The Auditor and The Company Stock

            The auditing profession provides a valuable service to all stakeholders by ultimately instilling confidence in financial reports and management integrity.  The value of the auditor is extremely apparent when the auditor resigns.  The resignation of auditors can immediately devalue a company.

            When auditors resign, especially respected auditors such as PwC, Ernst & Young, Deloitte Touche Tohmatsu or KPMG, many investors head for the exits. The resignation of auditors often results in major stock dips.  For example, shares of Singapore-listed Sky China Petroleum Services Ltd, tumbled as much as 32 percent to an all-time low after it said its auditors, Ernst Young LLP had resigned.   China Media Express Holdings, Inc.,  had their shares fall 4.3% when they announced the resignation of independent auditor, Deloitte Touche Tohmatsu.   A couple years ago American Apparel Inc. had their shares fall by 25% in New York trading after saying Deloitte & Touche resigned as its accountants.  This past summer Nasdaq-listed SinoTech Energy Ltd. had their auditors   Ernst & Young's China resign as the company's auditor ultimately resulting in the company's stock suspended from trading. The impact the auditor has on the value of a company's stock is affected by his opinion on the financial statements, his inability to give an opinion and his resignation from an engagement.

            When an auditor resigns he will state his reasons for his resignation, however until the public becomes aware of the reasons, their first reaction is to sell.  Auditors can resign for many reasons such as an issue of independence, lack of profitability to their firm, or dissatisfaction with how their personnel are treated.  However, when auditors state they are no longer able to rely on the representations of management or that certain issues need to be looked at by an independent investigation, the integrity of the company is affected.  Moody's who puts out ratings on a company stock is obligated to understand the reason for an auditor's resignation because in many cases it  can wind up affecting a company's credit profile, which will affect stock value.

            According to a survey by the Chartered Certified Public Accountants, questioning the value of an auditor, 90% of respondents felt that the external audit brings value to them, 80% felt that audited financial statements were important to them in making investment decisions, 75% agreed that the scope of the audit should be extended to enhance the value of audit and 85% of respondents felt that the provision of non-financial information would serve their investment decision making purposes.  Based on the results of the survey and more importantly the impact on the stock of a company upon the resignation of the auditor, it is obvious the value the auditor provides to all its stakeholders.  The auditor has a huge responsibility and needs to constantly exhibit integrity, professionalism and competence.   The company that they are working for may be paying them but the confidence they instill in the public will ensure the value of their service.

Why Do We Need Auditors?

The need for auditors may be the same reason as to why we need law enforcement.  We need auditors to police the activities of business!

It appears that if people have the opportunity to prosper from illegal activities, they will.  It doesn't matter who they are cheating.  You hear about white collar crimes constantly.  "White-collar criminals are opportunists, who over time learn they can take advantage of their circumstances to accumulate financial gain."  Just recently a "white collar student-in-training,” was arrested for getting paid to take the SAT  for high school students.  A fellow student eventually informed officials and confirmed the report with an analysis of the handwriting on the exam; an arrest was made.

You would think that by now procedures would be in place that would entail two picture ID’s.  When I sat for the exam we were required to bring one picture ID- which was never even checked by the proctors.  Once again, you have policies to deter fraudulent behavior, but they are not being followed.  We need constant review and policing of company policies; we need to detect that procedures are followed.  How was one student able to sit for the exam of several other students? Doesn't CollegeBoard realize that this undermines ttheir reputation?

How about the recent activity from the New York City Department of Education?  The DOE was paying out an average of $13 million a year on a contract that was supposed to be about $3.6 million.  After an investigation, it showed that a high level employee of the DOE was romantically involved with the owner of the company they were paying.  Again, what procedures were in place that would detect over-budget disbursements at this level?  Who was responsible for monitoring and enforcing the procedures?  Why it was not detected sooner?

What about Medicare fraud- how many cases do we hear about that each year?  Last year, in Miami two companies were set up to provide mental health services.  These services were unnecessary or never provided.  The companies were set up for the purpose of scheming to bill the Medicare system.   The fraud operation netted about $83 million. The investigation showed that fake symptoms were documented, physician signatures were forged and treatments were never given. Employees who suspected fraudulent activities were terminated if they did not cooperate.  Obviously, if they needed the job they just cooperated.  What about the procedures and policies in the Medicare system?   Were their policies followed?  There needs to be a system in place that can detect bogus claims and those procedures need to be enforced.  There needs to be reports and reviews on the adherence of these procedures.

I can go on and on about exposure of illegal activity, but how many fraudulent schemes go on undetected? Obviously, recommendations for the necessary controls to keep a company operating efficiently and deterring fraudulent activities are time consuming and costly.  All businesses including governmental agencies need to know the importance of detecting non-compliance and enforcing the controls.  Governmental agencies,  have an obligation to the taxpayers and  they need to be held accountable.  Governmental Audits are a necessity and not a waste of our tax dollars.  Effective audits actually can save millions of dollars.  We need auditors just like we need any other law enforcement agency!