Burned Investors Ask 'Where Were the Auditors?' A Court Says 'Who Cares?' (wsj.com) 88
One of the country's most influential courts has asked the nation's top securities regulator for its views on an uncomfortable subject: whether audit reports by outside accounting firms actually matter. From a report: The court already ruled that, at least in one case, they didn't. That case, where an insurer overstated profits and an auditor signed off on its books, led to an investor lawsuit against the auditor that was dismissed. In its ruling, the court said the audit report was so general an investor wouldn't have relied on it. The decision could have broad ramifications for the Securities and Exchange Commission, which oversees corporate financial disclosures, and for the auditing industry, which charged about $17 billion last year for blessing the books of publicly listed companies in the U.S.
The ruling, by a three-judge panel of the Second U.S. Circuit Court of Appeals, prompted three former SEC officials to tell the court it got the answer wrong. They asked the court to reconsider its decision, noting that the SEC in a previous enforcement case had said that "few matters could be more important to investors" than whether a company's financial statements had been subjected to a properly conducted annual audit. The court responded by inviting the SEC to file a brief expressing its views on the former officials' arguments. The SEC in a court filing said that "the commission has an interest in ensuring its views on this issue are considered by the court." Its brief is due Feb. 16. The court ruling involved a lawsuit by investors over an audit gone wrong. AmTrust Financial Services, an insurance company, had overstated its profit, and BDO USA, its outside accounting firm, had blessed the numbers.
The ruling, by a three-judge panel of the Second U.S. Circuit Court of Appeals, prompted three former SEC officials to tell the court it got the answer wrong. They asked the court to reconsider its decision, noting that the SEC in a previous enforcement case had said that "few matters could be more important to investors" than whether a company's financial statements had been subjected to a properly conducted annual audit. The court responded by inviting the SEC to file a brief expressing its views on the former officials' arguments. The SEC in a court filing said that "the commission has an interest in ensuring its views on this issue are considered by the court." Its brief is due Feb. 16. The court ruling involved a lawsuit by investors over an audit gone wrong. AmTrust Financial Services, an insurance company, had overstated its profit, and BDO USA, its outside accounting firm, had blessed the numbers.
Re: do as I preach (Score:4, Insightful)
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You're so spot on that this approach has several popular labels, the most well-known being "the Free Market" and "Laissez-faire".
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"Laissez-faire" certainly, but the word "market" in "Free Market" implies a few things. Things like both sides being fully informed about what is being bought and sold, and competition on both sides (no monopolies). The entrenched players hate those things, because it means the market is fair for all.
So Google and Apple vigorously defend their app store monopolies, Google and Microsoft make their ads near indistinguishable from search results (aka lying), and who knows what you will actually receive if yo
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but the word "market" in "Free Market" implies a few things. Things like both sides being fully informed about what is being bought and sold, and competition on both sides (no monopolies).
You're quite wrong. "Free market" means (and has always meant) a market that is "unencumbered" by government regulations and enforcement, where the "free hand" reins supreme.
What you describe is known as competitive market, and it only exist when it is well regulated.
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What you describe is known as competitive market, and it only exist when it is well regulated.
Point conceded.
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We don't seem to disagree on substance.
Actually "free market" in the sense Adam Smith imagined it WAS supposed to be "naturally" competitive, but the early economists did not know how complex the mechanisms to sidestep competition and engage in rent-seeking would become, especially when also involving a partially corrupt government.
So it isn't a simple issue in any way, shape or form, and government involvement is hardly a guarantee of the outcume.
Sadly, the phrase appears to have been politicized to mean e
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I'd say that in this context "well regulated" has to mean "competently regulated for the benefit of both buyers and sellers", not "subject to an excessive number of rules that construct a barrier to entry for new competitors and benefit the existing sellers".
Things like:
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I come from Australia. As an example, here ISP's are required to tell you minimum download speeds you will get, and are not allowed to lie about download limits. Price Waterhouse Coopers is going to have a difficult time operating in Australia [treasury.gov.au] due to unethical behaviour.
Most of the OECD make a reasonable stab at creating "well regulated markets", and that includes the stock market, so they don't need a list telling them what one looks like.
That said, Dollar Ton was spot on when he complai
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The problem in the United States isn't insufficient regulation, it's harmful regulation. It has frequently weaponized regulations against small players and new market participants, including things where a large company can staff a dedicated department to handle, but in a small company the owner has to submit Yet Another Report Where The Government Will Fine You Into Oblivion If You Make A Mistake.
