Comments: Audits IV - How many rotten apples will spoil the barrel?

There may have been a time in U.S. history when some sort of general ethical behavior was sufficient to make corporations behave, and make audit profession perform its intended role. I think the general pattern is that innovations in human organization have a lifecycle, in which they perform very well in the initial decade or perhaps, two. But as wider and wider circles of the general population come to understand the power, the actual range of motion that resides in various roles, if a person were greedy enough, then people gradually begin to behave that way. The darwinian process sets in. And then very bright and well intentioned people create new forms of dealing, new work-arounds.

And FC is no exception; every thing that was possible to do, was done, both the good and the bad, and the thing reached its limits pretty quickly. I think we had great potential-- we still have great potential-- but we're held back by the lack of software and capital, and the game theoretic opposition by governments, banks, the software industry, the telecoms/cellphone people, to name only a few.

Coming back to audits-- I concluded during the later phases of the dotcom years that problem of frauds could be solved very easily, stunningly easily, by having all transactions posted on public transaction repositories, where there would be some forms of visibility by stakeholders, and where fraudulent transactions could be rolled back endlessly. For example if an investor overpaid for a bundle of loans, then the original, big payment by the investor to the borrowers, years ago, would be partially rolled back on the servers and some formula would be applied that impoverishes the suppliers of those parties, who received the money and built the gaudy 5000 square foot houses. Those who got commissoins for example would forfeit first. This would be determined in the original contracts.

My point is, that the idea of settlements, or clearing, or end-of periods, would no longer exist. There would just be a continuous notation of economic events, and there would be accountability back to the original dealings when things went awry.

John Yunker and Bob Haugen did a tremendous amount of work for the ebXML consortium, explaining "computable" business processes to various communities including both the business domain that wanted better automation, and software developers working to develop 'web services'. It is amazing how complicated, and abstract, and subtle this area of software is. For example, there is a transactoin lifecycle from the original desire, to the search and negotiation, the commitment, fulfillment and payment/settlment and financial reporting or representation afterwards. As an accountant, I had been part of a profession that grossly oversimplifying everything in the economy as a crude debit or credit at only the time of fulfillment, and a bunch of ridiculous lies and generalizations that pass for financial statements.

One last point is that when your systems for transacting business are well designed and implemented, both parties see THE SAME version or view of the negotiation and commitment stage of their business dealing. Then when they MAKE a commitment, the terms of the transaction (locations, date and time of performance, unambiguous measures, quantities and product/service descriptions, etc are recorded. IF you have this done right, then, there are a lot fewer problems later. Reputation becomes computable, as the difference between what was in the contract, and what was performed. And you can roll back the other side of the consideration, more easily, i.e. with less reliance on lawyers or police or the kindness of strangers such as auditors.

Posted by TOdd at July 13, 2009 05:54 AM

If the financial crisis proves that most audits are worthless, what use are they? The only point I can see in them is for the various parties to finger-point backwards and forwards, after the horse has bolted. Then we can all conclude that we're not to blame, and nobody is to blame. Or is it in-fact that the complete opposite is true?

I guess this begs the question of the value of auditing Certification Authorities, in general. If the audits aren't worth the paper they're printed on, is it time to throw out the baby with the bath water?

Posted by ANON@an.on at July 13, 2009 05:57 AM

Posted by possible apple? at December 4, 2010 09:36 AM
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