Ernst_%26_Young#Accounting_scandals https://en.wikipedia.org/wiki/Ernst_%26_Young#Accounting_sca...

hef19898 4y ago
Well, EY started as part of Andressen (?) and was as such part of the Enron scandal. We shouldn't ignore the scandal of the century. EY so is a very reputable accounting firm. Unreputable would be the Metaverse headquartered shop FTX used.
- deleted 4y ago
  [deleted]
- tim-- 4y ago
  You might be thinking of Accenture, which was founded from the ashes of Andersen Consulting. Andressen is one half of Andreessen Horowitz (a16z) which (I think?) doesn't have any connection to Enron.
  - Zafira 4y ago
    Accenture is Andersen Consulting. It left and changed its name to Accenture because of internal infighting and politics prior to the Enron scandal that took down Andersen entirely.
    - bayouborne 4y ago
      The name Accenture was also chosen because they were able to keep using Andersen Consulting's existing ac.com domain w/o interruption.
  - er4hn 4y ago
    The OP is thinking of "Arthur Andersen", the accounting firm that serviced both Enron and Worldcom. The first paragraph of Wikipedia cites the scandals as factors in enacting SOX (src: https://en.wikipedia.org/wiki/Arthur_Andersen https://en.wikipedia.org/wiki/Arthur_Andersen)
  - cgeier 4y ago
    It wasn't, it was spun out before Enron.

hef19898 4y ago

The auditing arm of EY is in a completely different industry than McK and similar firms. That EY's auditing track record is, well, checkered is a different problem. By throwing those two into the same bucket, so, shows some lack of understanding of auditing, accounting and consulting. EY also does, sometimes legally required "consulting" work for in the accounting space. That work is completely different from stragoc management consulting ala McK and BCG. And it also a different beast than the lower level outsourcing consulting ala Accenture.

AniseAbyss 4y ago

[dead]

andrewjl 4y ago

> The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.1 Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.2 https://pcaobus.org/oversight/standards/auditing-standards/details/AS1001 https://pcaobus.org/oversight/standards/auditing-standards/d...

lordnacho 4y ago

What never made any sense to me was the incentives. Is the company supposed to hire people to write a public report saying the company committed fraud? It doesn't really seem like it makes sense for anyone. If anything, you'd just do some minimal performative work to say you had a good look in the company, and then you pick up more work next year. If you write a critical report, how many companies will want to hire you? I'll pick the easy going auditor who doesn't give me a hard time, thanks. Contrast that with say an HMRC tax audit. They're not there to be your friend and it actually makes sense for them to investigate certain firms. It would be interesting to read a history of the industry to see how we ended up here.

jsmith99 4y ago
The auditors are appointed by the audit committee which consists of board members who are non executive directors i.e. they are not involved in the day to day running of the company and so theoretically should be independent and interested in uncovering any wrongdoing by management.
- Jolter 4y ago
  Exactly — the auditor is appointed to represent the interests of the shareholders, not the executives. At least, that’s the way it is supposed to work.
  - lordnacho 4y ago
    If some fraud is uncovered, the shareholders will lose a bunch of money. So how does that align incentives?
    - Jolter 4y ago
      Presumably, any undiscovered fraud against the company is more expensive to shareholders than the discovered fraud.

remus 4y ago

> Auditors seem mainly to just double check the numbers they're handed. This serves a purpose, it provides some level of guarantee that companies that are acting in good faith are generally reporting correct numbers. Auditors don't do what people seem to think they should do - investigate and uncover fraud. If a company wants to commit fraud, the auditors simply aren't resourced in a way that would allow them to uncover it because there's not really that much incentive to uncover the fraud, the fraudster is extremely motivated, and if you wanted that level of hostile investigative work it would be much more expensive for every company. While I agree audit is a hard job auditors should not just rubber stamp what the company gives them. They should ask probing questions like "where did this sale come from?", "how did you calculate this figure?" and "why are you doing this? It is unusual." A consequence of this is that they may pick up on suspicious signs within a set of accounts and choose not to sign them off, but I wouldn't say theeir job is to identify fraud per se. What is clear from cases such as wirecard is that EY have failed to ask these probing questions on several occasions, and subsequent audits (by other firms) have shown it is entirely possible to ask appropriate questions and uncover dodgy practices.

IG_Semmelweiss 4y ago

1) auditors do uncover errors. sometimes those errors leaad to firings and restatements. An entire company does not need to be complicit with fraud, for there to be fraud. key employees commit fraud to enrich themselves or make their numbers look better. from that perspective, the board does benefit from existing audits. Also audit is highly regulated. If the standards are too loose the PCAOB can come in and punish you severely. Its the pervasive cases, the wirecards, that are hard. Those are the frauds that are pervasive and go to the top, and include auditors that are not pushing back. These are the true landmines. How are they addressed? Many ways: A) There is a layer of prevention, where audit firms will force rotation of their lead audit partners on an audit every 2-3 years to prevent cozy relationships. B) And theres Also the "audit the auditor" where another partner has the sole job of reviewing the work done. He's the landmine hound looking for explosives. 2) the insurance business actually rakes in profits typically after a large disaster, when premiums are sky high and customers are are hyper aware of the risks (and Boards unforgiving with CEOs that fail to mitigate the risks.