Quick example: paying sales taxes to the purchaser's state, county, and city on online purchases by an out-of-
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Man that takes me back to those halcyon days of 2008.
Sounds like we should give the IRS and the SEC more funding, more directives and let them enact more auditing of their own since we can't trust 2 private companies to regulate each other without collusion (like 2008 where the rankers of the MBS were functionally working with the banks selling them).
The Fed is already audited both by the GAO as well as Deloitte. What cretins like Rand Paul want is to be able to influence the independence the Fed has curre
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The Federal Reserve is afraid of an audit so the government doesn't allow it, I don't know what they are scared of, just hire the same guys who signed off on USA mortgage securities tripple A status.
The federal reserve gets audited [federalreserve.gov]. You should not expect that an audit will find every problem, that's not what an audit does.
Judges (Score:2)
Re:Judges (Score:5, Insightful)
I wonder if we're even qualified to vote on judges.
Judge work is highly technical and most people have no visibility on how well a judge is doing.
I think a judge should be appointed by some board that has the technical knowledge to know if the judge is doing a good job or not.
Being a judge is not a popularity contest. Or shouldn't be.
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I wonder if we're even qualified to vote on judges.
Judge work is highly technical and most people have no visibility on how well a judge is doing.
I think a judge should be appointed by some board that has the technical knowledge to know if the judge is doing a good job or not.
Being a judge is not a popularity contest. Or shouldn't be.
Judges should be appointed based on their legal education, legal experience and ability. Even if you want a system where you are able to vote for judges, because you think it important to have the option to ensure with your vote that only judges with the currently proper political bias get elected, then it should still be the case that candidates who don't possess a proper legal education, legal experience and ability should be precluded from even running .... Now enter stage right, a whole clown posse of S
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I disagree. Judges should be appointed based on a history of competency in both the law and the subject matters. Education says little more than a person is book smart and can regurgitate what they've been taught.
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Pray tell; where does the judge then get his first case as a judge to establish such a history?
It's the good old entry-level job requiring ten years of experience. At some point someone has to give the new guy a chance.
Besides, the post you replied to specifically also mentions legal experience.
Re: Judges (Score:2)
I disagree. Judges should be appointed based on a history of competency in both the law and the subject matters. Education says little more than a person is book smart and can regurgitate what they've been taught.
WTJFC? Judges should be that ... AND book smart, like whoever you're responding to said. Which part do you disagree with, should judges NOT be book smart? I think "book smarts" might be a taaaaaad more important to the legal profession than you think it is, it might kind of be a big part of it all.
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I disagree. Judges should be appointed based on a history of competency in both the law and the subject matters. Education says little more than a person is book smart and can regurgitate what they've been taught.
And then what? Abolish bar exams as well? Being taught law until you know it by heart and then regurgitating it in court is literally what a huge part of what the legal profession is all about.
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That's an American thing and I would say that in general, the answer is no, you are not qualified.
That's not meant to be a slight, but just as people aren't qualified to vote for who gets to be a physicist or thoracic surgeon, it seems insane to vote for who's a judge.
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US Circuit Court Judges are appointed by the President and approved by the Senate, not elected by the populace. In theory, this should put qualified people in these positions.
https://www.justice.gov/usao/j... [justice.gov]
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Here in Canada, my understanding is that a board of Judges and Lawyers nominate Judges, a few (3?) for a position and then the government picks one and Parliament votes to appoint them. Can't remember if Provincial Judges are appointed by the Province or the feds, I think the Province. They can then be appointed to higher courts including Federal ones
Some courts such as the Supreme Court, the Constitution also has a say, a couple of the Supreme Court Judges have to be qualified in Quebec's civil law, shown
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Most of the Supreme Court are Federalist Society stooges, and that certainly does include the stooges the former alleged president installed with the hearty approval of the GQP.
Conflict of interest (Score:5, Insightful)
Re:Conflict of interest - then who should pay? (Score:3)
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Re:Conflict of interest - then who should pay? (Score:4, Insightful)
'The current owners have an interest in over stating the value of the company.'
Interesting argument. I suspect you are being overly cynical; current owners are equally likely to want to know what is really going on and what the company is achieving. If their company is being presented as worth $30m when it's only worth $10m, then their investment is at risk. If a short seller specialist spots there is a problem, then they are liable to lose all their investment. So they have an incentive to get an accurate picture.
