Wal-Mart Audits?

Hat tip to Mark Bailey (a VeraSage Trailblazer) for passing along an article from CFO.com, “Audit-Fee Fall: It’s a Matter of Trust.”

The article discusses how audit fees have fell by an average of 5% to 8% in 2008 (depending on company size), and have continued to fall in 2009, albeit at a slower pace.

Lynn Turner, former chief accountant with the SEC is quoted: “We don’t view audits as a commodity. We don’t want the Wal-Mart audit.”

He went on to say that lack of confidence among investors in financial statements has been a significant factor in the poor performance of investment markets during the past decade.

Really? This is economic illiteracy at its highest (or lowest).

You mean the burdensome Sarbanes-Oxley legislation, onerous corporate taxes (the second highest corporate tax rate in the world), costly and useless regulations, and uncertainty over government policy didn’t have more to do with the stock market’s poor performance?

Turner is blaming the thermometer for the temperature. Financial statements are nothing but lagging indicators, and to claim anything else is the equivalent of timing your cookies with your smoke alarm.

The article also discusses pushing audit efficiency, but that’s not what makes an audit effective.

Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.

I don’t want an efficient audit; I want an effective one.

The only reason people focus on efficiency is the built-in incentive of the billable hour to reward inefficiency.

The other point the article misses is that the audit is an insurance product.

As actuaries have taught me, you can’t price risk by the hour. But look at how audits are priced.

One other interesting point: the last paragraph talks about banks not really caring about audited financial statements. They send in their own auditors to document the existence and value of assets they are lending against.

This is an example of why the audit monopoly that CPAs have needs to be relinquished.

If you really want to improve the audit, along with investor confidence, open it up to competition. There is no better protector of the investor than a robust competitive market.

The audit could stand some innovation.


  1. Ron, this is something you and I have talked about, and I agree with you 100%. I too have written about my distress with this whole situation.

    I’ve been auditing for over 20 years and I’m finding that with each new standard there is less flexibility for me to apply my judgment to the situation. Think of SAS 99 – this is what you HAVE to do to comply with the fraud standards. No more giving me any leeway in figuring out what makes sense. The PCAOB is going to say you have to confirm every single bank account (which makes me think they are getting paid by confirmation.com); I’d much prefer alternative approaches.

    Yes – the audit could stand some innovation. Let it start with giving the auditor the ability to innovate.

  2. “Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.”

    Maybe so, but that doesn’t mean it’s not important. Assuming equal effectivness (again I believe it’s a balance between the two), if it takes my firm 20 people to handle a portfolio of audits that another firm can handle with 15 people, how can that not be relevant?

    Efficiency might not be a competitive advantage, but that doesn’t mean it’s not necessary. The first gas station that installed “pay at the pump” technology had a competitive advantage over the gas station across the street that did not. So when gas station #2 decides to implement the same technology, it does not give them a competitive advantage; but still they have no choice but to do it, just to stay even and survive.

    Which brings up another point. Look again at the statement, “Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.” This can be said about many other tactics that your competitor later copies, such as the gas station example above.

    Best Regards,
    Jim Caruso

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