If you are a public accounting firm, you are in the business of signing your name to a piece of paper saying “this company’s financial statements are basically true,” and charging for it. Before signing your name, you will do your best to confirm that the financial statements are true, but there is always a risk that you’re wrong. If you are wrong you might get sued or fined; also, though, if you are wrong too often your signature will lose its value and people will stop paying you for it. Your high-level goal is to (1) minimize that risk while (2) maximizing your revenue. Broadly speaking, you minimize risk by being conservative, by only auditing the statements of simple trustworthy companies in stable industries, and you maximize revenue by being aggressive, by auditing the statements of companies in fast-growing industries and by being, uh, customer-friendly about your audits.
The tensions here are all very obvious and hard, but sometimes there are easy calls. Like if you got into aggressively auditing statements of companies in a complicated and risky industry because you were betting on its rapid growth, and then people lose confidence in the finances of companies in that industry and it starts shrinking, then (1) the risk of auditing that industry has gone way up and (2) the potential revenue has gone way down. Why bother?
‘Enforcement 40’ for 2020
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