An audit should (under ISAs, and the broad concept is not different under US GAAS) be planned and performed to provide reasonable assurance that the financial report taken as whole is free from material misstatement whether due to fraud or error. The standards specifically make reference to both reasonable, and thus not absolute, assurance and also that due to its nature (collusion potential, misrepresentation, sophisticated schemes designed to conceal……) the risk of identifying a material fraud is greater than for error. Management fraud, such as the ones mentioned on the whole, are also explicitly identified in standards as being harder to identify than those perpetrated by employees?

Unless the auditor has reason to believe the contrary, the auditor may accept records and documents as genuine. If conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor, the auditor shall investigate further. (ISA240).

My experience in the profession (in both the UK and Australia) is that both partners and staff working on audit engagements of all sizes are ethically sound, skeptical, overtly keen to ensure that appropriate accounting practices are followed and not interested in cutting corners on quality in order to achieve greater margins. It is simply not worth being any other way. FYI I am not an audit partner.

In the past 5 years I have seen significant improvements in quality and I generally saw similar, albeit not such great, improvements in the preceeding 5 years. A personal observation, as are all of my comments obviously, is that the pace of technological change, increases in transactional volumes for large corporates, financial creativity/engineering/complexity and increasingly complex financial reporting frameworks and standards (including the use of significantly more estimates and judgements) all conspire to create an increasingly complex and volatile environment. In other words the audit job is getting harder not easier.

The concepts discussed on this forum regarding audit fees and the associated agency issues are a difficult and complex one. As an auditor I have an ethical issue with considering anyone other than the shareholder being my client, but the idea of the shareholder selecting the auditor is also frought with logistical difficulty and there is no reason to conclude that a current shareholder (who in a scenario of shareholder selection of auditor would be in control of such selection) wouldn’t prefer aggressive policy and treatment for short/medium term price accretion than management, I.e. there would still be incentives and pressures driving behavior – they would just be different ones. To consider otherwise would be to assume that all shareholders are long term investors. Developments in technology have somewhat changed this dynamic over the years, although I accept that share registers of most large corporates do still have long term stalwart investors, an interesting study for another day! Regulator selection of audit firm and agreement of fees is also equally peppered with significant issues and also potential downside risks to audit quality in the long term.

I disagree with the concept of mandatory auditor rotation, principally because from practice know that after 3/4 years of auditing a large client the audit will be “better” than in the first year. This is not to say that the first year engagement would be deficient rather because knowledge of the client (critical to a risk based audit approach) improves as is only natural over time. I am heavily in about of mandatory partner rotation, which currently exists, to ensure familiarity risks are addressed in some manner – as no matter how independent or competent a fresh pair of eyes is required every few periods and allows a person independent of prior decisisions to reassess such key decisions to get comfortable when opining.

A final point that I think should be raised by way of defending the profession is that the matters that hit the news papers are the significant minority of audits undertaken. Given the inherent risks associated with an audit and the concept of reasonable not absolute assurance it is inevitable that there will be a percentage of audits that do not detect a material error or fraud. For the percentage where the audit did not identify a material error or fraud, but one existed and came to light, the immediate conclusion can not be that the audit was deficient given the aforementioned matters. Accounting Standards also implicitly acknowledge from time to time errors may be made that require correction, otherwise IAS 8 wouldn’t exist, I am not suggesting that they are desirable however. A next logical question could be what is an acceptable non-identification rate and should the settings on the audit framework be dialed up or down accordingly. Obviously as I mentioned I don’t believe audit teams are interested in colluding with management to perpetrate fraud and to do so would require a complicit team and the circumnavigation of other quality control measures – there is always a bad apple or two in anything but I would suspect the volume would be significantly lower than unscrupulous or positively biased management teams which the audit profession must remain skeptical against.

So what is the solution to it all, perhaps a federal based audit service. On the other hand given the mass mishandling of simple housekeeping and budgeting by governments around the world reflected by unsustainable national debt levels, perhaps not. Whoops I forgot that auditors are not there to assess managements business decisions rather the accurate reporting of them, although in the case of Greece I might have had some going concern concerns and they aren’t the only ones.

-Would it have been JPMorgan’s job as sales agent and 1 of 14 investors to notify
buyers of NWS Junk Debt of May1 Report before the May2 sale of $2-4B of junk debt
that most logical buyers would agree a finding by UK Parliament the CEO of Issuer is “Unfit”
and board of NewsCorp resposible for Coverup all to be things Bank of Australia’s debt buyer who
has fiduciary duty to Shareholders of Bank of Australia or Bank of America would want to
know existed prior to buying JPMorgan NewsCorp Junk Bonds.

And why was JPMorgan rushing ? Why didnt JPMorgan review and take the time to read the
140p report before closing sale of NWS securities ?

Willfull Blindness? Additional showing JPMorgan is lacking in internal controls? Or evidence of malfeasance and
corporate culture to evade law?

When did Dimon become aware NewsCorp UK Hacking Report released May1 existed? When did he review or
inquire from JP Morgan analyst? When did JP Morgan analyst read the May1 Parliament report? Who did he tell
of his conclusions?

http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/903/903i.pdf

http://www.sec.gov/Archives/edgar/data/1308161/000119312512212019/d342572dex101.htm

Modeling For Fraud, Models Behaving Nefariously.

Very well done!

IA