So I mentioned this thing called the expectation gap in auditing. As you may have guessed it is the gap between what the client and/or public in general expect from an audit and what the auditors are delivering.
Auditors must work hard to narrow the gap as much as possible, so I'll do what I can by explaining what it is that the auditors provide.
Auditors do NOT prepare the financial statements of their clients. The clients themselves do that. The auditors come in and examine the financial statements that have been prepared, checking to make sure the accounting standards (e.g. Generally accepted accounting principles -- GAAP) have been applied properly and that everything is fairly presented.
The second part of an auditors job is to provide an opinion (unqualified, qualified, adverse, and I can't even recall the 4th one because it is rarely even used -- you will generally see unqualified or qualified opinions) on the statements. If everything looks great and any potential issues were cleared up (adjusted) with management, then an unqualified opinion will be issued (as weird as it sounds, this is the best opinion a company can hope for).
Notice, though, that the auditor does NOT go through every single transaction and balance to ensure they are 100% correct and free of error. They use sampling methods to test them. This means that the auditors do NOT provide 100% assurance (i.e. they are not providing insurance on the financial health of the company). There will be some small percentage of misstatements that are not caught by the auditors.
So, does that mean if I'm an investor and I invest in the company based on the audited financial statements and lose money due to the misstatement then I can sue the auditor for negligence? Well, it depends. It depends if they followed GAAS (generally accepted auditing standards) or not. If the auditor followed GAAS, then they provide reasonable assurance that the statements are fairly presented and have sufficiently done their job. If the auditor failed to comply with GAAS, then an investor could sue them!
This is a good place to explain the difference between business failure and audit failure. Business failure is where a business fails to make it's debt payments and could result in bankruptcy. Audit failure, on the other hand, is the failure of the auditor to comply with GAAS. They are NOT the same. As was explained above, business failure could occur while there was no failure in audit.
So do we want 100% assurance from the auditors? It would sure be nice, but it just means that it will cost the company more money in audit fees. More assurance = more work for the auditor = higher fees. The level of assurance that is currently provided is sufficient enough that investors can have confidence in it and make informed decisions based on the audited financial statements. It's currently cost-effective.
Wednesday, March 2, 2011
Monday, February 28, 2011
Very busy at the moment!!
Sorry, to all my loyal followers, that I didn't post on Sunday. I'm extremely busy with school right now, but I should have more time tomorrow night.
Today I've got a midterm on Environmental Economics, which is an absolutely terrible class. The material is at times interesting, but my professor is horrendous. He should not be giving lectures! I won't bore you too much ranting about him though.
Tomorrow I've got another midterm on Audit and Assurance. As investors, we love the auditors. They dig into the financial statements of a company and ensure that everything is in order. I'm going to post tomorrow more about auditing and what is called the expectation gap.
Until then, wish me luck! For any of my followers that are currently in the midst of midterms, good luck to you too!
Today I've got a midterm on Environmental Economics, which is an absolutely terrible class. The material is at times interesting, but my professor is horrendous. He should not be giving lectures! I won't bore you too much ranting about him though.
Tomorrow I've got another midterm on Audit and Assurance. As investors, we love the auditors. They dig into the financial statements of a company and ensure that everything is in order. I'm going to post tomorrow more about auditing and what is called the expectation gap.
Until then, wish me luck! For any of my followers that are currently in the midst of midterms, good luck to you too!
Saturday, February 26, 2011
What's so special about this Buffett guy, anyway?
The amount that I talk about/praise this guy, one would think he must be paying me to do it or something. Well, I wish. Truth is, he is just the absolute most brilliant investor (among other things) that has ever lived. Don't just take my word for it (or his astounding networth), look at the money people are willing to shell out just to have lunch with him! (This is taken from Businessweek.com)
Buffett’s $2.6 Million Lunch Auction Shows Reputation
June 14, 2010, 8:46 AM EDT
(Updates with Moody’s in seventh paragraph.)
By Andrew Frye
June 14 (Bloomberg) -- Warren Buffett’s annual charity- lunch auction reached a record $2.63 million after a year in which the billionaire defied an economic slump by completing his biggest takeover and boosting Berkshire Hathaway Inc.’s profit.
