Is our Dickie right here?

UK forensic accountant Richard Murphy says: \”The fundamental question is how accountants got away with changing rules of accountancy, which state they don\’t have to assess the valuation of assets underlying the assets on a balance sheet. How did they get away with changing the audit rules?\”

I can see two possible statements here.

1) That accountants, when doing an audit, do not trouble themselves to find out whether a Gilt in hte books at £101 is actually, on the Gilts market, valued at £101. If they\’re not doing that then indeed, that would be absurd.

2) That auditors should be looking at the Gilts market and deciding whether the market valuation of £101 is indeed a true and fair value. To insist that they should be doing that would also be absurd.

So it becomes, I guess, which is it that Ritchie thinks they ought to be doing and which is it that they actually do.

Given his comments on the Madoff fraud, I have the horrible feeling that he\’s trying to insist upon 2). He\’s said that those who audited feeder funds to Madoff should have checked to see whether Madoff was a fraud: but that, of course, was the function of the auditors to Madoff, not the auditors to anyone else.

8 thoughts on “Is our Dickie right here?”

  1. Let’s face it, any accountant good at doing 2) isn’t going to be an accountant for very long. As soon as he discovers his abilities he’ll be paving the way to an early and luxurious retirement by moving to a broking house or day trading or whatever.

  2. Several points:

    1) Dickie isn’t a trained forensic accountant, and from his own description of his professional experience, I doubt sincerely that he has much i the way of meaningful auditing experience. He certainly doesn’t have any in auditing publicly held companies.
    2) “Accountants” don’t set or change the rules of auditing. There are quasi-governmental organizations, whose composition includes accountants, that are charged with that responsibility. The setting and changing of auditing rules is public and are accomplished in a set protocol.
    3) At least in the USA, auditors most certainly do have to test valuations of assets on the balance sheet. I suspect it is no different in the UK.

    This is yet another example of Dickie’s remarkable level of ignorance regarding his chosen profession.

    Of course he’s picking #2. What he is arguing here is that auditors should ignore asset valuations arrived at in orderly, efficient markets and come up with one based on, well, whatever happens to strike the auditor as “right”. What is “right”? Well, that is entirely arbitrary and based upon the whim of Dickie at any particular moment.

    It is worth noting that Dickie never really does explain – at least on a professional level – just what he means by assessing valuations. Nor does he provide any meaningful outline of just how auditors are supposed to arrive at such an assessment. Thus, for other professional accountants, Dickie’s suggestion is profoundly meaningless.

  3. The article is a bunkum. Take this paragraph:

    ‘But others are less sure. The SEC last December pointed out that 31% of bank assets were reported using the fair value measure, rather than mark-to-market, as of first-quarter 2008. “Banks generally carried investment securities, trading assets, and derivatives at fair value.”‘

    Um. Mark to market accounting is a type fair value accounting! If the author had bothered to go so far as to read the report – hell even the executive summary would do – he’d realise that.


    Without getting too technical in the context of the report mark to market accounting is where adjustments to the price of securities and other financial instruments (i.e. their fair values) go through the income statement rather than through equity reserves. Generally outside of the US mark to market simply means fair value accounting of marketable financial instruments, whether it goes through the income statement or equity.

    As to what Dickie means, yes he does mean he wants to second guess market values at every turn.

    Basically if Cadbury’s bid price at year end (IFRS requires securities to be valued at bid (long) or ask (short) price rather than last trade price) is 30 pounds on the LSE, Dickie wants auditors to comprehensively review the accounts of Cadbury, apply some magical valuation methodology to convert Cadbury’s net assets (which will mostly be held at historical cost, not fair value) and then determine if 30 pounds is the right price.

  4. And just to confirm the International Auditing Standards have an entire standard dedicated to auditing fair value. IAS 545.

    The standard makes it abundantly clear that where there is a risk that the valuation of marketable securities is incorrect then the auditor needs to attained published price quotations. Paragraph 35 calls this the “best audit evidence of fair value”.

  5. I feel you might be being unfair to Dickie “man of action” Murphy on this occasion. Having read the whole of the article, the tone appears to be more one which focused on how certain elements of the profession (PWC,KPMG in particular) have come to influence the IASB and other rule making bodies. I doubt many would disagree that the influence of these firms, exercised for their own ends and for those of their clients, has become pervasive over the past decade, or so, and extends far wider than accounting rules. Whilst not being entirely sure what marks out a forensic accountant, as opposed to any other type of accountant, Emile Woolf is highly regarded and I cannot imagine he will be best pleased at being bracketed with Dickie.

  6. In the USA there is a specialized license for forensic accounting. I have no idea whether the UK has one.

    Given that Dickie’s experience is in small firms (and tax shops at that), I sincerely doubt he has any meaningful forensic accounting experience.

    Dickie has a habit of holding himself out as an “expert” in either auditing, tax, forensic accounting and economics when it suits his purpose.

    It is also worth noting regarding Cheesie’s first point that the GAAP application of mark-to-market is not “one size fits all”. There are substantial differences in how it is used, and that is based on the type of securities involved, as well as the specific classificiation of those securities. This is something Dickie seems to not know, and it undermines much of his argument.

  7. btw. I believe governments account for their bullion holdings by valuing them at the price the metal was bought. I certainly read somewhere that’s hw Uncle Sam declares the contents of Fort Knox in his annual accounts.

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