Auditors: finding the middle ground

We reported that the big firms are sending less experienced staff to summer
schools to educate them on how to spot companies in trouble. This is because
many have not been through harsh economic times and are yet to acquire the
battle scars and experience that come with it.

We also know that regulators have warned auditors to tighten up their work
and are expected to begin issuing more ‘nuanced’ audit opinions. There are two
reasons for this. One, regulators want to ensure there’s no chance of problems
slipping through the net. That’s in the interests of investors concerned about
their investments and their concerns are the regulators’ concerns, too.

Second, auditors realise that in difficult times they face the risk of
scandal. Not least that investors see auditors as having the deep pockets that
will restore their capital in the event of a corporate collapse.

A more nuanced system of audit opinion can help deal with that. This is
because there has been an established fear among auditors that use of a ‘going
concern’ statement may actually precipitate corporate failure when a company may
still be some distance from the edge. Such a worry could tempt auditors into
holding back when investors need to know something. In other words a middle
ground was needed between saying nothing at all and using what many had come to
see as a potential death blow.

This makes good sense, though consideration of this issue is overdue. What
needs to be safeguarded against is that the ‘nuance’ doesn’t make the position
of a company more opaque. There’s no point in bringing in statements that leave
everyone more confused than they were before. As one audit expert pointed out,
this is a hot topic.

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