Third party auditing and reporting of financial statements and conditions is crucial to the operation of capital markets and commerce.

1. Audit Accounting
Professor John Cousins
jjcousins@gmail.com

2. What is Auditing
• Accounting
• Third Party review
• Testing
• Meets standards
• Good accounting
principals
• Financial Statements and
Presentation
• No:
– Fraud
– Latent liabilities

3. Audit
The general definition of an audit is an evaluation of a person,
organization, system, process, enterprise, project or product. The
term most commonly refers to audits in accounting, internal
auditing, and government auditing, but similar concepts also exist
in project management, quality management, water management,
and energy conservation.
Auditing is defined as a systematic and independent examination of
data, statements, records, operations and performances (financial
or otherwise) of an enterprise for a stated purpose. In any auditing
the auditor perceives and recognizes the propositions before him
for examination, collects evidence, evaluates the same and on this
basis formulates his judgment which is communicated through his
audit report.

4. What is the purpose
• Insure accounting is
accurate:
• No:
– mistakes
– Fraud
– Omissions
• GAAP
• FASB
• Latent liabilities:
– Lawyers
– Banks

5. Public Company Reporting
• Financial Statements
• Notes
• Clear and transparent
• Represent an accurate
picture of the
enterprise
• So intelligent investors
can make decisions
relative to ownership of
stock

6. SEC
• Their job is to police
markets and enforce
regulatory standards to
ensure that investors
have confidence and trust
in the security markets.
• Auditing standards and
practices are
fundamental to
maintaining fair and
transparent markets.

7. Historical Context

8. Stock Market
• Foundation of
Capitalism
• Concentrate capital and
focus it on projects
• Greed overcomes Fear
with promise of returns
• Risk
• Ticker Tape
• Railroad stocks
• Rumors move stocks

9. Liquidity and Speculation

10. Crash!
• 1929
• Loss of Value
• Loss of investor
confidence
• Money evaporated out
of markets
• Great Depression
• Political instability
• Worldwide crisis

11. Great Depression
• Capitalism Flawed
• Communism?
• Socialism?
• National Socialism?

12. Securities and Exchange Commission
• Regulate and oversee
the stock market
• First Chairman: Joseph
P. Kennedy
• Appointed because he
was a nefarious stock
manipulator: he knew
all the tricks of the
trade
• Brilliant move by FDR
• 1933 & 1934

13. SEC purpose
• Transparency of listed
company operations
• Regain investor
confidence
• Concern that Markets
were fixed and rigged
• Importance for capital
markets and investment
and economic growth

14. Graham and Dodd
• Stock valuation based on
business fundamentals
• 1934
• Security Analysis stands for the
proposition that a
professionally-trained investor
can determine the intrinsic
value of a company from a full
financial analysis of the
corporation, make purchases
in stocks when the market
price is selling below its value,
and earn a satisfactory return
• Review 10Ks and reporting

15. Post War Boom
• 1950s boom in public
companies
• Stock Market rise
• 60s Go Go Years
• Economic Expansion

16. Crashes and Regulation
• 1973 Oil Crisis
• 1974 Stock Market
Crash
• Recession
• S&L Crisis late 1980s

17. Tension
• Capital markets
• Companies and
Valuation
• Regulation
• Accounting and
Auditing
• Competing agendas and
conflicts of interest

18. Glass-Steagall
• Separate Investment
Banking from Commercial
Banking
• Restricted affiliations
between commercial
banks and securities firms
• Why?
• Removal of Regulation
• Danger: systemic risk
• Moral Hazard

19. Moral Hazard
• a situation where a
party will have a
tendency to take risks
because the costs that
could incur will not be
felt by the party taking
the risk

20. Dot Com Boom
• Monitization of
Business Models
• Growth
• Earnings
• Bubble
• Bubble burst and
exposed problems

21. Enron and Arthur Andersen
• Auditing and Consulting
• FASB
• Money and clients
• Conflict of interest
• CFO: jail
• Jeff Skilling CEO: jail
• Chairman Ken Olson died
• AA convicted shredding
documents related to Enron
audit
• AA disbanded; bankruptcy

22. SOX
• Sarbanes Oxley
• Reaction to Enron,
WorldComm
• New Audit standards
• New audit and
accounting regulatory
board (no more FASB
self regulation)
• More rigorous
• Costs of being public

23. CFO and CEO
• Requirements to sign
financial statements
• Arms length
relationships with
auditors
• Why?
• 10K and 10Q reporting

24. 10Ks and 10Qs
• SEC.gov
• Financial Statements
• Notes
• Reporting

25. The Great Recession
• Causes
• Derivatives
– Speculation
• Rating Agencies
• AAA rating to securitized
subprime mortgage
portfolios
• Systemic problems
• Regulators behind curve
– Best brains chase $
• Investor confidence
challenged

26. Auditing
• Foundational to Free
Market Capitalism
• Provides investor
confidence in:
– standardization,
accuracy of financial
reporting
– absence of fraud and
misrepresentation