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How audits must change.
Julia Homer, CFO Magazine
July 1, 2003
In a recent issue of the New Yorker, a cartoon shows three shirt-sleeved employees approaching the boss, seated behind his desk. Says one employee: "Sorry, sir — we seem to have lost five million dollars in the fog of accounting."
To anyone looking for a new indicator of market moods and trends, I recommend the New Yorker's cartoons. (For the record, the first New Yorker cartoon to use the designation "CFO" appeared in 1994.) Before Enron, accountants typically turned up in the cartoons as the straight arrow or party pooper. Now, they are whimsically regarded as rather mysterious (if still dweebish) characters, marked by a hint of intrigue or even with a scarlet "A."
This perception, distorted as it may be, explains why auditing must change as clearly as any report on the notorious fraud cases of the past two years.
The truth is, auditors have long insisted they cannot catch major fraud. And privately, finance executives concurred. But to an extent few recognized, the real value of the audit rested on its effectiveness as reassurance that $5 million had not been lost in the fog of accounting — that, in fact, audited financial statements were an accurate representation of a company's financial condition.
As senior writer Kris Frieswick argues in "How Audits Must Change," more than stricter rules and new enforcers are needed. Auditors must take more responsibility for trying to catch top-level fraud. The public, as represented by the stock market anyway, needs to believe that those skeptical, dogged numbers nerds are back on the trail again.