Introduction

Hardly any year has passed in recent memory without shrill breaking news about a corporate collapse scandal.  In all cases the failures that occurred before the auditor arrived would hurriedly be framed as audit failure even before facts become known, because society misunderstands audit as an absolute gatekeeper that should prevent everything untoward. But upon closer examination, whenever anyone cared enough to look deeply, we find that entities hardly implode from one failed audit event.  But the problem is that this misunderstanding has become negatively formative to society’s perception of accounting, audit and auditors.

Audit is Trustworthy! This time-honored declaration is not audit failure denialism. Rather, it is an edifying pivotal reminder to society to be gracious and grateful in considering and valorizing the role of audit in its civilization.

From the shrieking debacle of the Savings and Loans industry in the 1980s to the deplorable collapse of the iconic Barings Bank in 1995, to the deserving demise of Enron in 2001, and most recently Wirecard 2020, SVB and Tingo in 2023, the failures were the last stages of insidious pathologies that started many years before and which had nothing to do with audit primarily.  In most cases, according to Pav Gill, the Wirecard whistleblower, the insidious pathologies are “powerfully protected” for years in such a way that no outsider can detect them given the furtive low visibility of the schemes. 

Audit failure needs to be properly characterized if we must make progress with minimizing it.  Today it is unfairly framed as if auditors cause the failures.  They don’t.  Auditors may fail to notice that a company has been eaten by its own insidious rot, particularly when executives decidedly lie and make predatory false representations to auditors.  That should not make auditors responsible for the failures that they did not cause; the auditor did not provoke the failure.  Governing and controlling the organization is the responsibility of its governance officers.  For example, an article in the Atlantic (Friedman, 2010)[1] asked: Should auditors shoulder blame for the financial crisis?  The writer tells us that: 

The “New York Attorney General Andrew Cuomo filed civil-fraud charges against the country’s second-largest accounting firm, Ernst & Young, in the first major legal action arising from the collapse of Lehman Brothers two years ago. The lawsuit accuses Ernst & Young of approving Lehman’s use of an accounting trick known as Repo 105, which enabled the investment bank to move assets off its balance sheet temporarily and thereby conceal its financial distress from investors.”

Reports like this, that the auditors approved of Lehman’s use of tricky accounting, misinform the doxastic states of society.  The truth, and state of praxis, is that auditors do not approve accounting policies for their clients.  Never.  The Board and management of the organizations adopt the policies they want; the auditors check that the numbers are consistent with the policies and report any discrepancies.  The notion that it is audit that failed when organizations collapse due to insidious fraud is wrong; it is an invidious misconception. Suffused with such formative subreption, society readily, with invidious prejudgment, scapegoat auditors for the failings and inscrutable finaglings of corporate executives.

No one wants to bear the blame for the financial crisis, but we all know that it could not be without cause.  Treating the auditor as an absolute gatekeeper in the circumstance is an egregious misnomer.  Audit is an information gatekeeper after the facts, not governance or operational gatekeeper and so should not be held responsible for governance, management and operational failures that lead to financial scandals.  Unfortunately, audit has become an expedient scapegoat for the financial scandals of the past few decades.

Not unbeknownst to the public, accounting has been brought low, invidiously, by financial scandals; audit has had more than its own share of blame, ridicule and contempt for corporate failures that are invidiously foisted on it by an uncritical culture of blame and shame and unexamined media expediencies.  Having a proper perspective of recursive financial scandals will be more productive in society’s quest for solutions.

Depending on the root causes, the failure pathologies might relate to governance and furtive management misdeeds that have serious deviogenic ramifications, the sorts that audit is not designed to prevent or detect.  For example, surreption exercised by collusion and furtive low visibility conflicts of interest embedded in a hidden organization structure operating from behind the scenes are difficult to detect by any audit due to the insidious furtiveness. There is nothing in traditional audit that prepares auditors to detect “powerfully protected” management collusions and hidden organization charts. Fraud perpetrated in these nefarious cloisters are covered with all the proper process documentation that give them aura of legitimacy, backed up by the eloquent representations of the Board and management to the auditor affirming the validity of related transactions and assets, but all of which turn out to be pretentious, particularly when psychopaths in suits, or deviogenic éminences grises (hidden organization charts), are embedded deep in the blindside structures of the organization beyond the sight of auditors and regulators.  Their surreptions can only be detected by serendipity, not by any canons or praxis of audit or regulatory procedures.

