The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Monday, April 14, 2014

Strategic CSR - Auditors

Core to the theoretical underpinnings of Strategic CSR is the idea of vigilant stakeholders. While firms have a duty to listen and understand the needs and concerns of their stakeholders, broadly defined, stakeholders have an equal duty to hold firms to account.
Along these lines, one of the checks and balances that make capitalism a more effective economic system is the external audit. By verifying the accounts of the firm, auditors convey a halo effect that carries a strong message to investors (who do not have the time or expertize to verify the accounts, but are very interested to know whether they are accurate). Given this, the article in the url below raises some troubling questions:
“More than one in three audits inspected by the U.S. government’s audit watchdog were so deficient the auditors shouldn’t have signed off, an official said this week.”
The report reveals that, on inspection, the auditors could not provide sufficient evidence to support the claims they were making in their audit:
“‘When we look at an audit, the rate of failure has been in a range of around 35 to 40%,’ Martin Baumann, chief auditor of the Public Company Accounting Oversight Board said on Thursday in comments to a New York State Society of CPAs conference. … That doesn’t necessarily mean the underlying corporate financial statements are incorrect, but the audit failures could start to undermine investor confidence, Mr. Baumann said.”
It seems that the combination of increasingly complex financial transactions, together with recent tightening of regulations around compliance, suggest that the auditors are not receiving the training and supervision that they need to evaluate effectively what the firm is doing:
“The PCAOB has found five common trouble spots for auditors: complex “fair value” measurements for hard-to-price financial instruments, management’s estimates, revenue recognition policies, internal controls, and relying too heavily on the use of data prepared by the company being audited.”
Take care
David Chandler & Bill Werther
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One in Three Audits Fail, PCAOB Chief Auditor Says
By Emily Chasan
January 24, 2014
The Wall Street Journal