Bidding outpaced last year’s during the first days of the weeklong event and ended in a frenzy June 11 with 77 offers, according to EBay Inc., which ran the online sale. Proceeds go to the San Francisco-based Glide Foundation, a favorite charity of Buffett’s first wife, Susan, who died in 2004. The winner asked to remain anonymous, the organization said.
As a global credit crisis accelerated in 2008, firms seeking capital appealed to Buffett, 79, for support, and Barack Obama enlisted his economic expertise during the presidential- election campaign. Omaha, Nebraska-based Berkshire prospered without a U.S. bailout, providing Buffett with funds for a $27 billion buyout of railroad Burlington Northern Santa Fe in February.
“Warren Buffett’s reputation, if anything, has been enhanced over the last couple of years” as Berkshire was sustained by the $44 billion cash cushion that he built through the end of 2007, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “For those who can afford it, this lunch can have great value.”
New York Steakhouse
Buffett, the world’s third-richest person, rose to prominence through five decades of investing success. Like in previous years, he will meet the winner and as many as seven guests for lunch at Smith & Wollensky, the steakhouse on New York’s Third Avenue with the commercial tagline “Nice to see you again.”
Berkshire’s investments in firms that were blamed for contributing to the housing slump have increased pressure on Buffett to publicly discuss the financial crisis, assign blame and recommend remedies.
At his company’s annual meeting in May, shareholders pressed Buffett about his investment in Goldman Sachs Group Inc., which was sued by regulators in April for misleading investors. Buffett on June 2 defended credit-ratings firm Moody’s Corp., another Berkshire holding, at a hearing by the Financial Crisis Inquiry Commission.
Moody’s management shouldn’t be singled out for failing to anticipate the nationwide decline in housing prices, Buffett said. John Taylor, chief executive officer of the National Community Reinvestment Coalition, said after Buffett’s testimony that ratings firms deserve blame for assigning top grades to securities created by Wall Street that plunged in value.
‘Stinking Garbage’
Investment banks “walked into the room with a bagful of stinking garbage and the rating agencies not only embraced it but put their best sale of approval on it,” Taylor said.
Diners at the charity lunch may leave the table with investment ideas, business contacts and career advice, said Kass, who accompanied 48 students to Omaha for a lunch with Buffett five years ago. After that meal, Buffett picked up the tab, Kass said.
The auction’s previous record was set in 2008, when hedge fund manager Zhao Danyang of Hong Kong won it for $2.11 million. A group led by Courtenay Wolfe of Salida Capital paid $1.68 million last year. Greenlight Capital Inc.’s David Einhorn prevailed in 2003 with a $250,100 bid. Including this year, Buffett has raised more than $8 million with the auctions to help Glide, which serves meals to the needy.
“It’s actually a remarkable calibration of his value,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “It measures what people think his worth to them is.”
Profits Amid Crisis
Berkshire’s earnings increased 61 percent to $8.06 billion in 2009, helped by Buffett’s investments during the crisis. The company got a coupon of 12 percent on an investment of 3 billion Swiss francs ($2.6 billion) in Swiss Reinsurance Co. and of 10 percent on a $3 billion allocation to General Electric Co.
The $5 billion that Buffett injected in Goldman Sachs 2008 yields $500 million a year for Berkshire, and the warrants he negotiated as part of the deal show a paper profit of more than $897 million. Weeks before he invested in the New York-based bank, he rebuffed a request for funds from American International Group Inc., which then needed a U.S. rescue.
Buffett’s fortune was estimated at $47 billion by Forbes magazine in March, placing him behind telecommunications investor Carlos Slim and Microsoft Corp. co-founder Bill Gates in the worldwide rankings. Buffett’s stock picks and takeovers turned Berkshire from a failing textile mill to a $184 billion seller of bricks, power and hurricane insurance.
