The Auditor-Investor ”Expectation Gap”

Investors seem to expect that an audit is an assurance of a company's financial health, laments Deloitte's CEO, who maintains that there's only so ...
Stephen TaubOctober 17, 2005

Investors may have unrealistically high expectations from auditors, said William Parrett, chief executive officer of Deloitte Touche Tohmatsu, in an interview with the Toronto Globe and Mail.

Parrett acknowledged that his industry must do a better job of performing audits and avoiding potential conflicts of interest between auditing and consulting work. According to the newspaper, however, he also warned that “we’ve always had this expectation gap between what the auditor really can do and what the investing public wants the auditor to do, or wants the audit to represent.”

For example, Parrett elaborated, investors seem to expect that an audit is an assurance of a company’s financial health. In fact, he reportedly stressed, an audit is an attestation of the accuracy of a company’s financial statements, based on information that the company itself provides.

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According to the Globe and Mail, he also lamented that auditors are held accountable for not detecting complex or “collusive” frauds perpetrated by company insiders. Parrett cited the Parmalat scandal as one example; of course, his firm is facing several high-profile lawsuits stemming from the collapse of the Italian dairy giant.

“It’s really extremely difficult for the auditor to find a collusive fraud,” he told the paper. “We fundamentally were on top of this issue but it had been going on for a number of years.”

The chief executive reportedly stated that Deloitte has taken steps to correct deficiencies cited in a recent report by the Public Company Accounting Oversight Board. The firm has appointed an ethics officer in each of its member national companies, beefed up audit teams, required deeper investigation to confirm results, and expanded its use of review teams to check initial audits, according to the paper.

Parrett also warned, “There’s no way that fraudulent activities will ever be fully eliminated from the business community or the world at large.”