Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Auditors no match for internal mischief

- by Alan Duvall 

Published in Dayton Daily News  June 3, 2007 

“And the beat goes on, yea the beat goes on.”  Cher 

Enron...WorldCom...Adelphia...Tyco...  Massive corporate scandals super-charged by executives who dreamed of being kings. 

Into the breach marched Congress which in 2002 passed a two paragraph corporate governance statute labeled the Sarbanes-Oxley Act (SOX).  Since governments cannot abide simplicity, commissioners soon drafted over 300 pages of compliance regulations. 

SOX mandated that adequate systems of internal controls be maintained by public companies, the trustworthiness of which attested to by external auditors.  

Pursuant to these guidelines, businesses established audit committees, whistle-blower protections and management certification of controls and financials.  Outside auditors were prohibited from performing consulting services deemed a conflict of interest to independence. 

Administrative costs of compliance skyrocketed to a reported $2 to $3 million annual price tag per company.  Small public firms were slapped particularly hard with the unintended result U.S. initial public offerings have plummeted in favor of less restrictive foreign markets.  Over-regulation and litigation risks may have cost America its edge in attracting investment capital, particularly in the technology sector. 

The internal/external phalanx of controls was designed to insure management integrity to restore investor confidence in American capital markets.  But management is a wily beast and greed games merely morphed to more complex models. 

In stepped the options backdating scandals which were not exposed by diligent accountants, but instead by the curiosity of business journalists.   

Closer to home, the DP&L trial showcased financial calamities which occur when a less than attentive Board of Directors (despite averaging $250,000 annual fees per member) is paired with very aggressive management.

Unless the Boards of public companies arise from their collective stupor, all of the SOX safeguards in the universe will not prevent graft by unscrupulous management.  Outside auditors are simply no match for internal mischief. 

“Beatniks are out to make it rich, oh no, must be the season of the witch.”  Donovan 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.