Comments on: “When” Another One Bites The Dust

By: re: The Auditors » Blog Archive » The Fannie Mae Freddie Mac Takeover – Now We’re Holding The Bag

Mon, 01 Mar 2010 13:48:14 +0000

[...] who had no real control over the destiny of their firm were wiped out. If another audit firm fails, and it will, the current firms’ partners, the majority of whom also have no real control over their [...]

By: re: The Auditors » Blog Archive » Auditors And ERPs – Can We Rest “Assured” ?

Mon, 15 Feb 2010 17:03:42 +0000

[...] ZDNet warns of “Ticking Time Bombs in Enterprise Land.” He makes liberal use of my recent post with the prediction of the imminent failure of one of the largest firms. He also connected me with Vinnie Mirchandani, a member of the [...]

By: James

James — Thu, 26 Jun 2008 13:39:00 +0000

Also not practical is having 2-3 auditors on a client as suggested in the 2nd comment. The size of the big4 makes it impossible not to have conflict of interest for at least a few of the firms so clients kind of get rotated between them. It would be nice, from a competition and (if you believe in the power of the market) quality standpoint, to have the big87654 turn the other direction and grow in number.

By: Anonymous

Anonymous — Thu, 26 Jun 2008 11:24:00 +0000

Professor Ronen was the man behind the insurance idea. Interesting theory but not practical in reality.

By: Chicago Accountant

Chicago Accountant — Tue, 24 Jun 2008 22:41:00 +0000

"Rather than offer an audit opinion we (the firms) should simply sell insurance." This has been proposed before. I have seen some research. Perhaps from the NYU accounting professor Independent Accountant suggested. Maybe it was Dr. Baruch Lev? It's an interesting model that should be revisited.

Francine is also right about firm's being uninsurable in the traditional sense. Even the large mid-tier firms create reserves for these lawsuits.

Francine, I took your advice. I am "Chicago Accountant" now. Maybe I'll set up an ID.

By: Tom

Tom — Tue, 24 Jun 2008 22:12:00 +0000

FM,

I doubt if any Big 4 firm will crumble soon. Maybe some major embarassments, but not crumbling. From the Enron and Worldcom cases, it emerges that it takes criminal negligence from the auditors for a company to crumble, not some goof here and there. In addition, based on my recent experience within the Big 4, the partners are becoming increasingly paranoid by the day, closing all loops and sealing all holes, even when it is inefficient and unnecessary to do so, such as minor audit documentation issues. The audit industry is also unique in the sense that an audit firm can bungle issues, but the company/client still survives. In short, nowadays an audit is not really a value adding exercise, and hence a shoddy audit will not necessarily mark the demise of the client. And the large companies like GE & JP Morgan have excellent internal control environments, including internal audit functions, that ensure that the auditors add precious little value other than affixing an audit report to a set of financial statements.

By: Independent Accountant

Independent Accountant — Tue, 24 Jun 2008 21:53:00 +0000

Anonymous:
A professor of accounting at New York University, whose name I’ve forgotten, suggested the “insurance” sales business 10-15 years ago. So far, no Big 87654 firm has offered the product.

By: Anonymous

Anonymous — Tue, 24 Jun 2008 20:43:00 +0000

No doubt you are right Francine, there would need to be some standard setting body to ensure consistency of reporting (although the free-for-all would otherwise be glorious). And I don’t disagree we are writing insurance now, but with no limits and apparently poor underwriting. No wonder we give real insurers the vapours.

By: Francine McKenna

Francine McKenna — Tue, 24 Jun 2008 20:26:00 +0000

@Anon Most recent Interesting idea having the firms write a straight insurance policy as a warranty type opinion backed by their own funds.. But if there are no min standards, then how will fin statements be comparable? The firms are essentially self-insured now. They pay the cash for a loss, either as a settlement or a jury verdict, out of their own pocket. They are uninsurable by normal underwriting standards. There are no insurance policies for the Big 4. The smaller firms have some coverage but it is minimal. In the case of BDO it is a fraction of the jury verdict that is hanging over their head, hence the death sentence if they lose the appeal and the death march right now.

By: Anonymous

Anonymous — Tue, 24 Jun 2008 20:17:00 +0000

Rather than offer an audit opinion we (the firms) should simply sell insurance. Our opinion would state that we insure the finacial statements against errors of more than $y for up to $x. Maybe a minimum threshold based on something like market cap to “protect the public” – or maybe not. If the board, lenders etc. decides they need more insurance or a lower error threshold they would have to pay the firm more. The firms can carry out whatever procedures they want to underwrite and price the insurance. That’s right – no minimum standards of work or quality, no PCAOB, no nothing – but if you screw it up and miss something, there is a claim against you and you pay. No chance of bankrupting the audit firm assuming they price the insurance properly and are adequately reserved, and I think a more efficient market in many ways.