Too Big to Fail: Could Auditors Ease Concern of the “Next” Economic Crisis?

“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

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