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The Dixon, Illinois Fraud Is the Latest Example of Why Reasonable Assurance Is Bullshit

Posted on by Caleb Newquist

As you know, the former CFO of DIxon, Illinois, Rita Crundwell, has been accused of misappropriating $30,236,503 and 51¢ from Ronald Reagan's boyhood home. It's a haul of Sue Sachdeva proportions, although it appears that obsessive shopping wasn't so much the motive as it was a My Little Pony fascination for a grown woman. ANYWAY, there seems to be a lot of questions about how such a fraud of this scope could go on undetected for so long, and could only be discovered when Ms. Crundwell took 12 weeks of unpaid vacation. A lot of people think both CliftonLarsonAllen, who compiled the city's financial statements, and Sam S. Card, CPA, the auditor of the financial statements bear some responsibility, but there's also the Illinois Comptroller's Office who is supposed to review the audited financial statements. 

It's interesting to note that CLA prepared both the compilation and the audit, prior to recommending Mr. Card to be the auditor. That occurred in 2006, around the time that the alleged fraud began. But before you get your knickers in a twist, someone would like to give you a refresher:

That doesn’t necessarily mean the auditor did anything wrong, said Mark Peecher, an accounting professor at the University of Illinois. “One of the things you need to keep in mind, there’s this thing called the expectation gap,” Peecher said. “The public thinks the audit does more than it does.” Even so, Peecher said he wouldn’t be shocked to find out the audit wasn’t up to par. “The probability that this happens and the person doesn’t get caught increases if the audit was of insufficient quality,” he said. “But even if the audit were up to standard, this could still happen and that would not be shocking.”
See? Audits can be great and fraud can still happen! And we wouldn't be shocked! OR audits can suck and fraud can still happen! And we wouldn't be shocked! There's really nothing you can do. The good professor knows, as all auditors, that most people out there don't have any idea of what an audit really is. Fine, an expectations gap. It's a crock, but again, there's really not much you can do about it. You an try to explain to your cousin in Dixon why it's not the auditor's job to detect frauds like this and (s)he would look at you, confused, and say, "Then what good is it?" AHA!
 
This is why the idea of reasonable assurance is bullshit. "Reasonable assurance" is just really just another way of saying, "in a perfect world where nothing out of the ordinary happens," except we live in a world where SHIT HAPPENS ALL THE TIME. Obsessive shoppers gone wild, mark-to-make-believe, repurchase accounting, insanely priced electronics, the list is endless. And auditors – large and small – can't do much about it.
 
So if you want to blame auditors, compilers, comptrollers for missing the horse lady's shenanigans, go ahead, they're used to it. But let's not pretend like auditors are really equipped to do a job that actually meets anyone's expectations or has any sort of value. And, really, aren't professional services supposed to accomplish both those things?

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Brits Call Big 4 Auditors ‘Disconcertingly Complacent’ During Financial Crisis

Not exactly what you would call a compliment. And while they were at it, the House of Lords would like the Office of Fair Trading to investigate why the “Big 4” isn’t a “Global 6” or “Universal 8” or “Dirty Dozen” or something similar.

Of course auditors have claimed that did everything they were legally obligated to do and the HoL admits that’s kindasorta true but not really:

Its report said: “We do not accept the defence that bank auditors did all that was required of them. In the light of what we now know, that defence appears disconcertingly complacent.” It added: “It may be that the Big Four carried out their duties properly in the strictly legal sense, but we have to conclude that, in the wider sense, they did not do so.” Bank auditors and regulators had been guilty of a “dereliction of duty” by not sharing more information with each other on an informal basis before the crisis, the committee claimed. Auditors were either “culpably unaware of the mounting dangers” at banks or they were at fault for not sharing any concerns with supervisors, it added. Either way, auditor complacency had been a “significant contributory factor” in the banking meltdown, the committee said.

So in “the wider sense,” auditors best step up their game. Go forth.

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