In post-Enron/WorldCom financial times, auditors' reports become must reading

The Leckey File

Your Money

August 14, 2005|By Andrew Leckey

They parked in the company lot. They wore suits. They drank coffee. They looked at the company books. They closed the door when they talked.

They were the auditors. And when they finished, they issued an auditor's report because, well, that's what auditors did.

"We really did look at these financial statements, even though company management is responsible for what's in them," seemed to be the gist of most reports. "We pretty much followed each and every audit rule, so in our opinion these statements fairly represent the company's position."

A familiar-sounding paragraph included in each annual report granted most companies a clean audit opinion, with the occasional qualified opinion if generally accepted accounting principles weren't followed. Piece of cake. See you next year!

In 2005, auditors still drink coffee and close the door when they talk, but they've gained importance and responsibility in a post-Enron, post-WorldCom financial era. Shareholders and employees of publicly held companies learned the hard way that rubber-stamp accounting can damage the financial well-being of everyone.

The auditor's report has become must reading for all investors.

That's because companies must ensure that their internal controls over financial reporting are reliable, and auditors must vouch for those controls. It's required by the 2002 Sarbanes-Oxley law.

Hundreds of cases of weak internal controls at companies have been reported, and restatement of earnings now is common. The company-auditor buddy system is crumbling, with more than a fourth of publicly listed companies switching auditors in the past year and a half.

While I've found some of the management-internal-control comments to be rambling and soul-searching, no longer will chief executives be able to sit on witness stands and testify they had no idea funny stuff was going on with the numbers.

The new auditor to-do list: (1) agree that the audited company's controls are adequate; (2) say exactly how effective those controls are; and (3) deliver an opinion on the financial statements. If a firm has inadequate internal controls, it must present a plan to solve this and issue quarterly statements on its progress.

That means auditors and company management are on the hot seat. At least that's a welcome change from the recent past, when most of the discomfort was felt by investors and employees of companies that treated them as if they couldn't handle the truth.

Andrew Leckey is a Tribune Media Services columnist.

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