It’s a Tough Job but Somebody has to do It

For the past couple of weeks we have been posting about government auditing and how it is important in keeping businesses in check. Government auditing plays such a big role and the people that work as auditors are very important. Last week we talked about changing the audit structure. I completely agree with that because the current audit structure is tough. I am going to talk about how it is important to help our auditors so that they may be more efficient and more effective when it comes to doing their jobs.

I worked in the government auditing office for the Health and Human Services Department in the Administration of Children and Family division. When I walked in the first day every person who worked on the floor as an auditor had paper stacked pretty much everywhere and the inbox had more papers in it than the outbox. Also a lot of the papers would be stalled because there was a chain of command that people had to send their completed audits too and since people had so much on their plate’s papers would get lost or stalled and things weren’t being done efficiently. When I got there I had to sort out a whole room of old audits since they keep records with paper when they are done with them. Most of the people there worked harder than anybody at any other place I have worked at. It was amazing to see them still work paper even though they had the technological means to make life a little easier on them.

So then I suggested we start digitizing the archive so that things can be easier and so that when people would be ready to send things up to the chain of command for approval they would just send it electronically. This made it more efficient but at the same time though I had to scan hundreds of documents and thousands of papers day after day so that the archives and other audits could be accessed easily. It was tough work. I everyday things would start to pile up and my desk would look the desk of the normal employees and I’m just an intern.

Another thing I observed while working in the auditing office was that they just don’t work hard but they also have to work in conjunction with the firms they are auditing. It is tough to deal with pe ople when you are talking about the management of money. People show off their attitudes and it is hard for the auditors to keep their composer and focus on getting the job done.

Overall I say all this to say that the auditors have a very tough job to do and they do the best they can. We need to make sure that we support them in any way that we can because it is really hard to be an auditor especially when they have so many things to focus on and audit. What they do is very important and with better equipment and more support they can do their job with more efficiency. So in conclusion government auditors have a tough job but they are the perfect ones to do it because they work hard and are driven to make everything right in the financial world.

 

Continuous Auditing Continuing Corruption

The procedure that we would like to see enacted entails a government agency conducting audits on large companies prone for missteps or fraud. There are many procedures currently in place that could theoretically circumvent the need for such an agency if they were conducted properly. As we have discussed earlier, they are prone to bias and inaccuracies. Miklos Vasarbelyi, Alexander Kogan, and Michael Alles of the CPA Journal talk about the possibility of continuous auditing eliminating the possibility of such an agency being created. Well, not directly, but we can most certainly apply it to our proposal. In their article, titled “Would continuous auditing have prevented the Enron mess?”, they analyze the preventative worth of continuous auditing, a method that is conducted within a company, much like internal auditing. Unlike internal audits, continuous auditing or continuous assurance monitors transactions and compares actual results to expected or calculated ones. If there is any discrepancy, the supervisor can address the issue only hours, if not minutes after it happened, rather than in a traditional system, where several days or weeks may pass before any inconsistency is uncovered.

Graphic from http://www.accounting-degree.org/scandals/

So could it have stopped the Enron mess? Assuming that a continuous audit would pick up on the massive accruing debts of Enron, we still have to look at the subjective nature of any internal operation, which is talked about in the article, questioning its own conviction of the idea. Seeing that Arthur Andersen, one of the world’s largest audit and accountancy partnerships, was pulled into the scandal, presuming some monetary gain by the conspirators fudging the books, it is even more conceivable that one of the companies own higher-ups would have some reason for overlooking debts being amassed.

“Tighter regulation can be devised and implemented…”

A continuous auditing system seems as it has a good set of procedures that would fit perfectly with government monitoring. Obviously not every company could be monitored through this system, at least not without significant effort and technology on the government’s part. Perhaps companies at a higher risk for fraud or lack of appropriate auditing. These would include rapidly growing companies with hastily swelling stock prices and companies that have little to no physical assets, such as software companies, which we are seeing a candid rise in. Having a high margin of liquid assets as opposed to physical increases the potency of bankruptcy, as no returns to investors or lenders can be distributed.

The article itself say that times have changed and outgrown old procedures and “Tighter regulation can be devised and implemented…”, showing that this is not such a radical a new idea, simply a sensible one. Without trust in our nations economy and the companies that we see on the stock ticker everyday, we will see a striking decline in many spheres, not just the economy.

