The fall of the Big Accounting Firms

A recent survey suggests some investors would like auditors to identify their clients’ key risks as well as highlight areas that could possibly have questionable estimates made by management (2008 Center for Audit Quality Institute survey).

“Investors want to know where the high risks are,” said Mary Hartman Morris, a California Public Employees’ Retirement System investment officer.

Unfortunately, the disclosure of financial problems at public companies tends to come after the fact.  Auditors don’t examine every transaction and event, so there is no guarantee that all ma­terial misstatements, whether caused by error or fraud, will be detected.

The audit report — which is the sole communication between auditors and investors on a particular company — explain the auditors’ role and their limitations in finding fraud, “If the discovery of material errors and fraud is not a major part of what the audit is about, it is not clear what value-added service the auditor offers the investor and capital markets,” (Andrew Bailey, University of Illinois accountancy professor emeritus).

So if the big accounting firms refuse to find fraud and ma­terial misstatements, then who will.

A group of finance and accounting professionals offer an innovative new solution to identify key risks as well as highlight areas that could possibly have questionable estimates made by management. Their online forum, http://www.zethics.com, provides employees a structured process to anonymously disclose information about fraud and ma­terial misstatements.

Investors need assurance that the companies within their portfolio will not be the next highly publicized failure. To give them that assurance, investors must have the ability to identify the potential causes of such failures.

Disclosing fraud and ma­terial misstatements online is an internal audit best practice and assures investors that the companies within their portfolio will not be the next highly publicized failure.

To investors, information is knowledge, and knowledge is power.  Improved internal transparency from an independent third party arms investors with comprehensive information about the quality of the business and strength of the management team.  This information serves as a check and balance against the information provided by management as well as auditors and outside consultants.

The online forum aims to demonstrate that transparency can work.  When information is relevant, standardized and public, it fosters intelligent decision-making.

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About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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