The Lehman Brothers’ mentioned above shows the readiness of society to blame auditors for the surreptions of governance and management officers of organizations.  According to the Bankruptcy Examiner’s Report:

“the examiner did find that in pursuing its aggressive growth strategy, Lehman’s management chose to disregard or overrule the firm’s risk controls on a regular basis.”^[2] 

But the public and regulators blamed the auditors despite this fact.  Audit is based on the understanding that officers of the company are competent and trustworthy and bring these qualities to their relationship with auditors.  This mutualism is proclaimed by  Justice Lopes (1896)[3] in the enduring landmark case of re Kingston Cotton Mill, stated clearly that thus:

“An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. He is justified in believing “tried servants” of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care.”

Successful audit requires symmetric integrity, namely, the integrity of the auditee and the auditor.  Experts who analyzed the Lehman case concluded that:

“under standard accounting rules, ordinary repo transactions are considered loans, and the assets remain on the firm’s books … But Lehman found a way around the negotiations so it could count the transaction as a sale that removed the assets from its books, often just before the end of the quarterly financial reporting period, according to the Valukas report. The move temporarily made the firm’s debt levels appear lower than they really were. About $39 billion was removed from the balance sheet at the end of the fourth quarter of 2007, $49 billion at the end of the first quarter of 2008 and $50 billion at the end of the next quarter, according to the report,” as reported by Knowledge at Wharton (2010).^[4]

When trusted and “tried officers” of a company betrayed the trust and “found a way around” rules to exercise fraud, they would not tell the auditor, and being insidious, the auditor would not detect it in a normal audit since by tradition and legal precedence, an audit is not an investigation, and nothing in the history of audit prepares them to decode criminal’s arcane argots.  This is reminiscent of Barings Bank where auditors could not understand the arcaneness of derivatives and so were easily deceived by the “trusted officers” of the bank, but again, auditors were blamed.  At Lehman Brothers the way they “found around” the rules were not communicated to Ernst & Young in plain English.  The Dark Triad in Boardrooms and management have mastered arcane argots they use for evading rules, then they present auditors with carefully curated information that meet audit evidence standards, but which actively misdirect auditors.  It seems to me that the world applies differential standards when dealing with accountants and auditors, resulting in asymmetric judgment of responsibility for the financial crisis.

To be sure, audits do fail, even as Bazerman, Loewenstein & Moore (2002)^[5] noted, “good accountants do bad audits,” sometimes due to sheer idiocy and incompetence, or instigated by outright villainy, but all that without diminishing the “significance” and utility of audit.   I use the word significance in connection with audit decidedly to refer to “the importance of something [audit], especially when this has an effect on what happens in the future,” (Oxford Learners’ Dictionary, 2024).^[6]  Audit produces the ballast of trust on which everything in our civilization hangs, so it has definite predictive effect on what happens in the future.  An important role of accounting is maintaining the significance of audit as a bearer of legitimacy which in turn supports the markets, nation building and civilization by reliably producing the ballast of trust and cooperation on which they thrive.

With such profound “significance,” the demonization of audit as untrustworthy is, regrettably, unwarranted; it ignores the historic magisterial role of accounting in our civilization.  Trust needs audit. Audit makes trust among strangers possible, without its agency diverse groups of people cannot function with conative cooperative cohesion.  According to Whitney (1996), without the cooperation enabled by trust “we would be living in caves and hunting with spears for our daily subsistence.”  Trust, the hallowed promise of accounting and product of audit, is overshadowed by unexamined overdramatization, and catastrophizing of the ostensible audit failures that ignore the root causes.  In the distraughting angst of financial crisis following corporate failures, society fails to appropriately valorize accounting and audit, instead the profound sublime affordances of audit are diminished as credence goods. Accounting, audit, and auditors get besmirched, unfairly, with no one speaking out on their behalf.  These putative failures may have bruised and chastened audit, but they have not broken it.  Audit is perdurable. Audit is Trustwrothy! – because every dizzying audit failure evokes fulgent accounting and auditing wisdom and novel rules that address the identified failure pathologies, literally making auditing antifragile, ready to deal with future problems though not necessarily prospectively.

