It is annual report season and shareholders have received or are receiving their Proxy statements. One of the understandable pieces of information in the Proxy material is usually the amount of money paid to the Auditing firm. These auditing fees, in the case of many of our public companies, are extraordinarily high in dollar terms even if not high relative to revenue. There are two important questions, however. The first is a question of the degree of protection received by the stockholders from the audit and the second is the understandability of the financial figures produced in the annual report.

In the wake of the financial meltdown, stockholders should wonder why the auditors did not discover the questionable procedures and activities of financial institutions involved in the subprime mortgage activity. If the auditors tested transactions, shouldn’t they have determined that loose underwriting procedures (no doc loans) and teaser interest rates added a substantial element of risk? One must wonder why, with the billions involved in subprime mortgages that just didn’t happen. Shouldn’t an audit of Bank of America, Merrill Lynch, Bear Stearns, and Lehman, Citicorp etc. been able to connect the dots and caution stockholders about the inherent risks their companies were taking? Are there other practices going on in our public companies that undermine the future of the company at the expense of a quick profit from a risky activity? If audits are not testing transactions and identifying situations that increase risk, then what is the protection received by the shareholders? It seems that the audited reports are designed to test compliance with accounting standards and applicable laws rather than provide the shareholders with understandable, useful information.

The Annual Reports themselves, when they arrive, are three months out of date and present financials in a completely obscured manner. All of the important information is included in footnotes to the financial statements where only a professional would find and understand the information. Wouldn’t it be great if the Accountants were required to produce a summary of salient footnotes with a cogent explanation as to what the information means to the shareholder? The financial details in annual reports seems to be produced for accountants and not laymen and it is left to stock analysts to pour through the reports in order to decide the relative merits of the companies. Isn’t it time for shareholders to lobby for easier to read and understand financial information designed for the typical layman and not only for the accountants and analysts?

There is no question that governmental regulation has added a great burden to corporate accounting. Perhaps it is time to revisit the regulations impacting auditing and re-examine the cost-benefit relationships again.

Finally, it is amusing that public corporations ask shareholders to vote on the Auditor. Why? Has it ever happened that a shareholder vote resulted in dumping an audit firm? That is just a charade to let the shareholders think they have a say in the governance of the company. It is just like the shareholder sponsored motions before an annual meeting. Has it ever happened that the Company recommends a “yes” vote on a shareholder sponsored motion?

There is really no place for shareholders to express their views on corporate management or accounting in any meaningful way. Any view to the contrary is a joke. If shareholders had a say would they choose the format of financial presentations used by the accountants? The Accountants are just another high cost of doing business that is made to appear approved by shareholders.

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