Auditing

Many consider the annual financial statement by an auditor to be a necessary evil. They usually submit to it in silent resentment either because it is prescribed by law or because an investor wants to be sure of his investment.

As an auditor, I have been intimately familiar with the legally mandated and “voluntary” annual balance of accounts for the last two decades. I have seldom been greeted with joyous enthusiasm in the audited companies (probably due to the nature of the thing), but I have noticed that these audits are being increasingly burdened by new irritations.

New Irritations during the annual Balance of Accounts

 

First: The charging of additional fees
The ongoing poor economic situation has led to stiff competition among accounting firms. This encourages the bad practice of first securing an audit assignment by presenting a low cost proposal and then, after being commissioned, suddenly discovering “special additional work expenditures” that supposedly can only be dealt with by a large amount of extra work time to be paid for at rates that can no longer be considered very moderate. Because it is very difficult to change auditors once one has been commissioned and one strives to avoid burdening the atmosphere even more, such additional fee demands are usually accepted through gritted teeth.

Second: Insensitive phraseology in the Audit Report
Ever since the Basel II Accord, lenders have been reading audit reports much more critically. At the same time, it is becoming increasingly likely that you will meet an auditor who simply ignores the effect poorly formulated wording in audit reports can have on banks or stockholders or approvingly accepts them because he has never sat on your - the company’s - side of the table during his professional career. As is the case with employer’s references, even a phrase that ostensibly sounds harmless or favorable can do permanent damage to the status and ranking of your company.

Third: Restrictive interpretation of options
The German Commercial Code (HGB) and the International Financial Reporting Standards (IFRS) expressly provide for a choice of options in preparing the balance sheet. If the auditor agrees with you in the selection of an option that is then used, it means nevertheless that at a later date he may have to justify his approval to his supervisor or to a reviewer of the report, as the case may be. This effort and the subjectively perceived risk of standing by their own decision is increasingly being sidestepped by auditors at the expense of the companies, who instead are forced to accept unnecessarily conservative valuation of their assets. This is often coupled with a time and money consuming repositioning of the balance sheet items (see point 1).

Fourth: The widening information gap to the disadvantage of the company
Certified annual financial statements are increasingly being qustioned; audit scandals (e.g. FlowTex, Enron, banks) led to sharp constraints by the insurers and a wave of new legislation. As recently as five years ago, an auditor was able to plan and document his audit on his own responsibility but today he has dozens of regulations and “audit standards” for each step of the audit that he must take into account. If he ignores them, he is putting his insurance coverage at risk. Even so, a great many regulations are broadly composed and their interpretation is placed at the discretion of the auditor.

Many auditors, however, are unable to cope with this generous latitude of discretion and prefer to take the easy road. The risk of having to justify a certain decision is minimized at your expense by using the most conservative interpretation conceivable. The auditor takes refuge from responsibility behind his rulebook; a “can” is presented as a “must” and audit procedures are forced upon the company that carry the principle of essentiality to an absurd.

 

The auditor’s increasingly complex set of regulations, however, are almost unknown outside of the industry. Once it was possible to discuss the German Commercial Code, with which both sides were acquainted, but today a company is confronted with regulations and “auditing standards” that they know as little about as, say, Latin ecclesiastical law. This means that an audited company is redundant at the mercy of the auditor’s sporadically questionable interpretations of these regulations.

Sound Familiar?
If you have not suffered any of these irritations, congratulate yourself on your excellent choice of auditors up to now. You will have no need of the services I am presenting here.

Thank you for taking the time to read this.

If, however, some things here sound painfully familiar, then please read on to learn how you can level the playing field in the future.

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