Audit’s big question

The 2,000 pages on the collapse of Lehman Brothers and the accounting behind
it provides another uncomfortable moment for auditors.

The claim from Anton Valukas, the bankruptcy examiner, is that the position
of Lehman was misrepresented and that auditor Ernst & Young was negligent in
not spotting the problem.

We now wait for whatever action will follow. The examiner certainly believes
there was evidence to bring claims against both directors and auditors.

There has, of course, been a rush to condemn. Especially the auditor.

Auditors are in a unique position because so much is expected of them when
working on the audit of such a large company. Indeed, it is arguable that public
perceptions of what auditors do is way out of kilter with the actual work
undertaken when checking whether the accounts deliver a true and fair view. They
should be chief fraud detector, sometimes even final arbiter of the company’s
business model – general financial policemen acting as all things to all people
with a stake in the client.

In truth the brief, even one as complex as auditing a $700bn investment bank
like Lehman, is fulfilled on a much narrower basis than most people imagine
which, in times of crisis, leads to incredulity, disappointment, anger,
bitterness and, in some cases, a search for retribution and compensation.

Much of this is understandable. When things go wrong it is natural to ask who
was standing guard. But it’s also worth asking precisely what the guardsman’s
orders were before we condemn.

That brings us to the much bigger question that often becomes confused with
the need to blame someone – what do we want an audit to achieve? As mentioned
above there is a gap between what is generally understood an audit will do and
what it does in practice.

So we need to address that question properly. It came after the collapse of
Northern Rock too and there are those in the profession who are brave enough to
face the issue. But what we must be clear about is all the other issues that
will be raised as a result, such as what liability protection we are prepared to
allow auditors or whether we consider vast financial institutions so different
in nature and consequence that they require a different audit approach entirely.

Perhaps there has been a reluctance to grapple with these problems because
they are extremely complex and pose questions that are difficult to answer. None
of this should allow auditors to escape their responsibilities or feel that
there are no risks attached to what they do.

But those in charge must now face up to the problems if we want a better
regulated financial world for the future.

Further reading:

Lehman smoking gun leaves E
&Y facing questions

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