Confidence Accounting 2.docx

Loss of competition corrodes confidence Which is all a disgrace as good financial information is supposedly accurate, complete, relevant, reliable, and timely. And this is not a "one off." At the beginning of the millennium there were the high-profile failures of Enron, WorldCom, Qwest, Adelphia, Tyco, HealthSouth, etc. What is going on? Why are audits less and relevant? Why does the accounting and audit profession seem not care? Problems with audit firms preceded these headline collapses, as bad diet precedes symptoms of illness. The decline in confidence in audit has been going apace for some while. Fairly evident by the mid-1980s, the Dickensian practices of auditors inspired less and less confidence about their relevancy and their value. By the late 1980s, for a variety of reasons the industry was racing towards an oligopoly in the provision of audits. The coalescing of this oligopoly was due to a number of factors, such as regulation reducing new entrants, regulation reducing diversity, economies of scale and low differential added value. By 1970 the Big Ten were fusing to the Big 8 (1970s-1989), the Big 6 (1989-1998), the Big 5 (1998-2002) and the Big 4 (2002-present). A more restricted list of audit firms created an increasing number of conflicts of interest as audit firms branched out into numerous business lines, most noticeably consulting and IT outsourcing, again very evident by the late 1980s. Anglo-Saxon societies used litigation to solve the problems of poor audit quality and conflicts of interests, again very evident by the late 1980s. Successful litigation exacerbated conflicts of interest and eased competition by reducing the number of firms further. Auditors and their firms attempted, predictably, to circumscribe liability, pretending to be one-stop international shops while collapsing nationally or threatening to collapse and create less so-called competition. Meanwhile, fees have soared, trebling in some cases in just a few years (Mainelli et at, 2003). While much has been made of IFRS versus GAAP, the overall trend has been for more consolidation and less competition. Theoretically, the trust that audits give to investors and other stakeholders such as employees, creditors, banks, governments, and the general public is crucial to the functioning of modern commerce. If we believe that we have a true and fair view of our economic entities, then we can better understand them, better contract with them, and better manage them. Yet we know that that trust is ebbing away. Audits are seen as a process "one goes through" rather than a process that adds value. Public confidence in audits is low. The Public Company Accounting Oversight Board (PCAOB) is a private, nonprofit corporation established by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies, an auditor of auditors. At a technical level, PCAOB assessments show that the loss Of confidence has justification, but of much more concern is that the entire auditing profession is not working. One issue is particularly troubling, mark-to-market, i.e. taking valuation from some third-party forum's price. Why is this troubling?