The group that most wants a false picture to persist is the management, and the whole idea of an audit is to challenge the management's figures so that the owners can know what is actually going on. That's why auditing exists.
The object for the current owners is to know what's really going on so they can make changes if there is a need for change. To assume they prefer to live with a lie doesn't, for the reasons I've given, really make sense.
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And that's only true if the management knows that there's something shady going on and wants to keep it covered. Note that that doesn't always mean that they're part of the problem. It may mean that they're trying to clean things up internally and hoping to keep the lid on until everything's been straightened out.
Re: Conflict of interest - then who should pay? (Score:2)
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"So how do you propose to pay for the audit if it isn't paid for by the current owners?"
an optional token fee/tax applied to all stock purchase transactions- call it 1/10th of 1% of the purchase.
if you opt in, it goes to pay for auditors/sec pools.
also if you opt in, in the case of fraud such as started this story, you get paid out with a higher standing in the creditor pool than the stock holders who do not. same as any other insurance
some variation like that.
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No. Investors are people who have bought a share of the company and hope to be rewarded with a share of the profits. It is in their interests to see that the company accounts are correct and that the directors are doing a proper job.
The people who buy shares hoping to sell them to somebody else for more money at a later date aren't true investors, they are speculators. It is in their interest that the company is perceived to be worth as much as possible.
Unfortunately, there are too many of the latter type o
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"The company is owned by the current investors. They hire the auditors."
Wrong! The auditors are hired by the company management. The fact that the interests of owners (investors) and management do not align is the root of the entire problem. Having the investors directly hire and pay for the auditors is an interesting thought, although there are practical difficulties with that.
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Yes, but being able to sue the auditors and hold them accountable would resolve that conflict. They'd have CYA motivation.
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No,it wouldn't happen all of a sudden. But it would TEND in that direction.
OTOH, and if I understand correctly (IANAL) there isn't much official protection for the senior executives, but somehow the evidence to prosecute them is either never collected or never asked for. The actual legal protection (again in my understanding) is for the stockholders holding less than 10% of the company's stock. But somehow the executives are never charged.
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The whole point of audits is to at least put a finger on those individuals who knowingly cooked the books. Properly done audits would make it easy to know precisely who to prosecute in the case a criminal trial is needed. The easiest way to make sure that the audit is done to a certain standard is to make the auditor liable for mistakes that they failed to uncover. Audits should be comprehensive enough that the auditors should either find the problems in the books, or, in the case of more comprehensive f
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This is precisely it. An auditor that doesn't share in the civil and criminal liability is a complete waste of time.
In an ideal world investors would come to recognize quality auditing firms in the same way that we recognize quality manufacturing firms. These firms would demand a significant portion of the fee up front and would not sign off on the audit until they were satisfied that the company was, in fact, clean. The company being audited could then rest assured that their books were clean (interna
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There is a conflict of interest: The company wanted to launder its numbers is paying the auditor. I don't see any way around that. The only way to balance that us for the auditors to share in civil and criminal liability.
Indeed. Incidentally, that is how it works in Europe: External audit is responsible for whatever it reports. If that is inaccurate, incomplete or unclear, they are on the hook.
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"The only way to balance that us for the auditors to share in civil and criminal liability."
That doesn't eliminate the conflict of interest; that increases the incentive for the auditor to participate more directly the the fraud to make sure it can be covered up correctly.
What do people expect? (Score:5, Interesting)
Look at the terms of service and you will notice they explicitly state that they will not be held liable for anything. You have no recourse unless they have acted criminally and can be prosecuted using statutory laws that override the contract terms.
Here in the UK there is a huge scam called conveyance, where you hire a solicitor to handle the buying and selling of your home. The idea is that you have a sense of security that you have someone who is responsible for the transaction that can be held liable if anything goes wrong. The reality is that no liability is accepted by the solicitor in their contract with you and no solicitor has ever been successfully held responsible for mistakes they have made. The whole professional services market is money for old rope.
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Yet Deloitte completed an audit of them in 2022. Did they do any auditing or just take money in exchange for a good audit result? https://www.tingogroup.com/new... [tingogroup.com]
Now the SEC is suing them for fraud.
