AC answer to auditor independence

[bunny]

I have been writing an essay on recent changes to auditor independence (a bunch of rules were introduced after the enron collapse amongst other things). I wondered if an AC fan might speculate on how auditor independence would fare under AC? It seemed to me on first blush that free-market/unregulated is what used to exist and it turned out to fail miserably. The "People will trust audit opinions from historically trustworthy firms" idea seems to fail since it would be easy to follow a high risk/high return strategy (ie give dodgy audit reports for good money) then constitute a new company if you ever got found out.

I cant imagine there being enough of a problem for people to fund a private audit regulatory system (plus it would face its own independence problems)

Any solutions? Or is it not really a problem?

[WordWhiz]

Explain how government regulation changes anything. Or do government auditors (or auditor regulators, or whatever your proposed alternative is) magically become immune to bribery, influence, coercion, ineptitude, etc. once they put on their magic government hat?

I'm not sure what you mean about companies folding tent and starting over. An audit from a brand new company has little cachet to it. As in any industry, reputation is important.

Finally, you say you doubt this would be enough of a problem to fund a private regulatory system. If that's the case, then why force taxpayers to fund it?

[hmkpoker]

How many of us are there in this forum now?

[bunny]

Chill out - I was just curious, I wasnt attacking AC. Fact is, there are often AC solutions I've never thought of and I was curious if there was one to this.
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Explain how government regulation changes anything. Or do government auditors (or auditor regulators, or whatever your proposed alternative is) magically become immune to bribery, influence, coercion, ineptitude, etc. once they put on their magic government hat?

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I dont think they are immune but they are employees of a violently coercive oppressor, remember? The government can ensure they follow rules relating to independence and enforce those rules inefficiently - guaranteeing a higher level of independence but probably spending more resources to do so than the market would.

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I'm not sure what you mean about companies folding tent and starting over. An audit from a brand new company has little cachet to it. As in any industry, reputation is important.

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This is true for the big businesses, less so for the small companies though. Nobody is going to expect a small 1m turnover firm to employ one of the massive audit firms - they'll go to a small and cheap auditor, many of whom you as an investor will never have heard of.

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Finally, you say you doubt this would be enough of a problem to fund a private regulatory system. If that's the case, then why force taxpayers to fund it?

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That was exactly my question - is it just not a problem?

[Borodog]

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I have been writing an essay on recent changes to auditor independence (a bunch of rules were introduced after the enron collapse amongst other things). I wondered if an AC fan might speculate on how auditor independence would fare under AC? It seemed to me on first blush that free-market/unregulated is what used to exist and it turned out to fail miserably. The "People will trust audit opinions from historically trustworthy firms" idea seems to fail since it would be easy to follow a high risk/high return strategy (ie give dodgy audit reports for good money) then constitute a new company if you ever got found out.

I cant imagine there being enough of a problem for people to fund a private audit regulatory system (plus it would face its own independence problems)

Any solutions? Or is it not really a problem?

[/ QUOTE ]

There's a bunch of stuff on this on Mises.org. Basically, the government put into place the conditions that led to the problems, and it was the market that actually identified that something was wrong.

See for example http://www.mises.org/story/872 .

[bunny]

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I have been writing an essay on recent changes to auditor independence (a bunch of rules were introduced after the enron collapse amongst other things). I wondered if an AC fan might speculate on how auditor independence would fare under AC? It seemed to me on first blush that free-market/unregulated is what used to exist and it turned out to fail miserably. The "People will trust audit opinions from historically trustworthy firms" idea seems to fail since it would be easy to follow a high risk/high return strategy (ie give dodgy audit reports for good money) then constitute a new company if you ever got found out.

I cant imagine there being enough of a problem for people to fund a private audit regulatory system (plus it would face its own independence problems)

Any solutions? Or is it not really a problem?

[/ QUOTE ]

There's a bunch of stuff on this on Mises.org. Basically, the government put into place the conditions that led to the problems, and it was the market that actually identified that something was wrong.

See for example http://www.mises.org/story/872 .

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Thanks for the link, although it didnt specifically address what I was referring to - I probably confused things by mentioning enron, I didnt mean to imply that that was an example of capitalism failing, merely that the collapse of enron provoked a wide-ranging investigation into all sorts of things, one of which was auditor independence.

To clarify (and I repeat I'm not saying "AC is a failure because..." I'm just curious if this is a problem that has been solved or if it is seen as a non-problem) the big reason behind auditors is that investors dont have the time to fully investigate financial statements of corporations. Yet nobody but the corporation is really able to give accurate figures.

One of the big things that was previously unregulated (or barely) and is now heavily regulated was auditor independence. One common example was a firm would audit a corporation for which it also performed substantial non-audit services. When that happens there is clear incentive to be "soft" in the audit in case a profitable client in other areas leaves.

In an unregulated environment, I cant imagine there being a market for people to run around investigating auditors (especially at the low end of the scale - auditors of the small, 1m turnover companies). And it seems there would be a market for gentle auditors who provided impressive looking but generous audited figures at a higher cost.

Any ideas if this (admittedly fairly esoteric) issue has been discussed?

[natedogg]

Audits only exist because of government regulation. In an AC world, the only audits that would happen would be from firms who wish to be listed on the fully unregulated exchanges that would demand their own audit criteria.

In this case, certain exchanges would have more stringent audit rules than others, and the audits would in fact be geared to making sure that the profits recorded are true.

In an environment where corporations are untaxed, the concern of the audit would be around proving income as opposed to hiding income.

Auditors would have a big incentive to be accurate because the exchanges would hold a lot of power over whose stock was offered and could literally put a accountants out of business with one stroke. They could blacklist accounting firms and disallow member companies from using the blacklisted accountants' audits.

If an exchange were totally corrupt then people would not buy the stocks listed on that exchange. Most of the market is driven by big buyers and mutual funds, so the mutual funds have a big incentive not to buy stocks from companies listed on an exchange known for looking the other way when companies lie about the profits.

I'm not an ACist but I am close and when it comes to buying and selling stocks there is no freakin' way you should have the government involved in any role whatsoever. (currently the main reason is for tax collection which I would solve by not taxing businesses).

natedogg

[bobman0330]

It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment. So auditors would only be needed to verify figures in private transactions and such, where they could be effectively monitored by the counterparty.

[Borodog]

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Audits only exist because of government regulation. In an AC world, the only audits that would happen would be from firms who wish to be listed on the fully unregulated exchanges that would demand their own audit criteria.

In this case, certain exchanges would have more stringent audit rules than others, and the audits would in fact be geared to making sure that the profits recorded are true.

In an environment where corporations are untaxed, the concern of the audit would be around proving income as opposed to hiding income.

Auditors would have a big incentive to be accurate because the exchanges would hold a lot of power over whose stock was offered and could literally put a accountants out of business with one stroke. They could blacklist accounting firms and disallow member companies from using the blacklisted accountants' audits.

If an exchange were totally corrupt then people would not buy the stocks listed on that exchange. Most of the market is driven by big buyers and mutual funds, so the mutual funds have a big incentive not to buy stocks from companies listed on an exchange known for looking the other way when companies lie about the profits.

I'm not an ACist but I am close and when it comes to buying and selling stocks there is no freakin' way you should have the government involved in any role whatsoever. (currently the main reason is for tax collection which I would solve by not taxing businesses).

natedogg

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Excellent post.

[jstnrgrs]

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It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment.

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Is this true? This means that If I want to start a company, I am risking everything I own. Right?

(What is passive invstment?)