Accounting/auditing, a realized confident profession, now needs emergent confident advocacy to make visible their historic contributions in society and to correct the doxastic wrong – the incorrect belief – that suggests that audit is untrustworthy.  In a fair world, accounting, audit, and auditors would have received serial Nobel prizes for having “conferred the greatest benefit on mankind” and our civilization.  Unfortunately, accounting, audit and auditors are not captured in the imagination of society enough to inspire deserved acclamation.

It will become a civilizational failure if society does not properly determine the causes of corporate failures and place the blames where they belong.  The reason is that the unforced error of baselessly foisting failures on auditors overbroadly will misdirect remedial policies and resources and place society into a form of “vulnerable system syndrome” state (Reason, 2013)[7] in which the most visible players (in this case auditors) are wrongly blamed while denying the existence of insidious pathologies, hence, misleading society to a blinkered pursuit of futile remedies. 

This misdirection is an existential threat seen at least once in the history of Western civilization.  According to Callie Williamson (2005),[8] the Roman empire resorted to making an increasing number of laws, some of which were not appropriately directed at the root causes of the problems at hand.  The elaborate palimpsest of laws did not save the empire from collapse because problems persevered in the face of increasing laws and rules of which some fell into desuetude at the time.  According to Williamson, the empire collapsed on top of an inordinate number of redundant laws and rules.  A lot of accounting and auditing regulations have been made to deal with auditing aspects of the corporate failure problem.  Society needs to look in the right direction and make rules and regulations that directly deal with the root causes of corporate failures on the client side.     

In studied, substantiated concatenation of incontrovertible reasoning, therefore, we can only conclude that, despite its imperfections, audit is trustworthy.  This is a fact that is compellingly evident in our civilization.  Therefore, accounting, accountants, audit and auditors deserve confident advocacy to shift the incorrect belief that audit is untrustworthy to a belief in the truth that audit is trustworthy. Having parlayed the ballast of trust built by audit, our confident society should readily, inspired by evidence in its history, acknowledge, admire, cite and dignify accounting and accountants, audit and auditors, for the profound perdurable role that they have played in the ontogeny of modern civilization with their distinctive affordances.  But what is interesting to note is the fact that despite the criticisms, we have not experienced audit hesitancy in the market.  Instead, we are seeing increase in demand for audit services and introduction of auditing in many aspects of society, such as General Manufacturing Practice quality audit for manufacturers and various regulatory compliance audits.  Auditing has become so prevalent that Power (2013)[9] has described modern society as an “audit society” because there has been an “audit explosion” in human affairs.  It reflects society’s appetite for and dependence on the distinctive benefits that audit confers.  Therefore, it is arational not to acclaim audit exceptionalism.    

Audit is Trustworthy

The inviolable, equable accounting promise is trust; it is rendered by audit.  Without trusted audit and the trust that it delivers, the markets cannot function as they do today with strong relative harmony.  The role of audit-induced trust in society and the entire civilization is by now irrefutable – everywhere and every piece of evidence you look at supports the unassailable conclusion that civilization progressed when trust became sufficiently high in society.  History shows that audit produced that high trust.  It is evident that low trust societies wallow in the slimy mire of underdevelopment while high trust societies are known to accomplish productive capital formation and utilization more effectively, attesting to the irreplaceability of accounting and audit in modern civilization.  Writing about the consistency of this evidence, Betancourt (2022)[10] quoted Robert J. Shiller as having said that: 

“trust is the glue that binds civilization together. Without trust, there can be no commerce, no social order, and no peace. Trust is the lubricant that makes it possible for disparate individuals, groups, and nations to cooperate with one another.”  

In an article in the CPA Journal, Craig-Bourdin (2020)^[11] referred to the assertion of experts that accountants are in an ideal position to build trust in society, quoting Stephen Covey who said that:

“our whole world runs on trust. If you take it away, everything slows down or even grinds to a halt, … Accountants play a vital role in enabling trust in companies, markets, and societies.”

The Nobel laureate Kenneth Arrow described the economics of trust thus:

“Trust is an important lubricant of a social system: It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word.”

