Tuesday, July 15, 2008

Limiting Auditor Liability is Plain Dumb

Audit firms put too many relatively inexperienced staffers on audits to do much of the leg work. Most auditors never take a single semester in-depth college level course devoted exclusively to combating fraud or understanding weaknesses in internal controls before graduating college. Worst yet, too many topics covered on the CPA exam have to be learned in a cram CPA review course, only after potential CPA candidates’ graduate college.

Now some clowns at certain audit firms want to limit their liability for failed audits? As a former CPA and the criminal CFO of Crazy Eddie, I advise public accounting firms to increase the professional competence of your staffs and improve your audit procedures if you truly want to reduce your liability exposure for your screw ups.

In the AAO Blog, Jack Ciesielski writes:

The funny thing is - the audit is under the control of the auditor. They could "audit better," if they chose to do so. And they could walk away from audits that they cannot audit better. Better that they have limits to their legal responsibility? Hmm... seems like they'd have even less incentive to do an audit better. I smell a moral hazard in the offing.

However, limiting auditor liability is not just a “moral hazard.” Limiting auditor liability is ultimately a danger to the integrity of financial information that is relied upon by investors. The integrity of financial information is the main pillar of our great capitalist economic system.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)