Financial Statements are Now Designed to Protect the Auditor
In my previous blog, I discussed how incomprehensible financial statements have become. By the sheer volume and detail of information, they confuse the reader. The trick is to give so much detailed and professional explanation in these documents, that no-one except the most sophisticated of readers can understand all of the professional lingo, and very few in this busy world have the hours and hours necessary to understand financial statements.
By their complexity, these documents have become relatively useless. Except all investors insist that a company have audited financial statements because there is currently no better yardstick of judging the affairs of a company.
It is not beyond the realm of reason, that in the future, there will be appended to every financial statement, a simplified and understandable summary of what on earth the financial statements are saying.
If you doubt what I am describing, please ask yourself what the following words mean, as they are the most basic of accounting terms under which the financial statements are prepared. Consider it a test:
– Comprehensive Income,
– IFRS,
– black scholes,
– measuring warrants that each year can dramatically increase or decrease income without anything happening (fun with figures), and so on.
Under no circumstances can you now ask for “Net Profit” – it doesn’t exist.
The Big Four Auditing Firms
When an investor looks for an Auditor’s Report, they usually insist that the name of one of the big four firms is on it – sort of gives a comfort to the reader. What that provides in reality is nothing more than giving a license to a privileged class within the Auditing profession to charge more money and earn more money. Nice job if you can get it.
Independence
Every auditor must follow the same rules, every auditor must be approved by knowledge and experience by the regulators, every auditor must have the same standards of independence. Choosing one of the Big Four is asking the company to spend much more money, for little benefit, but that is a reality that will not change in the near term.
What is more ridiculous, is that Auditors are now required to be ‘independent’. In reality, that means that Auditors may no longer advise those that they audit. Companies must now hire third parties to advise them on how they should prepare Financial Statements to be audited by the Auditors. The height of ridiculousness.
Guess how the Big Four take advantage of that stupid rule? Each of them advises the clients of another of them, all in the appearance of independence. In reality, it means that the work for the Big Four has doubled.
More BMW’s, more conventions in Vegas. Life is very sweet when bureaucrats create rule after rule to keep us all “SAFE“.
You have to be inside this comedy of Keystone Kops to understand the insanity of it all.
Government Reaction
In order to address this never ending list of economic failures and “to protect the public”, our governments create level, after level, after level, of rules and regulations. We have the SEC, the OSC, the rules, the regulations, the books and books and books of interpretations, the armies of enforcers.
If one imagines the levels of employment created by all of this, it could be viewed as a positive thing. The sheer cost imposed on companies is a very bad thing however, as the more money, capital and resources devoted to non-productive efforts, the less is available for what we really need companies to do – create economic prosperity.
And with all of this money spent, and all of these wealthy Auditors, and all of these regulations, are the number of frauds decreasing? No ! They just keep moving to different sectors, where the next fraud will create yet another rulebook, and yet another level of bureaucracy.
Sounds a bit futile to me.
How to Fix This
Shift the Emphasis to Controlling Fraud and Misrepresentation Internally
Let’s start by saying that anyone connected with, or employed by a company will be responsible for inappropriate or improper behaviour. It could be as simple as the total cost of every misdeed is borne proportionately by every person in ratio to the amount of their salary or fees earned from that company.
WHAT A DIFFERENCE THAT WOULD MAKE.
Imagine a scenario where if a fraud occurred, every employee, contractor, executive and connected person had to fear for their liability in the case of a fraud.
Imagine the tidal wave of change in attitude of executives, of all the people involved with a company. All of a sudden, employees would not accept jobs except with ironclad assurances that no fraud could occur. They would want to see concrete checks and balances.
Unions would insist on examining companies from a different perspective.
Executives would not blindly accept assurances of others without ensuring the validity of those assurances.
People who worked for the Bernie Madoff organization would not be able to say “I know nut-ting” (nothing)– just like Colonel Clink did in the old TV sitcom ‘Hogan’s Heroes’.
Instead it would become the norm for every employee to ask many questions and never accept any blind assurances. Their financial future would depend on it.
Imagine the work ethic. All of a sudden, every worker would be concerned with more than his pay cheque. Every worker would be concerned with his future financial well being. Workers in every company would become a close knit team, believing in each other, double checking each other, improving everything.
Sort of like the old failed Eastern European societies tried and failed to create. Except this time Capitalism would have created it.
Just imagine the staggering burden of administration, auditors, paperwork, filings, regulations, etc that would be done away with. Life would become much more pleasant.
But perhaps we do live in a fool’s paradise. Logical solutions are rarely implemented. Instead we look to the inefficiencies and bumbling bureaucracy of government to solve all issues.
