In my blog of December 9, 2010, I pointed out how our capitalist society suffers from dramatic up and down cycles that rob the middle class of their wealth and earnings. I suggested 10 points that would very much moderate these cycles and bring about a far better capitalist society.
This is the 8th of that series.
Point # 8 We Have to Fix Capitalism
Understanding ‘internal oversight’ as compared to ‘external auditors’
There was a great hue and cry when our Financial Institutions melted down in 2008 and governments had to step in to rescue our financial system. There were calls for more oversight, more rules, better audits, and better governance.
Our Reliance on Public Auditors
For the accuracy and reliability of financial reporting, we rely on public auditors who charge enormous rates varying from $500 to $1,000 per hour. That’s correct! Senior partners at accounting firms charge $1,000 per hour and more.
What is more outrageous, is that these important people don’t have the time or energy to examine anything other than what their juniors and assistants show to them. So it is not the $1,000 per hour that is costly, it is the 2,000 hours of their juniors at $500 per hour that bring information to their bosses.
Yet somehow, in spite of these fees that are such an enormous and uselessly unproductive burden on our economic engines (companies), they seem to miss the forests for the trees on a very regular basis. Thus we have with predictable regularity, scandal after scandal: everything from Bernie Madoff, to Lehman Bros, to Long Term Capital Management and so many others. The stream of frauds never seem to slow.
The Useless Bureaucracy
These ‘Independent Auditors’ are an enormous bureaucracy with a monopoly on their services. Yet they fail to understand what it is that they are auditing more often than not. It is the classic story of missing the forest for the trees.
In every reported failure, the auditors missed the boat. It is quite amusing to watch an audit of a public company. Now I admit than I am a Chartered Accountant and a CPA, and I also admit that I am being somewhat negative towards my own profession. Still, what I see is so outrageous that someone has to point it out.
How Auditors Perform Their Audit
Today’s auditors are not concerned with whether financial statements are accurate, or whether they are understandable, or whether they reflect reality.
Those objectives are farthest from the auditor’s mind. What the auditor wants is to ensure that many checklists are completed, that many forms are executed, that many procedures are certified to have been performed, all in the intent of ensuring that no lawsuit against the auditor is winnable.
No one cares about anything else.
Have you tried to read a financial statement recently? Even an experienced accountant simply cannot take the time and effort to plow through the voluminous Notes to the Financial Statements. They are filled with so many words, so many accounting principles, so many obtuse calculations, so many disclosures, that almost no one takes the time to read them. They have reached the point of ridiculousness and uselessness.
The Notes to Financial Statements are now so detailed, so complex and so voluminous, that every company has to also publish an MD&A to further explain everything. Try reading the MD&A. It is a continuation of the nightmare.
Insurance Policies
In order for insurance companies to protect themselves against claim holders, the fine print in insurance policies started to grow, until these policies were essentially incomprehensible. Then an insurance company had a bright idea in the interests of marketing themselves. they put the essential points in clear unmistakable words on the face of the policy and lived up to what they said. Very simple, and everyone was happy.
May I suggest that Accountants hire a few of those insurance advertising executives. It might return financials statements to the realm of understandability, rather than incomprehensible googly-gok.
And what is the effect of all of this? The only effect that I can see is senior accountants drive BMW’s, live in fancy homes, and have regular conventions in Las Vegas. There doesn’t seem to be much benefit to anyone else.
In our next blog, we will discuss the effect of all of this, the wealth and security created for accountants, the monopoly created for accountants, and a simple yet effective manner of doing away with all of this nonsense.
