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Audits Are a Joke and Here’s Why According to a Salty Old Industry Veteran

Kid in a suit with a briefcase

Ed. note: By “salty” I mean in the experienced sailor/pirate way, not the modern definition of someone who’s just mad because they suck.

Industry OG and commentator Gene Marks has written an opinion piece for The Hill about what audits actually are that is less opinion and more brutal fact: Why you should be very skeptical of that auditor’s report. Those of us who’ve worked or even simply seen behind the curtain of audit know the things he points out to be true — assurance is reasonable not absolute, financial statements are the responsibility of management not auditors, “finding fraud” is not the ultimate goal of audits — but do investors? Probably not, that’s why they’re always suing audit firms when companies go bust with millions of dollars of fraud hidden in plain sight on their balance sheets. Most of the time, auditors can confidently (and legally) shrug their shoulders and say “not my job.”

He writes:

Basically, the accountant is saying to the world that all the information in the financial statements comes from management and that they’ve made efforts to verify that the financial statements are mostly right. But if the you-know-what hits the fan, their attorneys have plenty of cover (and insurance) for when the litigation starts.

So they might catch a fine from the audit regulators. What’s a few hundred thousand or even million dollars to a firm bringing in tens of billions a year? The PCAOB is busy going after firms for sharing answers on internal training exams anyway, who has time to figure out ways to fine audit firms for doing the minimum audit work required by existing standards.

The entirety of his article is worth a read and should be passed along to any naive investors in your life. I wanted to call attention to this bit though:

During an audit, the lion’s share of critical work on the ground (inventory observations, cut-off testing, analytical reviews, receivables confirmation) is being done by children — yes, children — who are still hung over from their college graduations. I was once that person, and looking back, I am shocked by the responsibility I had, given my lack of experience at the time. The accounting profession’s desperation to find recruits has not only lowered the competence bar but also added more tasks on the shoulders of an already exhausted staff, to the point where reports are being delayed.

To address this particular issue, he has a crazy idea:

And on the topic of partners, they and their managers need to cut down on the client lunches and instead get in the trenches. Like our annual continuing professional education requirements, the leaders of accounting firms should be professionally required to do a portion of staff work, like observing inventories, grilling the accounting managers on expenses or even checking bank reconciliations. Why? Because someone my age not only has more experience, they have a much different perspective on these things than a green 22-year-old. The devil’s in the details, people.

I dunno, you guys. I feel like partners would rather eat the million dollar fines.

12 thoughts on “Audits Are a Joke and Here’s Why According to a Salty Old Industry Veteran

  1. “During an audit, the lion’s share of critical work on the ground (inventory observations, cut-off testing, analytical reviews, receivables confirmation) is being done by children — yes, children — who are still hung over from their college graduations.”

    This was true back in my day. Now this work is being done by slave laborers in sweat shops on the other side of the world. So, not as concerning as the author makes it sound.

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    1. Also most time is spent documenting how the director of financial reporting “made sure” the SAP report was pulled for the correct month and didn’t lose data in the export. Actually testing the numbers is now only a fraction of total audit hours thanks to ever moving goal post for the ICFR audit.

  2. “Like our annual continuing professional education requirements, the leaders of accounting firms should be professionally required to do a portion of staff work, like observing inventories, grilling the accounting managers on expenses or even checking bank reconciliations.”

    I’m trying to imagine the partners I used to work for performing inventory observations or auditing bank recs, and I’m sitting at my desk laughing.

  3. But seriously, I just read the op-ed from start to finish and I think it is very stupid, simplistic, and perhaps deceptive (assuming that the author is being truthful when he says that he was a Big 4 audit manager). He greatly understates the amount of work and sound conceptual logic that goes into completing an audit. For example, he suggests that an account balance is tested by simply making a few selections. He neglects to say that the balance is either target tested to achieve sufficient coverage (leaving the untested portion as immaterial) or it is sampled according to statistical methods.

    I think its valid criticism to say that investors don’t understand the audit report, but that is very different than saying an audit is a bunch of circle-jerk bullshit. Shame on this “CPA” for betraying his profession just to get attention for himself. Asshole.

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    1. I don’t think this guy has been an auditor in the Sarbanes-Oxley era. Some of the things that he wants to happen are already happening for public companies, like reports on internal controls, disclosure of audit fees, and reviews by regulators (remember the PCAOB?). Some of this guy’s criticisms are just out of date and wrong.

      1. I understand that the author is trying to dumb things down for his non-auditor audience, but his op-ed really does read like its written by a second-year staff, not a former manager at a Big 4 firm. By the time kids have been at the firm for two or three years, they may be pretty disgruntled at the seemingly meaningless work they’re performing, but they also don’t fully grasp the conceptual soundness of the audit procedures or the overall big picture of the engagement. They also tend to think they know more than they really do about accounting and concepts. They don’t know what they don’t know. And at that level, they often get lost in the weeds because they a doing detailed testing and not seeing the big picture that they are contributing to. Maybe the author doesn’t respect what an audit is or what auditors do because he never understood it himself? He sounds like a washout.

  4. Not my experience performing compilations, reviews and audits. Staff may be young but learn quickly to survive. Partners and Managers are pretty sharp professionals. These folks are the source for CFO’s and controllers. These man and women are usually the adults in the room in a growth oriented private or public company. The author is just immature and has not spent enough time in the business despite being “salty”. Salt can be corrosive.

    1. I worked in BIG4 up to manager level and while some thoughts are true, others are not 🙂 You do not need audit partner to check expenses, but a few hours of experienced, engaged partner can bring a lot more insight than 80 hours of intern work (and find issues or focus areas where no one from the team would expect). And also interns need to learn somewhere and gain experience, if they are eager to learn and curious they can be a great assets of the team – better than experienced bookkeeper who joined in their 30’s. Some of my younger colleagues moved to smaller audit firms and they are shocked of the quality (which in BIG4 was much better). I moved to business and have a few former BIG4 employees in my team – they are among the most appreciated and dedicated people in our finance organization. But maybe something changed in the meantime. And at some point they started as interns 🙂

  5. Young auditors are not just ticking off what they checked and often don’t understand what and why. They do advanced staff as well like guessing real purpose of some shady transactions . They could be easily manipulated or fail facing some tough IFRSs that are hard to verify if implemented correctly. With manager’s hours at 10% of the total, manager not being CPA herself and spending most of his time shouting to younger staff ” faster , faster “…. well s* may happen. CPAs are on decline. Soon younger staff would be automated out of the audit business and the managers would be redundant too .

    Will you shout at ChatGPT?

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