“If it’s too big to fail, it’s too big to exist.” – Senator Bernie Sanders
Concur or dissent, Sanders’ words dare us to face the proposition that the global economy is merely a figurative house of cards. The failure of even a few corporations could have drastic repercussions for all tiers of the economic hierarchy. Sanders’ focus has been largely centered on the financial arena, but the oligarchic symptoms of Wall Street are far-reaching. Consider that Apple’s cash on hand is currently larger than the nominal GDP of 151 out of 192 sovereign nations, measured by the International Monetary Fund. The Senator’s solution of “breaking them up,” is a topic for another debate, but for now we discuss a potential alternative, auditors. Our journey goes vertical for answers.
Beyond merely the size of corporations, problems persist in society’s inability to effectively detect corporate deficiencies before they perpetuate “going concern” issues. Enron, Bear Stearns, Lehman Brothers, AIG, GM, and others, reached or came dangerously close to the precipice of bankruptcy, all while filing financial statements that were “presented fairly in all material respects.”
Listed directly on PriceWaterhouseCoopers website it specifically states:
Auditors don’t check every figure in the financial report, test the adequacy of all of the organization’s internal controls, or comment to the shareholders the quality of corporate governance or the quality of the organization’s risk management procedures and controls.
The rapid development of information technology in the profession could change all of that.
Imagine reduced audit deficiencies and expanded potential of the industry to address broader variables, such as internal fraud and highly-leveraged speculation. Consider a world where the profession doesn’t just evaluate the presentation of the financial statements and corresponding internal controls, but the health of the companies in aggregate. We already exist in a time where cloud computing permits audit and accounting procedures to be conducted anywhere in the world, independent of physical location. Soon auditing companies will possess IT equipment with dramatically higher rates of data processing, allowing company transactions to be audited in real time, instead of through archaic point-in-time “sampling” procedures.
The PCAOB member, Jeanette M. Franzel, in her speech today at the 16th Annual Financial Reporting Conference in New York stated she believes “distributed ledger technologies, also known as blockchain or distributed database technology, have the potential to disrupt markets and information sharing.” Artificial intelligence advocates suggest that audits of one hundred percent of a company’s financial transactions and certain internal controls isn’t all that far off.
The evolution of IT will free human auditors to convert from data analysts to data applicators. That metamorphosis could induce something completely foreign: predicting future outcomes instead of evaluating present ones. Based on internal corporate governance policies and risk management ideologies, auditors could assess the financial trajectory of a company. While it may seem as though financial analysts already exist to project future performance, they serve a speculative purpose, not an assurance one. Think of it as a potential blending of advisory and audit services that doesn’t threaten independence. Ideally, this would be paired with a political environment where regulation is constructively monitored and not suffocated, but even in a jungle of partisanship, plausible areas of increased auditor subjectivity – albeit narrow ones -- still exist.
PriceWaterhouseCoopers argues audits can’t “predict the future – the audit relates to a specific past accounting period. It does not judge what may happen in the future, and so cannot provide assurance that the organization will continue indefinitely.” Perhaps not today, but someday IT advancement could guide us further down that path. Just call it too big to fail.
By: Todd Cheney, CPA, Accounting Policy and Practice Editor
Continue the discussion at Bloomberg BNA Accounting LinkedIn.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)