Terry Gold has a nice long rant up on his blog titled The Auditors are here! Now, some of my best friends are auditors, but the state, dynamics, and incentives of the accounting industry have gone from bizarre to complete utter madness.
As an investor in many private companies, I ask all of my portfolio companies to have an end of year financial audit. Acquirers require them, you need them if you are ever planning on going public, and it’s just good overall corporate governance.
In 14 years of being an investor in private companies, I’ve never had a material accounting, fraud, or legal issue show up in an audit. Yeah – there are occasionally minor accounting changes around the margin, but they are usually for generally irrelevant issues like stock option accounting, minor revenue recognition issues, or expense timing allocation (none of which have an impact on cash or the real financial results of the company.)
Yet – every year companies pay real money ($20k for a startup, over $100k for a real operating business) to go through a mind bending time consuming process that results in a very long rep letter that the CEO has to sign.
Terry does a good job of highlighting the problems with this rep letter. Basically, it’s a cover your ass letter for the auditors. Ironically, this just gives the bad people another opportunity to lie and be bad. Terry sums it up nicely.
"I’m not picking on my auditors, or any auditors for that matter because they aren’t the ones making up all the new regulations. At their heart, I think they are trying to do a good thing by holding people accountable to a high standard, it’s just that I’m not convinced (and neither are they) that much of this is really making companies more transparent. It’s really just making it harder for the good people to comply and easier for the bad people to claim they actually did comply or that they misunderstood the rules.
In the end, nothing has really changed for me. If something is wrong, I should have known about it and I’m going to be held accountable for it. What can we do to keep the world from becoming a quagmire of ineffective laws, regulations and rules? Don’t assume that a new regulation will fix a problem. Work to fix the problem. Don’t enact a new rule and say, "there, problem solved" because you only get credit if the problem is actually solved. Focus energy on good people who will do their damnedest to make the right decision, because it is the right decision, and don’t tie their hands with bureaucracy that the bad people will just walk right through without a second thought."
I’m not picking on the auditors either (remember – some of my best friends are auditors.) But the meta issue – the one of the way the whole process works – is stupid.