Tingo and two related companies, Tingo International Holdings Inc. and Agri-Fintech Holdings Inc., have booked billions of dollars in false transactions through two Nigerian subsidiaries since 2019, according to the lawsuit, filed Monday in federal court in Manhattan. Tingo reported hundreds of millions of dollars in fake revenues and assets, the SEC alleges. The regulator accused Tingo’s chief executive officer, Mmobuosi Odogwu Banye, of orchestrating the alleged fraud. In one example, Tingo reported a cash balance of $461.7 million in March when legitimate bank records showed less than $50, according to the suit.
https://finance.yahoo.com/news... [yahoo.com]
As Twain famously said... (Score:3, Insightful)
There's three kinds of lies in this world: lies, damn lies, and statistics.
Auditors aren't dumb. They see all the numbers, and the numbers don't lie. But here's the thing... They're not paid to publish numbers; they're paid to publish statistics. And since you never bite the hand that feeds you, they're not going to publish statistics that make a company look bad.
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the numbers don't lie
How can you mention statistics and then say that with a straight face?
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If you follow the rules, you pass the audit. If you don't, then you don't pass the audit.
That is true even for clearly wrong code. Auditors will completely ignore signs of malfeasance as long as you are following the rules they ca
Re: As Twain famously said... (Score:2)
Absolute clownshow on that appeals court (Score:5, Interesting)
The overwhelming majority of investors are "non-savvy investors" and the court knows that. These are not people trained in financial audits, much less forensic auditing who are capable of really parsing the tea leaves to find signs of fraud.
Odds are good even major newsletters like Motley Fool premium would be fooled by this.
The courts reaction to this fig leaf of fraud is just \_()_/
They ought to be impeached by Congress and removed for this. They are completely unfit for public service.
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They ought to be impeached by Congress and removed for this. They are completely unfit for public service.
First, you would need to impeach most of congress!
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First, you would need to impeach most of congress!
Problem is - while people's opinions of congress as a whole do tend to be extremely negative, they don't typically feel that way about their own individual representative(s).
Re: Absolute clownshow on that appeals court (Score:2)
Blaming the auditor sounds like a path towards getting away with stuff because well, they signed off on it right?
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Probably just utterly corrupt judges doing somebody a political favor to the detriment of everybody.
An audit report must always be "useful". If it is incomplete or imprecise, the auditor in question myst fact unlimited liability.
A silver lining? (Score:5, Interesting)
I don't know enough about the history of financial auditing to be confident about what I'm thinking, so I'll just state an impression I have and ask a question based on it.
My impression is that unreasonably rosy 'nudge nudge wink wink' audits aren't at all uncommon. My question is "if sanitized audits are a common thing, isn't it good to have that industry quaking in its boots at the prospect of becoming utterly irrelevant and largely unemployable"?
It strikes me that this might be a much-needed wake-up call. But again, I'm not knowledgeable enough to be at all confident in that conclusion; so I'd be happy to look at the matter differently in the face of contrary evidence.
Re: A silver lining? (Score:2)
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You are not wrong.
The purpose of these audits is to diffuse responsibility and thus keep people out of prison.
The CEO and CFO of a company can say "our books are clean, look at the audit report" and if shit pops up, they can point to the report, claim ignorance and that they can't possibly know every small detail in their company and that they hired external auditors to do it for them, etc. etc. - so the CEO and CFO are not responsible.
The audit companies, meanwhile, write their reports carefully to avoid r
Both could be correct. (Score:5, Insightful)
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Could you reduce computer security, say in terms of the attack surface and mitigations of a company, to numbers?
Thinking hard on that will identify the flaw in your argument.
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>Could you reduce computer security, say in terms of the attack surface and mitigations of a company, to numbers?
Yes. This is done in the industry all the time, and security companies compete on their ability to get their clients to high security compliance scores.
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I'm aware of how often it is done. Does it protect anything?
The information assurance (IA) paperwork on the OPM system was up to snuff.
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>Could you reduce computer security, say in terms of the attack surface and mitigations of a company, to numbers?
Yes. This is done in the industry all the time, and security companies compete on their ability to get their clients to high security compliance scores.
The only thing these audits care about is how you dot the is and cross the ts on the compliance score. They do very little to secure the "attack surface" or protect the company. They don't even understand the technology that is being used.
This is from experience and the constant security audits and requests I'm asked to participate in. The last one had me flabbergasted with "can you please show me the screenshot with the check mark of the VPN being activated?".
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>The only thing these audits care about is how you dot the is and cross the ts on the compliance score. They do very little to secure the "attack surface" or protect the company.