What’s Wrong with Auditing

What’s Wrong with Auditing

Author: Eric Krell

The article I chose to discuss today talks about what is wrong with the internal auditing process and gives some suggestion on how it can be fixed. It is important to note that the author Eric Krell is interviewing Larry Harrington the Vice President of internal auditing at the Raytheon Company, which is known for having one of the best internal auditing programs. They have developed such high level of internal audit success metrics that other companies have started asking them for their secret. While trying to figure out how to help these companies they came upon a Thomas Reuters internal audit survey that they liked and proceeded to use it. Their findings were troubling to say the least; the top three results were a decline in information technology (IT) security and risk represents a declining priority, Strategic risk management was identified as a top-three concern by only 9 percent of respondents, seven percent or fewer of respondents indicated that they spoke to their compliance function on a weekly basis. Larry states that these are not the internal audits fault and that its more a lack of communication between departments.

The way Larry believes internal auditing can be a success is if  internal audits establish credibility, and if everyone in the business extends their trust to internal audit partners, who are scrutinizing their processes and decisions. Thats why the Raytheon Company stresses the importance of the audit process seen as improving the company rather than just an audit.

Some points that I agree with is that trust is a huge factor in the internal audit process. This is a difficult problem to fix because people are hesitant to admit wrongdoing or even open up the possibility that they have made a mistake. I think a way to fix that is to make requirements for how often workers speak to their compliance officers. In short the internal auditing process seems to be based on trust which does not seem like a good idea since you are policing peoples wrong doings.

Changing the Audit Structure

The way auditing firms are currently set up goes against their main purpose of serving the public. Currently public companies financial statements are audited by for-profit organizations. This becomes a problem because this for-profit structure promotes auditing firms to focus on profits as opposed to focusing on their core purpose of serving the public interest. By creating a vested interest in profits rather than quality, you end up with unreliable figures, leading to precarious business. A business must not forget its purpose in pursuing its motive. For example, a train’s purpose is to move cargo from one place to another, while its motive is the engine and its moving parts. If we give the train the best motive by giving it a fast engine, aerodynamic frame, and state of the art wheels, but it has no cargo then it is useless regardless of how fast it moves because it does not serve its core purpose. Unfortunately, auditing firms have become so concerned with their motive, or compensation from clients, that they have lost their objectivity when looking at their clients and are too concerned about pleasing them to keep their profits coming in.

“By creating a vested interest in profits rather than quality, you end up with unreliable figures, leading to precarious business”

This for-profit structure of business works well when the company or professionals direct interest and purpose is to serve the client or customer in some beneficial way. However, auditing is different in that its direct purpose is to serve the public interest as opposed to its client. A lawyer or retail store wants to serve the client as best as it can, so the client will want to come back and the firm will continue to get its motive, money, to keep moving forward. In auditing the public, who benefits from auditing services, does not pay the firm. Therefore, the firm has an incentive to better cater to the client who provides the firm its motive to keep moving forward. This changes the purpose of the firm to serve the client instead of the public and can create some relationships that cause auditors to be less diligent in examining the company, which can lead to companies under a lot of pressure putting out misleading financial information and costing investors a lot of money.
Over the years the number of public auditing firms has declined from the big 8 to the big 4. Through these years every large firm has had its share of scandals it was involved with. Take for example Arthur Anderson that got so caught up in keeping profits high that it couldn’t avoid major scandals, including Worldcom, Enron, Waste Management, and Sunbeam Products. Although they didn’t have a direct hand in all of the above-mentioned scandals, they also weren’t as honest with companies like Enron because they were concerned for the loss of such a big client. The failing of companies like Enron due to consequences of inaccurate audits is a burden our economy just cannot handle.

The solution is that the firms need to be structured as an independent government agency much like the SEC and the FDIC.By having it structured as a government agency firms won’t be as concerned with profits, and the public companies will still pay the audit fees to the government so that US taxes won’t increase. Another benefit of having the audit function performed by a government agency is that it will deter a lot of self-serving people from entering the profession. This is because the government salaries for executives and employees will be capped at a certain rate. Employees who enter this profession in the government will most likely have a strong passion to do this work as opposed to doing it simply for the money. Also by having the one agency perform the audits it will allow for better knowledge of the clients industries and make for better audits overall. This government agency will gain more experience working with many different areas and can provide new employees with better training, giving more assurance that financial statements out there are accurate and properly stated. This should be done sooner rather than later, it is only a matter of time before the next big scandal comes around, and there needs to be a strong agency in place to spot it before it damages the public.

“Public companies will still pay the audit fees…. US taxes won’t increase”

 

References

What We Need Our Auditors to Do

Author: Mark Funkhouser

This article talks about what we need our auditors to do. He starts off talking about a 56 slide powerpoint he had to sit through while at a National Intergovernmental Audit Forum. He talks about how the government auditors must focus on program effectiveness so that we can use that information to inform policy makers officials and the people when tough decisions need to made. Then he goes into talking about how the the job of an auditor is getting harder and that there are less staffers to fix the problem. He talks about how the state and local governments should not make so many cuts on auditing firms because “cutting back in those areas to save money is like trying to lose weight by shrinking your brain.”

