A common practice of corporate reporting is to use the auditors as the company’s ad hoc financial reporting advisor. The practice is prevalent in small & mid cap organizations because of staffing and budget constraints.

The SEC’s independence rules are clear on the topic:

An accountant is not independent if, at any point during the audit and professional engagement period, the accountant…performs any decision-making, supervisory, or ongoing monitoring function for the audit client.

The auditor independence standard is one of the genuine cornerstones for the protection of investors. The underlying idea being - it’s not possible to conduct an independent and objective audit of financial information if you were involved in, or responsible for, preparing the information that you audit.

The audit firms generally understand these bright lines. It’s the company that routinely asks the auditors to provide steering currents on their reporting issues. From the auditors’ point of view, it would be bad business to decline the invitation. A common result is to offer the client suggestions without definitive structure and advise further client investigation down the suggested path, with an implied understanding that the result would be agreeable to the auditors.

From the enterprise’s point of view, using the auditors as default reporting counsel is a faulty strategy. The auditors are the shareholder’s advocate. They work for the shareholder, under regulatory mandate, to assure the reliability of financial statements. This relationship is essential to the success and root credibility of world markets. However, it inherently limits the value of the advice that an auditor can provide to the enterprise.

Aside from its role as the shareholder’s advocate, the auditors’ views will be principally shaped by variables such as:

  • their perceived risk exposure, defined primarily by their firm’s national office
  • their national office’s interpretive policies re: GAAP
  • the audit industry’s own staff level constraints and
  • the omnipotent principal of conservatism

This risk & resource architecture leaves management’s views 3rd, after the shareholder and the audit firm. It emphasizes that management’s best strategy is to thoroughly build out its own representations first. Then allow the auditors to kick the tires when the working model is established. This assures the auditor’s role and value in the marketplace is anchored in attestation.

GAAP is a language for reporting financial information. Management has the principal rights of expression with it and the auditor warrants the accuracy and completeness of management’s use of the language. They assure users of the financials that things are as management says.