From the historical Richard Murphy

Why do auditors seem to make such a poor job of spotting fraud? One factor, says Richard Murphy, a partner at accountant Murphy Deeks Nolan, is a massive expectation gap about what auditing can and can\’t do. Despite unshakeable general assumptions to the contrary, he says, auditing (like accounting in general) is a subjective, not objective, discipline representing an opinion, not a certainty.

\’Put five accountants in a room with the raw figures,\’ says Murphy, \’and they\’ll come up with five different profit figures, all legitimate. Accountants and companies understand that, but regulators, users of accounts and governments want it to be black and white.\’

That\’s interesting, isn\’t it? Country by country reporting is therefore merely an opinion, not some fact which can be taken seriously.

Part of the problem, at least in the UK, is the structure of the industry. Auditing is the least profitable, lowest-status area of accounting, a commodity that makes little or no money for the Big Five firms.

Whereas the Murph keeps insisting that the Big4 (now, after the Andersen implosion) make out like bandits from it, doesn\’t he?

12 comments on “From the historical Richard Murphy

  1. ‘Five opinions, all legitimate.’

    An admission that HMRC cannot always be right. Corporate Income Tax is an amazingly complex thing that has got more complex with globalisation and the EU.

    And we have UKUncut as the new arbiters.

    Way to go, kiddies!

  2. Have any of you seen this?..

    By Richard Murphy

    Labour has launched a new consultation on tax as part of its Stability and Prosperity Policy Commission process. In its call for submissions it says:

    The Government’s economic failure means a Labour Government in 2015 is likely to inherit a deficit and tackling tax evasion and avoidance will be extremely important. When we are facing tough choices and people across the country are struggling with the cost of living, all savings are important.

    Every £1 million raised by tackling tax avoidance and evasion is the equivalent of the salaries for 50 newly qualified teachers. Yet when it comes to closing the tax gap, deep cuts to HMRC mean it is being asked to do much more with much less.

    We want to know how best we can:

    Ensure individuals and businesses pay the tax they owe
    Lead the way in tackling tax avoidance and evasion via the havens

    In the interests of full disclosure I should mention I will be taking part in this process as I am working with Unite on their submission.

    But the more the merrier. Get writing…http://www.labourleft.co.uk/labour-wants-your-opinion-on-the-tax-gap-and-tax-havens/

  3. “Why do auditors seem to make such a poor job of spotting fraud? One factor, says Richard Murphy, a partner at accountant Murphy Deeks Nolan, is a massive expectation gap about what auditing can and can’t do. Despite unshakeable general assumptions to the contrary, he says, auditing (like accounting in general) is a subjective, not objective, discipline representing an opinion, not a certainty.”

    As usual, Richard Murphy gets it all wrong.

    The reason audits do a poor job of detecting fraud is audits aren’t designed to detect fraud. The standard annual audit is designed to provide enough information to the auditor so that said auditor can render an opinion as to whether the financial statements fairly present the results of an entity’s business operations. Period. Go read the opinion letter of an audit of a public company some time… it specifically states that the audit IS NOT DESIGNED TO DETECT FRAUD… it is DESIGNED TO ALLOW THE AUDITOR TO STATE WHETHER THE FINANCIAL STATEMENTS ARE FAIRLY PRESENTED. And, even though he’s one dumb motherfucker, Richard Murphy should know that. It’s Auditing 101.

    By the way, if one wants an audit that will detect fraud, then one must design a forensic audit to do so. Such audits are quite a bit different in design and execution that a standard audit.

    So, once again, Murphy displays a breathtaking combination of ignorance and incompetence that borders on professional malpractice…

  4. As one who spent 3 mind-numbing years auditing, I can confirm that Dennis is right.

    All this talk of cut-backs leaading to more evasion suggests to me that they should privatise the fraud investigation arm. If they then recovered funds due under the law, it would pay for itself; if not, then perhaps the evasion is not as great as the left thinks….

  5. when you have to pay premiums for Professional Indemnity Insurance, your views on what the risks are change!

  6. were you around in the 80s, Dennis…when the “expectation gap” was started? Thje wording of audit reports started to change to give more explanation of what was being assured. In the UK, it was only around 2000 that the reports started to say explicitly that discovery of fraud was not on the agenda. And based on the Andersen/Enron experience, i would imagine the same was true in the USA.

  7. I started with Coopers in Sept. 1984, much to our mutual misfortune…

    As I remember, even back in those dark ages the opinion letter explicitly stated that an audit was not designed to detect fraud. However, the letter’s emphasis on such matters has grown since then, and on a relatively regular basis.

    And in the USA, any CPA who had bothered to pay attention could have told you that by the time Enron broke, Arthur Andersen had been an ongoing criminal enterprise for quite a while. Remember, they had both Worldcom and Waste Management in their record before Enron came ’round.

  8. I don’t think Murph has ever claimed the Big 4 make out like bandits from audit, has he? His claim is that they make out like bandits from selling consulting services to audit clients.

  9. I was audited once.

    The auditor wanted my permission to send out confirmation letters to randomly picked clients for whom I had held trust monies. I was astonished that permission was required. I was astonished that the auditor would tell me who the clients were, as I could have nobbled them.

    I knew that one of the clients had moved. I told the auditor. He refused to send the letter to any address but the file address. Notwithstanding a different address on a newer file. Notwithstanding a different address in the telephone book.

    Auditors are insane and incompetent.

  10. Fred Z -

    Evidently you didn’t (and still don’t) understand what the auditor was testing (in part)… Here’s a hint: It wasn’t just the balance of the trust monies he was interested in. Here’s another hint: He was testing your file system and how you maintained it.

    Things aren’t going make sense when you don’t understand what you’re looking at.

  11. The reason audits do a poor job of detecting fraud is audits aren’t designed to detect fraud.

    ^^This. “Watchdog, not a bloodhound”. If you want to detect fraud get a forensic accountant.

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