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Audit keeps failing – here’s why a fundamental change is needed

Audit keeps failing – here’s why a fundamental change is needed

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EY's auditors are under fire for failing to spot Wirecard's missing €1.9 billion sooner. James W Copeland / Shutterstock.com

A massive shakeup of the UK’s audit industry is on the cards. The Big Four, which audit all of the FTSE 100 and 21 of the FTSE 250, have been told by the accounting regulator to separate their auditing practices by 2024. It follows the collapse of Wirecard, a payments firm which recently admitted that €1.9 billion of the cash on its books probably never existed.

But change has been a long time coming. The frequency with which companies fail – seemingly without any warning signs – has grown in recent years and Wirecard is merely the latest example. Carillion, BHS, Thomas Cook, Patisserie Valerie, and many other companies were given clean bills of financial health by their auditors before collapsing.

We believe that these many failings highlight how the auditing industry is not fit for purpose. The perception of the public is that it is the job of auditors to go over a company’s books and make sure everything is in order. Surely they should be able to spot a looming disaster or better raise concerns about the direction a company is travelling in? Yet so often they fail.

Separating the Big Four’s auditing arms from the rest of their business is a welcome development. Research has repeatedly shown how problematic it is that these firms audit the same companies that they give financial advice to through their wider consulting and tax divisions.

But this is not enough in the fight against financial deception. First, giving the Big Four four years to separate their audit practices is concerning. Fraudulent financial reporting is a huge problem – and likely to grow as the coronavirus-induced recession begins to bite – and this time frame is enough for a worrying number of businesses to fail. But, more fundamentally, there needs to be a change to the approach that auditors take.

‘Serious and serial failures’

EY – whose latest audit of Wirecard’s accounts revealed the missing funds – said it was “an elaborate and sophisticated global fraud” and that EY had been provided false documentation. This defence is revealing of issues in the profession as a whole.

Payments firm, Wirecard's headquarters in Germany.
Payments firm Wirecard filed for insolvency after admitting that €1.9 billion of cash probably never existed. Rico Markus/Shutterstock

Critics say EY should have done more to detect the fraud. But the prevailing wisdom in the auditing profession is that auditors are not expected to go looking for fraud and they are ultimately not responsible for detecting it. The International Standards on Auditing, which sets out global standards for the profession, places the responsibility for the prevention and detection of fraud solely on a company’s managers and directors – not its auditors.

Clearly the current system is not working. The number of fines for negligence in failed audits speaks for itself, with Big Four firms hit with £16.5 million in fines in 2019 alone.

PwC was fined £4.6 million in June 2019 for “serious lack of competence” when inspecting the financial statements of IT services firm Redcentric. This followed a £6.5 million fine in June 2018 for misconduct in its audit of department store BHS. KPMG was fined £6 million in 2019 for misconduct in relation to the audit of automobile insurer Equity Syndicate Management Limited. Deloitte has just been handed a record £15 million fine for “serious and serial failures” in its audits of former FTSE 100 technology group Autonomy.

Reform roadmap

Despite the evident problems with the auditing profession, the UK government has been slow to make any serious changes to the way it is regulated or what is expected of auditors. A major review, known as the Brydon report, was commissioned in 2018 but little has been done to act on the proposals it made.

A good starting point is to put the onus on auditors to detect fraud. Auditors, the report said, should be suspicious and “endeavour to detect material fraud in all reasonable ways”. This is very different to the current soft approach.

We believe that auditors should accept full responsibility for detecting fraud in financial statements. Abdicating this responsibility to management negates the very purpose of audit in the financial reporting process.

Once the mandate of auditors has changed, this will shape how auditors are trained. Currently the emphasis is on simply identifying any departures from accounting standards. But they need to go beyond this and adopt forensic accounting procedures.

This involves a thorough examination of financial information, taking an investigative approach and analysing information as if it would be held up in a court of law. Embedding forensic accounting into their approach will likely save auditors from some of the fines they have been receiving, as they can clearly show what they did, if need be.

