Jim Peterson of the International Herald Tribune has imagined the unimaginable. (Well, unimaginable to those who are not too bright…) His column today asks the question: What would a world without the current external audit model look like? His ideas are grounded in vast experience, great contacts and a sharp mind. I may have a few other ideas and a few doubts. I don’t see super charged internal audit functions developing so quickly and easily and I don’t think you’re going to be able to reduce securities litigation much, but the article is worth a close read, at least to start a dialogue.
It’s a shame that the establishment, being so insular and inbred, can not imagine a model that works better than the one we have now. I agree with Jim that it’s broken. I agree that the external audit report and now the internal control report are not worth the paper they’re printed on, especially when they can be taken back so easily or when failures and “sudden downturns” can happen so soon after a firm says everything’s perfect.
The opposite is true, too. When a report actually tells a story about fraud, mismanagement, poor internal controls and continual lack of attention by management to the business fundamentals, the market generally ignores it if the company is still making a profit. But what profit? If their internal systems and processes are broken, how can you trust any numbers they produce? Isn’t the experience of any of these banks and their multi billion dollar writedowns enough to tell you that it’s all smoke and mirrors and investors are just playing a game of musical chairs. When the music stops, one of you will be holding the worthless paper.
Despite the threat to the survival of the Big Four accounting firms, none of the players – not the Big Four leaders, regulators or politicians, or the community of financial information users – will say it straight out: The large auditors’ business model is broken, and their risks are unsustainable. The next large-firm failure will take down the other Big Three as well, just as fast as Arthur Andersen crashed in 2002, leaving large companies unable to obtain the current form of audit report from any source.
And why is nobody willing to ask what life will be like after the Big Four?
…Whatever the fear of speaking the unthinkable about the next era of large-company assurance, it is now on the table. There is a broad-based symposium, waiting to be convened by a top global regulator, under the title, “The Future of Auditing After the Big Four.” If the boy wizard Harry Potter could name, face and overcome his nemesis, a group of adults should be able to do no less.