I think that this is an important source on the subject because it talks about the problem of auditors being cut and it is hard for auditing to be done if there is no one there to do it. The article states that targeting and technology will help provide more effective auditing. Well this addresses a problem in the auditing world and gives a good answer to the problem. As they stated in the article we need our auditors to do better because if they are not effective in doing their jobs then policy makers and the people will not be able to get the information they need when it is time to make tough decisions.

The author of this article should definitely expand upon technology and targeting. People should read up of the different technologies on how to fix this auditing problem and effective targeting methods so that the auditors can pinpoint and target the right places. Another thing to read about is different local governments and state governments that have successful auditing practices and those that do not have such success and compare them so we can identify problems on those levels. Also it would be nice to know what else goes on at a National Intergovernmental Audit forum as well.

The Corporate Scandal Sheet

Author: Penelope Paturiss

This article talks about various auditing scandals that have occurred. There are multiple companies in this article from places like Kmart (2002), Halliburton (2002), Enron (2001), El Paso (2002), Global Crossing (2002), Duke Energy (2002), Bristol-Myers Squibb (2002), Reliant Energy (2002), and WorldCom (2002). These are just a few of the names on the list and there are many known companies on this list as well. This article also categorizes the company, when the scandal went public, allegations, investigating agencies, latest developments, and the company’s comments.

This article is interesting for research because it brings up different scandals that have gone public. Also when you know how these scandals are being committed then it will be easier in the future to spot these problems again and correct them in a timely manner. Another reason why it is good for research because it shows how companies respond when they get caught and how they conduct themselves afterwards. Seeing the consequences of the scandals can help prevent others from committing the same fraud. This also is good for research because it can help prove why we need government auditors to step up as well.

It would be nice to research the auditors methods on how they found the problem and the steps they took to correct the problem. Also the different holes they found that busted the companies frauds wide open so that other auditors can know the signs and pinpoint them and correct them so that these problems won’t arise again. Another thing that would be nice to further research are more recent events in which auditors have busted open accounting scandals as well since this list ends in 2002.

Materiality Considerations 

Authors: William Holder, Kenneth Schermann, and Ray Whittington

This article talks about how preparers and auditors of state and local government financial statements need to clearly understand how to assess materiality. This article discusses current concepts and standards related to the preparation and audit of the basic financial statements of state and local government entities. It goes on to talk about materiality in accounting and auditing, materiality and GASB(Government Auditing Standards Board)  34, GASB’s Implementation guide, and the new AICPA Audit and Accounting Guide. This article then goes on to talk about the how evaluating materiality is complex, and how it involves quantitative as well as qualitative considerations.

This article is good for research because it talks about issues involving the preparation of financial statements. It focuses on how state and local governments introduced changes and how those changes make it even more critical for preparers and auditors to understand the materiality and other related standards. The visual used in the article which focuses on the the Overview of reporting Units and Opinion Units is also very helpful as well as it breaks different levels in the GASB’s implementation guide.

First off research the definition of materiality as it is not clearly stated in the text but for sure it is something that is an issue that needs to be addressed by auditors. For further research it would be nice if they talked more about the GASB and research the other sections that were not mentioned in the article. Also as well as that it talks about about the problems but go into different ways and research different methods on how to address the problems of materiality and the lack of preparation in the government when it comes to this . Another thing to consider in further research is how the auditor themselves can improve now that they know the problems and how to go about solving these problems and giving them help to solve these problems as well. But it is always good to look at other articles as well that pretain to this subject of auditors and materiality

Sarbanes-Oxley isn’t enough

In July of 2012 a house subcommittee held a hearing to review how the Sarbanes-Oxley has impacted the accounting profession. The law was passed in 2002 after the Enron and Worldcom demise two of the biggest accounting scandals in American history. Chairman of the center for Audit Quality’s professional Practice Executive Committee, Michael J. Gallagher, “believes the Act has been successful in achieving its objectives.” Marie Hollein, CEO of Financial Executives International, adds, “The requirement that CEOs and CFOs personally certify their company’s financial statements is the crown jewel of Sarbanes-Oxley.” While I believe this act has certainly helped with the issue of holding professionals more accountable in their accounting standards it certainly hasn’t fixed the problem.