Generally I've come to believe the compliance audits are created by reviewing every possible attack surface and giving you points for eliminating it. Yes, they're 'dumb', but they're used to get people who don't know shit to sign off on inconvenient security measures.
The issue isn't that they don't cover what they need to cover,
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That depends one "safe in what respect?". Safe to read systems can be quite useful, for many purposes. And are reasonably possible. A safe to read system coupled with a write once memory can be nearly as safe, and has a broader category of uses.
OTOH, if you just mean "perfection does not exist in this universe", then I agree with you.
Re: Both could be correct. (Score:3)
This is exactly the problem. SEC says to audit but doesnâ(TM)t do anything about quality or content, only quantity. So people will do just enough creating a small industry of auditors like PwC that will simply generate a report to satisfy the regulators. Proper 3rd party investor audits are stifled with these reports, because look, we already did one and SEC says I donâ(TM)t have to do another one.
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The WSJ article is free to read if you register. No trial offer or anything.
There's not much to it though. It quotes a few experts, and leaves it at that. Two contradictory quotes:
* These types of audits are pass/fail only and provide no details at all. Only standardized, general language is allowed.
* These types of audits can point of failures, by saying they are not "unqualified," and giving details.
The reason audits have boilerplate language is so the auditor doesn't get sued. That's probably how the cou
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s/the the/the
s/Missing from the news/Missing from the headlines/
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Does anyone have a link to a non-paywalled story? I suspect the title and summary are misleading in that the appeals court ruled in the plaintiffs favor on an issue regarding the auditor but the story suggests the court says the auditor does not matter. This happens a lot in this clickbait world.
For example this was a previous slashdot article:Court Rules Automakers Can Record and Intercept Owner Text Messages [slashdot.org].Reading the title and the summary, one would think the courts ruled that it was acceptable for au
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The problem here is that a "useless audit report" should leave the auditor liable for any and all damage caused to people relying on that report. Instead, the auditor just walks away. And that is fundamentally wrong.
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Yes, but that doesn't work.
See tax laws. Whenever the tax laws are amended to close some of the loopholes that corporations, the rich or others who can afford lawyers to go through the exact wordings with a very fine comb find, the same people will find new holes.
You can't win this game. You need to punish intent to evade. Yes, intent is hard to prove, but you will find the occasional whistleblower or leak of internal e-mails or whatever. Tear down one of the major culprits and the others will become a lot
You can't trust anyone these days (Score:5, Informative)
It used to be the case that professions were self regulated by a desire for the profession's members to retain their reputation as professionals. To be called out as a 'cad and a bounder' would be a matter of great personal shame, to be avoided by doing the right thing in a general sense.
Somewhere in the past 50 years we have shifted to a mindset where 'the right thing' is to follow the letter of the law, not to be 'professional' and honourable in fulfilling their duties. In response law makers have tried to articulate best practice - but end up playing 'wac-a-mole' as people twist the law to their own interest rather than do the 'right' thing. There is no good solution to this problem...
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The incentives have shifted, but I think you have much too rosy an opinion of past times.
Penny stocks! (Score:2)
Unaccountable accounting profession (Score:1)
the lawless GOP (Score:2)
Politicians (Score:2)
And the decline continues (Score:2)
Apparently, more money in the short term is so utterly important that even the future of the national economy does not matter in comparison.
Just for context: Audit reports are the only things customers and partners can rely on for information on the state of an enterprise. Well, they could Now that this is gone, expect more shoddy and incomplete audit reports and more enterprises to decline or collapse.
skills (Score:2)
Audit companies are excellent at one thing that's important to their business - and it's not checking someone else's books. It is writing up reports that have the exact right wording to ensure that no matter what, they can't be held accountable.
If you've ever read such a report, you have noticed how precisely they spell out the "according to the documents provided to us, the following conclusions ..." parts.
Paywalled (Score:2)
I wish the article wasn't paywalled. Can't know for sure, but I suspect what the Court actually ruled was that the law (probably SOX or similar) can require third party audits, but that the SEC can't require companies to pass such audits to some arbitrary level. That is, the Court is probably saying that the SEC can't enforce requirements that the law doesn't detail.
IANAL, and also can't read the actual article to even see which case it is referring to. That's just my guess.
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Here ya go. https://www.nysscpa.org/news/p... [nysscpa.org]
"The investors sued BDO in 2017, and the U.S. District Court for the Southern District of New York dismissed their claims, holding that none of the misstatements were actionable under the securities laws."