Auditors as Underwriters: An Alternative Framework

Abstract

In the United States, auditors are required to examine clients' financial statements in compliance with generally accepted auditing standards (GAAS) and provide an audit opinion to assure investors that the statements are free of material misstatements. Since investors must trust the auditor in order for them to gain assurance from the audit report, we reason based on prior literature that the current process of regulation is based on a trust framework. However, given the current crisis in confidence resulting from recent accounting scandals, we argue that an institutional system based on trust must be rethought. In this paper, we propose an alternative framework for auditing that would meet investors' needs to reduce or even eliminate information risk while transforming this trust framework. In this model, the need for a traditional financial statement audit leading to an audit opinion would be eliminated since regulators could require that public companies purchase insurance from insurance companies to indemnify their financial statements against material misstatement. The insurance company would hire an auditor to act as an underwriter to assess the risk of material misstatements in the financial statements. The auditor, in the capacity of underwriter, would assess the risk to determine the amount of the insurance coverage and premium. We believe that the proposed model will allow the SEC and the stock markets to more effectively accomplish their goal of eliminating or significantly reducing investors' information risk, while restoring investors' confidence and trust in financial reporting.

Do auditors make mistakes when they write audit reports? An empirical study applied to Spanish non-listed firms

“…Several researchers state that the auditor's role is to increase the trust in the information presented through the audit report (Bhattacharjee, Moreno, & Yardley, 2005;Dunn, 1996). However, there exist differences between users' expectations of the information they are to receive and what the auditors in fact communicate (Brown, Hatherly, & Innes, 1997;Duréndez, 2003;Humphrey, Moizer, & Turley, 1992;King, 1999).…”

Auditor independence: third party hiring and paying auditors

“…The board of directors decides how much insurance to buy, and the premium acts as an indicator. Similarly, Bhattacharjee et al (2005) propose a framework where regulators require public companies to purchase insurance to indemnify their financial statements against material misstatements, and the insurance company hires an auditor as an underwriter to assess the risk of material misstatement. Elliott (2002) presents an online reporting model in which the users pay for the assurance.…”

“…Other alternatives to deal with this independence issue were proposed in literature. Ronen (2002), Elliott (2002) and Bhattacharjee et al (2005) propose a model where public companies purchase financial statement insurance from insurance companies in order to indemnify against misstatements. Ronen (2002) proposes that before setting the premium, the insurance company hires auditors to assess the risk of misstatements.…”

Τα Διεθνή Πρότυπα Ελέγχου Των Οικονομικών Καταστάσεων Των Επιχειρήσεων Που Εφαρμόζουν Τα Διεθνή Πρότυπα Χρηματοοικονομικής Αναφοράς (ΔΠΧΑ)

“…Άλλωστε, έχει κατά καιρούς αναφερθεί ότι, με την βοήθεια χρηματοοικονομικών δεικτών, είναι δυνατόν να προβλεφθεί επερχόμενη χρεωκοπία οικονομικής οντότητας με μεγάλη ακρίβεια τουλάχιστον 5 έτη προ της χρεωκοπίας (Beaver et al, 2005). Υπάρχει δε και η διαδεδομένη άποψη μεταξύ αρκετών ερευνητών, ότι ο ελεγκτής δεν πρέπει να συνεισφέρει επιπρόσθετη χρηματοοικονομική πληροφόρηση, αλλά μόνον να αποφαίνεται στο μέτρο των δυνατοτήτων του επί της υφιστάμενης χρηματοοικονομικής πληροφόρησης (Dunn, 1996, Bhattacharjee et al, 2005. Από την άλλη πλευρά, μερικοί ερευνητές θεωρούν ότι, ως ανεξάρτητη δεύτερη γνώμη, η έκθεση ελέγχου σκόπιμο είναι να συμπεριλαμβάνει επιπρόσθετη πληροφόρηση, η οποία να σχετίζεται με τις αντιλήψεις των χρηστών και με τις διεργασίες λήψης αποφάσεων από τους χρήστες (Guiral and Ruiz, 2011).…”