As of right now external audits only account for about 3% of all frauds that are found. The PCAOB, public accounting oversight board, also reports that around 35-40% of all audits fail. Meaning that they issued opinions on financial statements with insufficient evidence to support their claims. This is a very alarming number, especially considering how much investors rely on this information to make informed financial decisions. I think a lot of this stems from auditing firms concerned too much with the business aspect of their company and not remembering their true purpose which is to provide a service to the public. An audit is supposed to be an independent outsiders look at a company’s financial statements, but many of these firms provide tax services and internal control reviews giving them potential conflicts of interest when performing audits.

SOX just isn’t enough and more needs to be done. Corporate governance scandals are still going on, Groupon and Wal-Mart are some recent examples. The government should add more regulation requiring that tax and audit services be provided by different companies and give more oversight and power to the PCAOB. It will be interesting to see how many more big scandals it will take to add more regulation to the environment.

 

 

 

Thomas Ventura

I am currently a Sophomore at the University of Maryland majoring in Communications. I have an interest in the commercial real estate market and the financial industry. Growing up near Washington D.C. I have been exposed to many national issues and believe that being informed is the first step to being successful. I believe the accounting industry is one of the most important in our society today and I look forward to discussing it in more depth.

What is the real problem?

Over the next few weeks, we will be discussing the nature and issues with the auditing system in the current business environment. One of the biggest problems with our system is that big businesses often report and conduct audits autonomously. These are called internal audits. Now this seems like a massive problem to me. How can any business be asked to fairly report on the mistakes, or lack thereof, of their own employees? In a perfect world, in which big business has morals and saint like honesty, every business would report every little mistake from entry-level misclick to large scale fraud. Now we know this is not the case, with billion dollar fraud as an all too common occurrence. In 2008 Bernie Madoff ran the largest Ponzi scheme in the history of big business, which tricked investors out of almost $65 billion. You may say this is separate from what we should be concerning ourselves with, as it was an upper echelon scheme, involving millionaire stock investors.

“In 1998 Waste Management Inc. reported $1.6 billion in fake earnings”

Now what about a more accessible company, a company that many of us see and have contact with on a normal basis? In 1998, Waste Management Inc., the very same company that takes the garbage from in front of my house, reported $1.6 billion in fake earnings. Now this is not a Wall Street dignitary cooking books, this is a blue-collar company that any one of our neighbors or relatives could work for. In a service industry like the one Waste Management Inc. operates in, many of the employees depend on their job heavily. Without it, many of them would need to go on public assistance, if they aren’t already. If you were in the same position, would you risk losing your job by reporting a mistake in the books of your company? One of my close family members has been called on multiple times for auditing service. Being an employee of over 30 years in the pharmacy department of a large retail conglomerate, she has come to depend on a paycheck every two weeks. I am not saying by any means that she cooked the books on her department’s revenue, but if there had been a discrepancy, and it was either omitting the mistake or Even though the auditors are not paid on whether the records come back clean, employees may still feel pressure to protect their livelihood. Sometimes internal audits can be effective in uncovering unsavory business practices. In 2003, WorldCom’s internal auditing system caught fraud of it’s own CEO.

 

 

By and large, by giving the responsibility of auditing a business on it’s own employees, you end up with quite the conundrum. Either the employees are truthful and report any of the mistakes in the business’s books and risk losing a dependable paycheck or they value their livelihood over the legitimacy of the business that they work for. By placing a vested interest, like a regular paycheck, in the auditor giving the business a clean slate, you create a breeding ground for corruption and shady business practices. To effectively avoid this situation altogether, a third party auditing system needs to be appointed for internal revenue and performance audits. A third party, with no bias or incentive to alter data, there will be less opportunity for businesses to misreport or alter spending, revenue, or investor profit margins. As it stands, internal audits happen much more often than IRS audits. Now it would not be prudent for the IRS to conduct audits on every business that was due, however it is very reasonable for a third party accountant or accounting firm to do them. The main purpose of internal audits is to catch mistakes before a legal body catches them. With repercussions in turn with mistakes, employees again have a reason to distort numbers. The existing systems have many flaws that can be fixed. As we continue throughout the next few weeks, we will attempt to lend a helpful opinion into this issue.

Nick Clark

My name is Nick Clark. I’m a sophomore currently attending the University of Maryland. I have lived in Maryland all of my life, right in between Baltimore and Annapolis. Looking toward an Economics Major with a possible minor in rhetoric. Having a local’s perspective to the capital not only of the nation, but also the state of Maryland, I hope to bring a regional interpretation of the pressing issue facing us today. Being so close to our nation’s capital, we should be the first informed on issues facing us today.

 

Nick Bianco

 My name is Nick Bianco and I am currently a Finance and Accounting major at The University of Maryland. I have studied business here for the past four years and believe that the accounting profession should change.