Annual Meeting
His views on markets are followed by investors around the world, and tens of thousands of people gather in Omaha each year at Berkshire’s annual meeting to hear Buffett expound on the economy and public policy. He advised Obama during his successful 2008 campaign, and the president seized upon Buffett’s characterization of derivatives as “weapons of mass destruction” to rally support for reform.
In 2006, Buffett pledged 85 percent of his Berkshire holdings, a commitment valued at about $37 billion at the time, to the Bill & Melinda Gates Foundation and charities of four of his family members. The Gates donation is being made in annual installments, and will continue after Buffett’s death. The charity, established by Gates and his wife, combats disease and global poverty, and funds U.S. education initiatives.
--With assistance from Dakin Campbell in San Francisco. Editors: David Scheer, Dan Reichl
To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.
Buffett’s $2.6 Million Lunch Auction Shows Reputation
June 14, 2010, 8:46 AM EDT
(Updates with Moody’s in seventh paragraph.)
By Andrew Frye
June 14 (Bloomberg) -- Warren Buffett’s annual charity- lunch auction reached a record $2.63 million after a year in which the billionaire defied an economic slump by completing his biggest takeover and boosting Berkshire Hathaway Inc.’s profit.
Bidding outpaced last year’s during the first days of the weeklong event and ended in a frenzy June 11 with 77 offers, according to EBay Inc., which ran the online sale. Proceeds go to the San Francisco-based Glide Foundation, a favorite charity of Buffett’s first wife, Susan, who died in 2004. The winner asked to remain anonymous, the organization said.
As a global credit crisis accelerated in 2008, firms seeking capital appealed to Buffett, 79, for support, and Barack Obama enlisted his economic expertise during the presidential- election campaign. Omaha, Nebraska-based Berkshire prospered without a U.S. bailout, providing Buffett with funds for a $27 billion buyout of railroad Burlington Northern Santa Fe in February.
“Warren Buffett’s reputation, if anything, has been enhanced over the last couple of years” as Berkshire was sustained by the $44 billion cash cushion that he built through the end of 2007, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “For those who can afford it, this lunch can have great value.”
New York Steakhouse
Buffett, the world’s third-richest person, rose to prominence through five decades of investing success. Like in previous years, he will meet the winner and as many as seven guests for lunch at Smith & Wollensky, the steakhouse on New York’s Third Avenue with the commercial tagline “Nice to see you again.”
Berkshire’s investments in firms that were blamed for contributing to the housing slump have increased pressure on Buffett to publicly discuss the financial crisis, assign blame and recommend remedies.
At his company’s annual meeting in May, shareholders pressed Buffett about his investment in Goldman Sachs Group Inc., which was sued by regulators in April for misleading investors. Buffett on June 2 defended credit-ratings firm Moody’s Corp., another Berkshire holding, at a hearing by the Financial Crisis Inquiry Commission.
Moody’s management shouldn’t be singled out for failing to anticipate the nationwide decline in housing prices, Buffett said. John Taylor, chief executive officer of the National Community Reinvestment Coalition, said after Buffett’s testimony that ratings firms deserve blame for assigning top grades to securities created by Wall Street that plunged in value.
‘Stinking Garbage’
Investment banks “walked into the room with a bagful of stinking garbage and the rating agencies not only embraced it but put their best sale of approval on it,” Taylor said.
Diners at the charity lunch may leave the table with investment ideas, business contacts and career advice, said Kass, who accompanied 48 students to Omaha for a lunch with Buffett five years ago. After that meal, Buffett picked up the tab, Kass said.
The auction’s previous record was set in 2008, when hedge fund manager Zhao Danyang of Hong Kong won it for $2.11 million. A group led by Courtenay Wolfe of Salida Capital paid $1.68 million last year. Greenlight Capital Inc.’s David Einhorn prevailed in 2003 with a $250,100 bid. Including this year, Buffett has raised more than $8 million with the auctions to help Glide, which serves meals to the needy.
“It’s actually a remarkable calibration of his value,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “It measures what people think his worth to them is.”
Profits Amid Crisis
Berkshire’s earnings increased 61 percent to $8.06 billion in 2009, helped by Buffett’s investments during the crisis. The company got a coupon of 12 percent on an investment of 3 billion Swiss francs ($2.6 billion) in Swiss Reinsurance Co. and of 10 percent on a $3 billion allocation to General Electric Co.
