The “audit failure” issue is one that we should all be concerned about, but in doing so, we need to separate reality from urban myth while we still have the time (Pat McDonnell)

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The “audit failure” issue is one that we should all be concerned about, but in doing so, we need to separate reality from urban myth while we still have the time (Pat McDonnell)
The admission by Olympus Corp that it falsified financial reports for more than a decade should not shock anyone. The shock is that, for years, auditors failed to detect such massive fraud. The failures of auditors to uncover cooked books, which run the gamut from Adelphia to Waste
Management Inc, are a cancer on the accounting industry.
Modern financial history is chock full of such stories, in which managements at brand name companies hide losses, fabricate revenues, report imaginary profits and claim to have assets that turn out to be non-existent, all of which supposedly independent auditors either fail to detect or keep quiet.
“A gray area where the accounting is being perverted; where managers are cutting corners; and, where earnings reports reflect the desires of management rather than the underlying financial performance of the company.” (David Johnstone)
Tony Tinker, an accounting professor at Baruch College in New York who is a leader in the critical accounting movement which favours more robust and skeptical examinations, says “auditors aren’t trying too hard to find stuff. Remember in Waste Management the management and the auditors signed a ‘contract’ to fix the mess, each year, for five years.”
Tinker points to a second problem: the SEC and other white-collar law enforcement agencies “are so understaffed and underfunded” that there is little risk of official inquiry and even less of official action.
Professor PremSikka, a reformer at the University of Essex in Britain, notes surveys showing that “as many as 70 percent of auditors admit to falsified audit work” in surveys of countries around the world.
“We need to look at the internal value systems and culture of the accounting firms,” Sikka said.
There is the real problem — the structure and the rules of auditing.

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