17(e). Reviews
[Context] Meeting of the Creditor Discussion Group on December 8, 1992. Part of the meeting was devoted to the topic of creditors' objectives and approaches. During the discussion, a comment was made on auditor involvement.
Participant C-6
I think it's just an ongoing problem there. I'm normally dealing with a compilation or review, and I would love to get an audited statement, but that happens very, very infrequently. But it is a matter of cost, and it's a continual issue with regard to lender or borrower. So that is certainly a consideration, no question. [Also included in 2(d)] [TC 12/8, p. 43]
[Context] Meeting of the Creditor Discussion Group on February 2, 1993. Part of the meeting was devoted to the topic of display. During the discussion, a comment was made on auditor involvement.
Participant C-2
[Cost] is a real concern I think for the small banks, small business. We're seeing already a dramatic trend from audited to reviewed and even more so to compiled statements now with no disclosures because of this, I'm sure. [Also included in 10(c)] [TC 2/2, p. 33]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of auditor involvement.
Participant C-6
At the level of the businesses that I deal with, which is on a much lower level than many of the people here, we strive to obviously get better than a compilation statement, and if we can get a review statement, well, we're very happy about that. But in many cases, we just get no disclosure whatsoever, that is, no footnotes, in a review statement. It's beyond me how an accountant can put out a review statement without putting any footnotes in the statement. Basic information, such as liens on assets, term loan covenants, inventory receivables are not discussed, and possibly bad receivables that may be in there. That's the most disappointing thing to me. When I strive to get a review statement, but get no footnotes, I think that's lacking. [Also included in 17(a)] [TC 3/11, p. 13]
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Participant C-7
Looking at the market we service, similar to [participant C-6], we're talking smaller companies. We're seeing I'd say a migration in types of financial reporting, from audits to reviews, reviews to compilations, because of costs. Our concern is in trying to build the perfect machine, you don't consider the market, and the cost benefit of what you are trying to impose. Now for a Fortune 500 publicly trading company, given their size, it's easy for them to bear that expense. When you start getting into, let's say the owner-manager-type companies, I'm concerned about the costs that you're imposing and that instead of improving financial reporting, you're going to have unintended costs by creating all these standards and you're going to impair financial reporting at the lowest level. [Also included in 2(d) and 17(a)] [TC 3/11, p. 16]
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Participant C-2
My concern about the question [that is, to have audits every five years] is what do you drop back to then, because we see a wide range of quality of reviews, where some are just a notch below an audit and some have absolutely no disclosures. So what protection do you have then if you have to wait five years to get audited numbers? [Also included in 17(d)] [TC 3/11, p. 20]
Participant C-8
This is already happening at the lower end. Many of our smaller clients are pushing us to accept reviews in lieu of audits or audits every other year, or some combination of a reduction in the quality of the statements, and it's happening quite a bit. And in our industry, it's becoming kind of a competitive issue as well, whether you'll do it or lose the business. So it's already occurring. [Also included in 17(d)] [TC 3/11, p. 20]
Committee/Staff/Observer
So you're saying in terms of your ability to write bonds that that's used as a competitive factor in terms of people down the street being willing to accept fewer numbers of audits? [Also included in 17(d)] [TC 3/11, p. 21]
Participant C-8
If we've been writing a company's bonds for a number of years, and we've been getting an audit, and then we get a phone call that says ABC company has agreed to write my bonds at the same level with a review. What are you going to do? Then you have to make a decision. So it's already occurring, and more frequently. [Also included in 17(d)] [TC 3/11, p. 21]
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Committee/Staff/Observer
Question 5 talks about the levels of assurance auditors can provide. Right not, you can either have an audit, or you can have a negative assurance called a review. And those are the only choices you have. The first question is: under what circumstances are you willing to accept the lower level (a review)? [TC 3/11, p. 27]
Participant C-5
At a minimum, obviously, we'd prefer to have audited statements; we weight them heavier in a credit decision. But we're making our own risk return decision exposure side versus the penalty to the customer for having to pay for that. The quality of what you get, even in an audited statement, at the small end, is really just a compilation with a high degree of assurance. We end up doing our own exams as a supplement to that, anyway, on most of them. And borrowing is always secured at that level, so that we're very focused on the current quality of our collateral. We spend a lot of time digging into it for our exam process. So, I would advocate having something that will allow us to get assurance on key elements instead of the broad set of financial statements. Things like recognition practices may be less important. Things like inventory and receivables become very important for secure lenders at the small end. And so an assurance on certain key items, or critical items at that level, which would allow for a slightly incremental cost but not a substantial difference would be important to me at that segment. [TC 3/11, p. 27]
Participant C-6
We try to adhere to the same type of criteria that [participant C-5] just mentioned as far as dollar levels with regard to the quality of audits. Most commonly we'll look at review statements. We try to derive additional information through direct dialogue with management and with the accountants. [TC 3/11, p. 28]
Participant C-8
We generally look at the corporate structure to see if it's a complicated corporate structure; it's usually just an operating company. We'll look at the balance sheet fairly closely; is it a clean balance sheet, pretty straight forward? Are the principals willing and able to give us support and schedules in most of the major items so that we can in fact do all the verifications? And finally, is the credit being requested reasonably conservative in relation to the size of the company? If you have to stretch any of those issues, then we push for an audit. But in the last year or two, competition has been a serious issue with respect to the quality of financials. [TC 3/11, p. 28]
Participant C-2
In larger credit granting institutions, you do have the ability to go out and do your own audit. But in a small bank like mine, we will sometimes step back from an audit to a review, but use agreed-upon procedures with the accounting firm to do a current asset and current liability audit for us, where we feel that we really need the assurance. [TC 3/11, p. 28]
Committee/Staff/Observer
Would there be advantage to being able to get higher verification on some things and lower on others? I think I've heard [participant C-5] say he'd like that. [TC 3/11, p. 28]
Participant C-8
It's really the individual quality of the statements. I can send you review statements that are probably better than 80% of the audits we get in terms of their completeness and the amount of work that's put into them. [TC 3/11, p. 28]
Participant C-4
In many instances, we'll get audited balance sheets and review financial statements. And we would be willing to accept the audit of certain accounts where there are material disclosures. [TC 3/11, p. 29]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of the impact of litigation on auditing and external reporting. During the discussion, a comment was made on auditor involvement.
Participant C-7
I have mixed emotions. The threat of litigation has made the accounting profession more quality conscious but I also see that the added cost that that's entailed has led to a lot of boilerplate coming into the financial reporting. And then the movement away from audited statements, in part because the accountants are coming back to the client saying this is what it's going to cost you for an audit now to protect us and so they're saying we don't want to bear that cost so step it back for us. I think there's a net loss in that respect. [Also included in 18(b)] [TC 3/11, p. 62]