EY gets banned from new audit business in Germany • Hacker News Board

Re: EY gets banned from new audit business in Germany

#41

Post by bradleyjg » Sun, Apr 09, 2023, 2:38 PM UTC

angus-prune wrote: post #26

ck45 wrote: post #17

Earlier quoted context omitted.

It would be an interesting idea to make auditors fully accountable like bankruptcy advisors. I know, this is never going to happen.

The current problem is that the insentives are all wrong. It is the company being audited that gives the auditers the business. Its not in the interests of a dodgy company to appoint a good auditor, and its not actually in the auditors (short term) interest to uncover wrongdoing as it just means they'd lose a client. My proposal is that you require every company to have insurance to cover the risks, making the insure…

There was something like this with bonds pre 2008 but it didn’t work out like you suggest.

Rating agencies were, and are, paid by bond issuers are rated a bunch of synthetic real estate backed bonds as very safe. But then on top of that, certain of these bonds were insured—-notably by AIG. However, AIG just rubber stamped the ratings and ended up going bankrupt when the crisis hit.

The real mismatch of incentives is one layer deeper than your comment suggests. An insurance company CEO can do very well for himself underpricing insurance. The business grows as premiums roll in and he collects a bunch of bonuses. When the SHTF he could just resign and collect his golden parachute.

Re: EY gets banned from new audit business in Germany

#42

Post by lumost » Sun, Apr 09, 2023, 2:38 PM UTC

calderarrow wrote: post #37

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

Auditors have access to all the financials, but they only audit a statistically significant sample, because it would be incredibly expensive to audit every transaction. Fraud can be easily detected if one employee is committing it. Fraud is substantially harder to find if two employees are involved, specifically 2 employees involved in internal controls. For instance, if you have a policy that all checks paid over $1…

Curious, this seems like a good place to deploy AI tooling. If I’m involved in internal controls, I’ll know what the auditors look for.

If an AI can augment the auditors to find more suspicious transactions such as to companies with no employees, or conflicts of interest - I could probably find more fraud.

Re: EY gets banned from new audit business in Germany

#43

Post by hahla » Sun, Apr 09, 2023, 2:41 PM UTC

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

It’s hard to grasp how complex accounting can be for companies. EY is not auditing small businesses, these are large multinational companies and per audit guidelines they likely just audit random samples of accounts. It’s not as simple as let’s pull a listing of all bank accounts and make sure everything ties. The actual effectiveness of audits is a different conversation.

Re: EY gets banned from new audit business in Germany

#44

Post by calderarrow » Sun, Apr 09, 2023, 2:44 PM UTC

lumost wrote: post #42

calderarrow wrote: post #37

Earlier quoted context omitted.

Auditors have access to all the financials, but they only audit a statistically significant sample, because it would be incredibly expensive to audit every transaction. Fraud can be easily detected if one employee is committing it. Fraud is substantially harder to find if two employees are involved, specifically 2 employees involved in internal controls. For instance, if you have a policy that all checks paid over $1…

Curious, this seems like a good place to deploy AI tooling. If I’m involved in internal controls, I’ll know what the auditors look for. If an AI can augment the auditors to find more suspicious transactions such as to companies with no employees, or conflicts of interest - I could probably find more fraud.

I’m very excited to see how technology impacts financial reporting in the future. We’re rapidly approaching a point where every single transaction could be audited in real time with software, and the details of each transaction automatically scrutinized.

Re: EY gets banned from new audit business in Germany

#45

Post by mostlystatic » Sun, Apr 09, 2023, 2:45 PM UTC

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

Don't know much either, but I found this Money Stuff story interesting: https://www.bloomberg.com/opinion/articles/2023-01-04/privat...

Someone was CFO at two companies and the auditors only checked the year end balance against his falsified statements. So he transferred money from the other company temporarily to make them match.

"""To avoid detection, Morgenthau doctored African Gold’s monthly bank statements by, for example, deleting his unauthorized transactions and overstating the available account balance in any given month by as much as $1.19 million. [...]

Morgenthau knew that African Gold’s auditor would confirm directly with the bank the actual account balance as of December 31, 2021, as a part of its year-end audit. [...]

Morgenthau deposited more than half a million dollars of Strategic Metals’ funds into African Gold’s bank account on December 31, 2021, because he knew that African Gold’s auditor would confirm the account balance as of that date, in connection with African Gold’s year-end audit. """

https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1...

Re: EY gets banned from new audit business in Germany

#46

Post by electroly » Sun, Apr 09, 2023, 2:45 PM UTC

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

> Or can the numbers all add up but there's still fraud?

Yes, of course. Consider that you've set up a separate company and you intend to steal money from your employer. You've got a buddy in accounts payable that you're in cahoots with. You get set up as a vendor, you send invoices to the company, they pay them, and you never deliver anything. The company's numbers add up. They pay vendors for services all the time. Whether the vendors are real, the contracts are legitimate, and the expected services were provided isn't on the account statements.

Re: EY gets banned from new audit business in Germany

#47

Post by noisy_boy » Sun, Apr 09, 2023, 2:48 PM UTC

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

Just because you have access to the entire source code of Linux kernel, doesn't mean you'll be able to find all the bugs in it. Sometimes the numbers may add-up but it is the patterns which may be suspicious. Automation like sanity checks/pattern matching etc (+ ML now a days) would help a great deal but even then it is not a guarantee.

Re: EY gets banned from new audit business in Germany

#48

Post by sega_sai » Sun, Apr 09, 2023, 2:51 PM UTC

And then there is also this https://www.ft.com/content/5e6f15ce-9eda-4b04-883d-686617020... -- cheating on ethics exams by EY. It's all very funny that the whole system is built on assumption where the supposedly knowledgeable, ethical experts audit companies, but in reality, it nowhere close to that.

Re: EY gets banned from new audit business in Germany

#49

Post by fnordpiglet » Sun, Apr 09, 2023, 2:51 PM UTC

cjbgkagh wrote: post #19

fnordpiglet wrote: post #11

Earlier quoted context omitted.

All audits should be disclosed in giant black letter on the front “PAID FOR BY THE AUDITED COMPANY” The conflict of interest in external audit is absurd. It’s similar to securities rated rating agencies paid to rate the instruments by the issuing company.

The audited company often buys consulting services from the auditors which in effect is an extra incentive on top of the moneys paid for the auditing service. The mechanism that allows this is the ‘Chinese wall’ but that is a total joke. What really need to happen is to separate out consulting from auditing. That’s not going to happen though as there is just so much money is consulting.

What should happen is audit becomes a public trust financed by a tax on all public companies.

Re: EY gets banned from new audit business in Germany

#50

Post by someweirdperson » Sun, Apr 09, 2023, 2:52 PM UTC

electroly wrote: post #46

crazygringo wrote: post #31

> Auditors insist that their services cannot be treated as a guarantee that accounts are truthful, and note that sophisticated frauds are by their nature difficult to spot. As someone who knows nothing about this area, I don't understand why audits won't always detect fraud. I would naively assume that auditors have access to all financial accounts and records of cash flows and they make sure they all add up and are…

> Or can the numbers all add up but there's still fraud? Yes, of course. Consider that you've set up a separate company and you intend to steal money from your employer. You've got a buddy in accounts payable that you're in cahoots with. You get set up as a vendor, you send invoices to the company, they pay them, and you never deliver anything. The company's numbers add up. They pay vendors for services all the time.…

Wirecard was the other way around. Send invoices to companies that don't exist, and transfer the earnings to a bank account that does not exist either. Don't forget to pay taxes of couse. Get bonus payments and earn nicely on rising stock prices.