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.

 

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”

 

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.