The $5 billion that Buffett injected in Goldman Sachs 2008 yields $500 million a year for Berkshire, and the warrants he negotiated as part of the deal show a paper profit of more than $897 million. Weeks before he invested in the New York-based bank, he rebuffed a request for funds from American International Group Inc., which then needed a U.S. rescue.
Buffett’s fortune was estimated at $47 billion by Forbes magazine in March, placing him behind telecommunications investor Carlos Slim and Microsoft Corp. co-founder Bill Gates in the worldwide rankings. Buffett’s stock picks and takeovers turned Berkshire from a failing textile mill to a $184 billion seller of bricks, power and hurricane insurance.
Annual Meeting
His views on markets are followed by investors around the world, and tens of thousands of people gather in Omaha each year at Berkshire’s annual meeting to hear Buffett expound on the economy and public policy. He advised Obama during his successful 2008 campaign, and the president seized upon Buffett’s characterization of derivatives as “weapons of mass destruction” to rally support for reform.
In 2006, Buffett pledged 85 percent of his Berkshire holdings, a commitment valued at about $37 billion at the time, to the Bill & Melinda Gates Foundation and charities of four of his family members. The Gates donation is being made in annual installments, and will continue after Buffett’s death. The charity, established by Gates and his wife, combats disease and global poverty, and funds U.S. education initiatives.
--With assistance from Dakin Campbell in San Francisco. Editors: David Scheer, Dan Reichl
To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.
Friday, February 25, 2011
To Provide Some Clarity on the 2 Cardinal Rules
Since there was some confusion about my last post, I figured I may as well clarify things the best I can.
Buffett is not suggesting that it is possible for you to provide 100% assurance against loses. It's all about calculated risks. However, there are some methods that can be used to help reduce the potential for loses (remember the all important principle of margin of safety?).
You've got to read between the lines here. It's really showing you Buffett's view when it comes to investing. Since I know a little more than the average person I'll tell you a few things about him:
- He's not into taking gambles. He likes to invest in companies that are solid and have a proven record of success -- not placing wagers on start-ups.
- He looks for situations where heads he wins, tails he wins too (yes, they exist). If that is not possible, then heads he wins, and tails he doesn't lose much.
- Buffett often remarks that his strategy involves significantly less risk than other methods of investing (and we can all see that it returns significantly more as well).
- Early in his investing career (there are 2 general phases: 1. partnerships, 2. Berkshire Hathaway -- that's a story for another time) he told his shareholders that he planned to achieve a long-term above average return that will likely be made up of 1. returns that approximately equal the average during prosperous periods, and 2. returns that are better than average during down markets (don't lose money!). This would work out to above average returns.
I could list more, but I just got home from an exam and I am tired. And you're probably all tired of this topic already! Have a good night everyone.
Buffett is not suggesting that it is possible for you to provide 100% assurance against loses. It's all about calculated risks. However, there are some methods that can be used to help reduce the potential for loses (remember the all important principle of margin of safety?).
You've got to read between the lines here. It's really showing you Buffett's view when it comes to investing. Since I know a little more than the average person I'll tell you a few things about him:
- He's not into taking gambles. He likes to invest in companies that are solid and have a proven record of success -- not placing wagers on start-ups.
- He looks for situations where heads he wins, tails he wins too (yes, they exist). If that is not possible, then heads he wins, and tails he doesn't lose much.
- Buffett often remarks that his strategy involves significantly less risk than other methods of investing (and we can all see that it returns significantly more as well).
- Early in his investing career (there are 2 general phases: 1. partnerships, 2. Berkshire Hathaway -- that's a story for another time) he told his shareholders that he planned to achieve a long-term above average return that will likely be made up of 1. returns that approximately equal the average during prosperous periods, and 2. returns that are better than average during down markets (don't lose money!). This would work out to above average returns.
I could list more, but I just got home from an exam and I am tired. And you're probably all tired of this topic already! Have a good night everyone.
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