Drawing on the history of civilizations in which accounting is not just the cornerstone but also a facilitator, Soll (2014)[12] asserted its exceptionalism thus:

“whether building a road or fighting a war, leaders from ancient Mesopotamia to the present have relied on financial accounting to track their state’s assets and guide its policies … From renaissance Italy, the Spanish Empire, and Louis XIV’s France to the Dutch Republic, the British Empire and the early United States, effective accounting and political accountability have made the difference between a society’s rise and fall.  Over and over again, good accounting practices have produced the levels of trust necessary to found stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest and worse. … What is remarkable is that the basic lessons of medieval Italian accounting – that it is essential to wealth and political stability … – are still as pertinent today as they were seven hundred years ago.”

In modern society, everything literally hangs on trust. If trust fails everything that hangs on it certainly fails too.  So, one reliable way, and perhaps the best way, in my opinion, to determine the existence and measure of trust, is to contrastively look at those things that hang onto it.  If they are standing and prospering, it means that trust is sufficiently effective.  The march of modern civilization has met in its path a barrage of vagaries and vicissitudes buffeting the foliage of progress and sending economies flailing in troubled times and propelled in good times.  In all the difficult times, one institution that remained a perdurable steward of society is accounting/audit, providing a steadying influence in times of crisis, helping to restore the journey of civilization toward progress.  This it did by providing an invigorating and corrective ballast of trust that inspires and reinvigorates society to rally to recovery, growth, and prosperity.  As Power (1997)^[13] noted,

“audit became a leading bearer of legitimacy … because other sources of legitimacy such as community and state, are declining in influence.”

Power here evinced audit exceptionalism, namely, audit as the linchpin, with affordances so good society cannot ignore it – nothing in our civilization can take its place.  Audit fueled the accretion of trust that energized and torqued the ascent of civilization and continues to nourish it.

To be sure, accounting, audit and auditors are incurably imperfect. However, so far, our civilization has survived and thrived and continues to prosper, though with imperfection and occasional obligatory distress, by exploiting the affordances of audit.  The residual imperfection of accountants and auditors did not dilute the utility of audit or hinder human progress as we know it today.  Therefore, audit, “the bearer of legitimacy” and the producer of the ballast of trust on which everything in our civilization hangs, is trustworthy, it does not need to be perfect.  It is the ballast of trust from audit that makes civilization “antifriagile, … beyond resilience or robustness,” because when it survives chaos and crisis it gets better, not just restoring to status quo (Taleb, 2012).[14] If audit was not trustworthy, our civilization would have been slow-walked into slippery entropy.  Facts matter – the ascent of modern civilization is the greatest testimony to the trustworthiness of audit; if audit failed, our civilization would have been ruined in an irreversible entropy. Yes, accounting and audit did all this despite all their imperfections.

I feel confident that resilient survivability, or antifragility, should be the touchstone of trustworthiness of audit in society.  If audit produces constant resilient trust that powers the cycle of progress to survive interruptions, restoring the march of civilization, that is the definition of reliability.  If audit and trust were inconstant, civilization would stagnate.  Look at the world today, contemporary and emerging, to determine the cultural and institutional effectuating influences of trust in our civilization.  You will see accounting and audit at all the inflection points exerting corrective, stabilizing influence.  The truth is that accounting and audit had long achieved enduring exceptionalism in society. They are irreplaceable.

In concatenation of reasoning, therefore, AUDIT IS TRUSTWORTHY!

Kudos to Audit, my beloved profession.

Accounting and Auditing have historically nurtured civilizations, a stewardship that calls for high trust.  Trust engenders cooperation which combines with it to engender prosperity and development.  Audit imbues trust into capital formation relationships.  The ascent of our civilization has trustworthy audit written all over it.  Without trust it would be impossible to achieve anything of substantial value like the civilization that we all cherish but take for granted. 

In a brilliant paper on the role of auditors, two leading lights in audit in our time (Lenz & Jeppesen, 2022)[15] describe auditors as “gardeners of governance, it is our nature to nurture.” That gardener metaphor is quite profoundly apt, because that is what accounting/auditing has done in millennia of human civilization, nurturing high trust societies that have developed crescively, and uplifted our prosperity. But modern society, distraught by the angst of recent corporate failures, financial crisis and the vagaries of the markets, does not appropriately valorize this legendary role of audit, and so no one appreciates and acclaims the work that auditors do in our society.  It makes more news to talk about the few failures we experience in auditing.  I say “few” decidedly because given the size of the global economy, audit failure is relatively insignificant compared to global progressive prosperity that trust drives. 

