Why not try eliminating the audit monopoly?

I don’t know Michael J. Daillak, CPA, from Bakersfied, California, but he recently wrote a letter to the editor of Accounting Today (June 16-July 6, 2008) that I found quite interesting, especially in light of my previous posting of Tim Williams’ article on the death of the advertising agency.

Essentially, Michael is arguing for audit-only firms, otherwise the CPA profession could slip into irrelevance (a condition I would argue, along with others—such as Thomas Stewart, Editor of Harvard Business Review—has already happened). He states the case for the CPA profession having a monopoly on audits:

The given for this profession is that the only thing—I repeat, the only thing—that a CPA can do that no one else can do is perform and report on an independent certified financial audit.

This is our raison d’être, our reason to be!

From there he leaps to this conclusion:

Audit fees should be sufficient to pay CPAs who choose to be so employed an attractive, competitive professional income to do the only thing that they can do that no one else can do. The future of the world’s financial system may be at stake.

This is hyperbole at its finest. I have a thought experiment: which would be noticed by society first—1) if garbage men went on strike; or 2) if CPAs stopped doing audits?

To believe that the world’s financial system would grind to a halt unless auditors continue to publish historical financial data is beyond belief for anyone who understands economics. Using audits to run a company—let alone a financial system—is like timing your cookies with your smoke detector. Audits are lagging indicators, and they can only explain about 15% of a company’s market capitalization. Coca-Cola’s brand is worth some $65B dollars, but you’ll look in vain to find it on its GAAP-based audited financial statements, which is why Thomas Stewart of Harvard Business Review refers to the traditional financial statements as the three blind mice.

But what’s worse is that Michael actually believes that auditors having a monopoly in auditing is a good thing. Economists don’t like monopolies; we prefer competition. Why not remove the attest monopoly from auditors and open them up to competition from banks, insurance companies, etc. The market would innovate new and better financial models, audit insurance, and a host of other innovations we can’t even fathom since we are constricted by a one-size-fits-all government granted monopoly.

I wrote an article on this very issue years ago.

But it’s really the second comment that disturbs me the most. It appears that Michael believes simply because some people choose to be CPAs who perform audits they should be guaranteed a living wage. That’s not how capitalism works, but it is how the former Soviet Union operated, as well as Cuba, and North Korea today.

We could have government mandate oil companies drill using corkscrews and create all sorts of employment, but it wouldn’t be very effective, nor would it create any wealth.

If auditors can’t make a decent living providing a government backed monopoly service it’s a testament that they aren’t adding much value. Innovation and competition are the answer, not a further mandate for audit-only firms.

Ignorance in economics is one of our most expensive commodities in this world, as this letter attests.


  1. Ron,

    I forwarded this article to a CPA friend of mine in South Carolina. His response:

    “Recently I had a client refer to his former CPA as 100% accurate and 0% useful.”

    Right on target!

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