Question

Countdown book.

1. Please comment on the following issue regarding the Scott London affair (pp 95-96): what value is auditor independence to the capital markets? Does it seem to have a material effect?

2. Do you feel that the Big Four are too big and inflexible to innovate (pp 96-99)? Please explain your position

Answer 1

1. An auditor must fulfill all his obligations even when it means opposing or denying the wishes of those who have employed him, and who, he knows may cease to do so. It is a requirement unparalleled in any other field. Auditor independence thus is a very important requirement for presenting the financial information of any corporate enterprise in a true and fair manner.

The financial statements of corporate enterprises are of great importance and value to capital markets as it is the source of relevant and reliable financial information. They are the basis for analyzing investments. Investors have every right to be able to depend absolutely on the integrity of the financial statements that are available to them, and if that integrity in any way falls under suspicion, then the capital markets will surely suffer if investors feel they cannot rely absolutely on the integrity of those financial statements.

The reliability of financial statements is possible only when they are attested by the auditor objectively. Unless an auditor is independent, his opinion is no more reliable than the financial statements prepared by the management itself.

In the erstwhile issue of Scott London affair, Mr. London in the role of an auditor disclosed the secret tips of many of his clients to his friend to make illegal profits by trading on the information. This was a kind of insider trading which is purely illegal and against the prudent practices of securities market. Mr. London comprmised his independence for getting undue benefits.

2. Big Fours do innovate, intensively and incessantly. Their R&D departments unleash untold resources. In fact the problem is not innovativeness, the resource allocation is however.

The too-big-to-innovate thesis typically focuses on the complex bureaucracy and short-term share-price orientation that come with success, conspiring to make big firms miss the next big thing. And the next big thing is creation of innovations and new business processes and ideas internally within the organisation.

The decision makers of the organisations have to smartly allocate the scarce resources.In case of big companies like Big Four, the tendency to spoilt for choices is very common.