Gary Turner's post speculating on the financial industry's ability to absorb technology gave me pause for thought. I read it about 10 minutes after I wrote t
his piece on auditing following the Lehmans collapse and what looks like the resultant firesale:
PwC is sifting through the bones of Lehman Brothers and according to Accountancy Age:
There has been speculation that PwC will have to hire specialists to make sense of the investment bank’s derivatives contracts, but all the initial work, apart from legal advice, is being handled by the firm, it said.
If that’s the case then how the heck do they audit these types of business? Oh yes: mark to market solves all ills - except when it goes catastrophically wrong. As it always does.
Derivatives have become so complex that it is exceptionally difficult to unravel them. Trust me. I've tried. Orchestrating the settlement of multiple hedges across multiple commodities or other assets and multiple currencies taxes the best. These instruments are created by PhD types whose brains operate on a different level to the rest of us.
They develop complex simulations designed to predict the future but when you boil it down, they are doing little more than placing bets in a giant casino. It should therefore be little surprise to find that auditors struggle to understand what's going on.
More worrying is the slow but relentless slide in the quality of audit expertise to understand the business systems of today. If you've seen the process map for the relatively simple SAP Business ByDesign then you know what I mean. When look at from any distance. it is simply impossible for a single human to visualize what all the flows mean and how they inter-relate.
Should auditors do more? Of course. But they are increasingly constrained by the fact that investors are spending less and less time worrying about the audit report, relying instead on market and other data.
My sense is that the current financial crisis will lead to a re-evaluation about what an audit of today's modern systems really means. What shape that takes remains to be seen but a fundamental rethink about the role of audit, its validity and usefulness is almost certain to emerge.