Why The American Audit Checks And Balances Fail?

The generally accepted accounting standards adopted in North America are too cumbersome and tend to emphasize accounting skills, which is easy for managers to manipulate artificially. This provides a "fertile ground" for us audit checks and balances in the first place.

The United States has always been complacent with its financial system. Under the American financial system, independent accounting firms, standard accounting standards, securities analysts' research, financial market supervision, anti fraud and insider trading laws constitute a complete system of market checks and balances. But from the Enron scandal to the subprime mortgage crisis, it shows that the US checks and balances system has serious defects in almost every link, from the basic principles, the specific provisions to the practice of the management system, which is exposed in the auditing link.

In the auditing stage, the failure of the US checks and balances system, the basic defects of American accounting standards and its legal principles can not be blamed. Almost all economic powers outside North America adopt international accounting standards or strive to approach them, while generally accepted accounting principles are adopted in North America. Generally speaking, the international accounting standards are more stringent than the generally accepted accounting standards. From the perspective of "principles", international accounting standards require accountants to ensure that the financial statements they prepare can reflect the real financial situation of the companies concerned. In contrast, generally accepted accounting standards are similar to the laws of the United States as a "regulations based system", which is too cumbersome and biased towards accounting skills, making it easier for managers to manipulate artificially, prepare misleading financial reports and seek personal interests. In this crisis, it is not a small number of people who deliberately use accounting standards to fabricate fraudulent practices. Lehman brothers was trapped in the subprime mortgage crisis in 2007, but its first financial quarterly report released in March 18, 2008 still reported a profit of $489 million, much higher than the market's general expectations. On the day of earnings announcement, Lehman's share price jumped 46%, reversing the two consecutive day's stock price drop of 30%. In fact, most of Lehman's book profits come from the "model based valuation" method of accounting standards, that is, in order to whitewash the balance sheet, the accounting standard allows Lehman to adjust his valuation model until he reaches his satisfactory number. In this earnings report, Lehman has only 200 million dollars for its $6 billion 500 million debt guarantee (CDO). In fact, about 25% of the S & P rating in April has fallen to BB+ or lower. In the end, this part of CDO is basically worthless.

Although the US Accounting Standards Committee (FASB) will make more rules to make up for the loopholes, in the regulatory and anti regulatory "cat and mouse game", the fundamental flaw of the basic principles of American accounting standards and legal system determines that regulators will always be left behind.

In terms of specific terms, compared with international accounting standards, GAAP has raised the threshold of some key information disclosure, and its consequences have been exposed in this subprime crisis. During the crisis, the losses of the Western giant commercial banks and investment banks came from the so-called special purpose entities (SPV, also known as "off balance entities" and "variable interest entities") that accommodated the structural investment vehicles (SIVs), such as the 6 structural investment vehicles rescued by Citigroup, which amounted to US $49 billion, and the two structured investment vehicles of HSBC were 45 billion US dollars. Practice has proved that the fair value of special purpose assets is greatly reduced, and the initiating banks often need to bear more than half of the losses. Therefore, the special purpose entities should be incorporated into the balance sheet. The international accounting standards and generally accepted accounting standards require that the balance sheet be consolidated when holding the majority of the anticipated risks and interests under the holding situation or the initiating entity. However, the former defines the definition of "holding" effectively (the proportion of shares can be less than 50%), and the latter defines the shareholding by more than 50%.

The basic principles and provisions have already existed defects that can not be ignored, and the defects in management system and practice are more prominent. In a series of accounting fraud scandals triggered by Enron incident in the past few years, independent accounting firms have acted in a way that helped enterprises to cheat, resulting in the disintegration of Andersen. The key for accounting firms to collaborate with enterprises is the conflict of interests and the "mercy" in the punishment of government departments. Before the Enron scandal, accounting firms often engage in lucrative information business for their auditors, so that the consulting consulting revenue of Arthur Andersen's firm from Enron Corp is higher than that of audit revenue. Obviously, for accounting firms, it is difficult for them to strictly control the accounts of their consulting business clients. After the Enron scandal broke out, the US government passed the accounting reform law, which prohibited the accounting firms from providing advisory services to their audit objects. However, the audited companies still have the power to decide which accounting firms to employ to audit their accounts. Under the implied pressure of losing the audit business, accounting firms still have difficulty in checking their accounts.

Editor in chief: Du Jun