The underappreciation of accounting and audit calls for concerted confident advocacy for the profession by accountants and auditors to explicate to society and edify it with the fact of the hallowed role of audit in our civilization and to acclaim accountants and auditors whose professionalism embody the affordances of accounting and audit.  They are Nobel prize worthy.  That audit is trustworthy should be a common refrain in our confident society.  Accountants and auditors should, therefore, not reproach ourselves with being timorous in defending our profession; we should not be cowered by failures.  We should courageously avow the mantra, Audit is Trustworthy!  It should be a refutative counterspeech to the objectionable, regrettable subreptitious assertion that audit is untrustworthy, contrary to the clear evidence in our civilization.  The overwhelming evidence that audit is trustworthy could not be so disregardable in the imagination of a civilized society. The insistence that the world is in trouble because audit is untrustworthy is a dysfunctional belief that needs to be corrected. The rational compelling conclusion is that the history of civilization bears out the truth that, imperfect though, AUDIT IS TRUSTWORTHY! 

NEXT: The Role of Accounting in Society

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REFERENCE:

[1] Friedman, U. (2010, December 23). Should auditors shoulder blame for the financial crisis? The Atlantic. https://www.theatlantic.com/business/archive/2010/12/should-auditors-shoulder-blame-for-the-financial-crisis/342901/

[2] Valukas, A. R. (2010, March 11). Report of Anton R. Valukas, Examiner: In re LEHMAN BROTHERS HOLDINGS INC., et el, Volume 1, United States Bankruptcy Court, Southern District of New York, https://www.jenner.com/a/web/fhT1LdvJNo4USaKZcDPSNw/7BZYSc/volume-1.pdf

[3] In re Kingston Cotton Mill Company (No. 2)” (1896) 2 Ch 279

[4] Knowledge at Wharton, K. (2010, March 31). Lehman’s demise and Repo 105: No Accounting for Deception. https://knowledge.wharton.upenn.edu/article/lehmans-demise-and-repo-105-no-accounting-for-deception/#:~:text=Wharton%20finance%20professor%20professor%20Franklin,for%20tougher%20restrictions%20on%20borrowing.

[5] Bazerman, M. H., Loewenstein, G., & Moore, D. A. (2014, October 31). Why good accountants do bad audits. Harvard Business Review, November 2002.

[6] Oxford Advanced Learners’ Dictionary. (2024b). Significance, noun – definition. Oxford Advanced Learner’s Dictionary at Oxfordlearnersdictionaries.com. https://www.oxfordlearnersdictionaries.com/definition/english/significance/

[7] Reason, J. T. (2013). A life in error: From little slips to big disasters. Ashgate.

[8] Williamson, C. (2005). The laws of the roman people: Public law in the expansion and decline of the Roman Republic. University of Michigan Press.

[9] Power, M. (2013). The Audit Society: Rituals of Verification. Oxford University Press.

[10] Betancourt, A. (2022, January 17). We are destroying the foundation for civilization, and we need to rebuild it! Medium. https://medium.com/bottomline-conversations/we-are-destroying-the-foundation-for-civilization-and-we-need-to-rebuild-it-551989e6d7b7

[11] Craig-Bourdin, M. (2020, September 10). Accountants in ideal position to build trust in society, expert says. CPA Canada. https://www.cpacanada.ca/news/accounting/the-profession/2020-09-10-stephen-covey-the-one

[12] Soll, J. (2014). The Reckoning: Financial Accountability and the Rise and Fall of Nations. Basic Books: New York, NY

[13] Power, M. (2013). The Audit Society: Rituals of Verification. Oxford University Press.

[14] Taleb, N. (2012). Antifragile: Things that gain from disorder. Random House.

[15] Lenz, R. and Jeppesen, K. K. (2022), The Future of Internal Auditing: Gardener of Governance, EDPACS, 66:5, 1-21 https://www.tandfonline.com/doi/full/10.1080/07366981.2022.2036314