Chicago Accountant, when the team is full of fraudulent people and you, there is not much you can do. They’ll simply exclude you from the audit and any information and continue on their merry way. My advice is to excuse yourself from the audit, but in a nice way so that you don’t get blackballed. You can only tell someone so many times that something is black and have them look at you with a straight face and claim its white, when you both know it is black.

Being a new-hire for the past 3 months at Big4 I can already backup the tick and tie claim. We are told to follow the guidelines with a critical mind and not simply go through the motions. The only problem is – critical thinking involves time I don’t have in order to audit to the degree I feel comfortable with.

The problem with the budgeting process is the bias is almost always to cut hours. In many cases this means cut and past PY and critical investigating be damned.

DBRS ran the number on this kind of doomsday forecast in October, and said the value of the assets didn’t meet the debt. DBRS managing director Paul Holman wrote: “This base case default scenario results in a decline in enterprise value of BCE … to roughly $34.4-billion or 33 per cent lower than the $52-billion enterprise value when the privatization was announced on June 30, 2007.”

In an interview, Mr. Holman said: “In a default scenario, we show total assets would be less than total liabilities and senior lenders would be covered but the unsecured and subordinate lenders would not be covered.

Like I said before, not having enough room in the budget is never a reason by itself to not dig deeper. Also, picking a new sample because something was wrong in the other sample is a cardinal sin. If I witnessed that on one of my jobs, there would be hell to pay. Odds are the person would lose his or her job.

To Francine:

I can’t say that I know what an acceptable failure rate is. It is also unknown how many failures occur. We now of some, but how many do we not know of? How many public companies have materially misstated financials that we aren’t even aware of?

There is a lot of research on this subject. I’m not an auditing PhD. The experts are just two and a half hours south of us at the University of Illinois. My own approach to evaluate firms would be to take the number of known failures over the past decade over total revenue. You would get a known failures per dollar metric. That would be a start. However, that doesn’t speak to the magnitude of the failure. It’s a complicated subject and I would be happy to discuss further.

The whole structure of an audit is a recipe for failure. Who ends up doing the heavy lefting in an audit? Why, the staff and seniors who simply tick and tie. Same as last year. No rhyme, reason, or basic understanding of the issues.

When an auditor knows something does not seem right, but choose to look the other way (i.e., pick another sample)… Isn’t this following audit procedures? How does it protect the shareholders? It does not. It does protect the hefty audit fees and the profit margin.

Very measured of you, sir…

I agree. All the facts are not obvious but the details of the methodology and data used is available. We’ll see if “questioning assumptions” means anyone can find sufficient error in the conclusions.

My inclusion of the BCE story as “bad news” for KPMG is for two reasons:
1) The auditor is being blamed for blowing the “good” deal. Too much publicity and the perception that publicity and pressure can change principles. Also there are accusations that KPMG opinion was not for pure principled reasons. This is bad publicity that KPMG and Ms. Glass have to defend themselves out of. It’s especially disappointing if it proves true she did the right thing and they were the right conclusions. Firms can’t win these days doing wrong thing for sure and can’t win doing right thing either, a la FAS 157.

2) Given the pressure, publicity, and perception that the decision can be changed or overruled by another firm, it’s more bad news and more bad publicity in the future for KPMG and Ms. Glass if either of these scenarios occur. I’m thinking there’s a good chance of either.

You have raised this issue of acceptable “audit failure’ before and now it’s suddenly piqued my interest. How much faiulure is acceptable given the franchise the firms have, government sanctioned services required as an inextricable part of being a public company? What are the historical percentages of “audit failure?” Is a percentage of “failures” on one client acceptable or X number of total failures as an percentage of total audits performed by all firms in a year? Or is it a percentage of failures by each firm? I’m going to go back and look at the textbooks and also look for some historical data, statistics of what has occured in the past and more recently. Interesting subject. Some would argue that Arthur Andersen was taken out because their percentage of “audit failures” and reputedly stubborn, arrogant attitude of non-acknowledgement of anything needing changing had become suddenly unacceptable to the Justice Department with Enron. Thanks for the idea.