Along with separating audit from the Big Four and a better regulator, this is required to restore public trust in the financial reporting process and prevent the seemingly sudden collapse of more businesses – something that is hugely important for the success of any business, as well as the wider economy.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Government

The Grinch Who Stole Freedom

The Grinch Who Stole Freedom

Authored by Jeffrey A. Tucker via The Epoch Times (emphasis ours),

Before President Joe Biden’s State of the…

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The Grinch Who Stole Freedom

Authored by Jeffrey A. Tucker via The Epoch Times (emphasis ours),

Before President Joe Biden’s State of the Union address, the pundit class was predicting that he would deliver a message of unity and calm, if only to attract undecided voters to his side.

President Joe Biden delivers the State of the Union address in the House Chamber of the U.S. Capitol in Washington, D.C., on March 7, 2024. (Mandel Ngan/AFP/Getty Images)

He did the opposite. The speech revealed a loud, cranky, angry, bitter side of the man that people don’t usually see. It seemed like the real Joe Biden I remember from the old days, full of venom, sarcasm, disdain, threats, and extreme partisanship.

The base might have loved it except that he made reference to an “illegal” alien, which is apparently a trigger word for the left. He failed their purity test.

The speech was stunning in its bile and bitterness. It’s beyond belief that he began with a pitch for more funds for the Ukraine war, which has killed 10,000 civilians and some 200,000 troops on both sides. It’s a bloody mess that could have been resolved early on but for U.S. tax funding of the conflict.

Despite the push from the higher ends of conservative commentary, average Republicans have turned hard against this war. The United States is in a fiscal crisis and every manner of domestic crisis, and the U.S. president opens his speech with a pitch to protect the border in Ukraine? It was completely bizarre, and lent some weight to the darkest conspiracies about why the Biden administration cares so much about this issue.

From there, he pivoted to wildly overblown rhetoric about the most hysterically exaggerated event of our times: the legendary Jan. 6 protests on Capitol Hill. Arrests for daring to protest the government on that day are growing.

The media and the Biden administration continue to describe it as the worst crisis since the War of the Roses, or something. It’s all a wild stretch, but it set the tone of the whole speech, complete with unrelenting attacks on former President Donald Trump. He would use the speech not to unite or make a pitch that he is president of the entire country but rather intensify his fundamental attack on everything America is supposed to be.

Hard to isolate the most alarming part, but one aspect really stood out to me. He glared directly at the Supreme Court Justices sitting there and threatened them with political power. He said that they were awful for getting rid of nationwide abortion rights and returning the issue to the states where it belongs, very obviously. But President Biden whipped up his base to exact some kind of retribution against the court.

Looking this up, we have a few historical examples of presidents criticizing the court but none to their faces in a State of the Union address. This comes two weeks after President Biden directly bragged about defying the Supreme Court over the issue of student loan forgiveness. The court said he could not do this on his own, but President Biden did it anyway.

Here we have an issue of civic decorum that you cannot legislate or legally codify. Essentially, under the U.S. system, the president has to agree to defer to the highest court in its rulings even if he doesn’t like them. President Biden is now aggressively defying the court and adding direct threats on top of that. In other words, this president is plunging us straight into lawlessness and dictatorship.

In the background here, you must understand, is the most important free speech case in U.S. history. The Supreme Court on March 18 will hear arguments over an injunction against President Biden’s administrative agencies as issued by the Fifth Circuit. The injunction would forbid government agencies from imposing themselves on media and social media companies to curate content and censor contrary opinions, either directly or indirectly through so-called “switchboarding.”

A ruling for the plaintiffs in the case would force the dismantling of a growing and massive industry that has come to be called the censorship-industrial complex. It involves dozens or even more than 100 government agencies, including quasi-intelligence agencies such as the Cybersecurity and Infrastructure Security Agency (CISA), which was set up only in 2018 but managed information flow, labor force designations, and absentee voting during the COVID-19 response.

A good ruling here will protect free speech or at least intend to. But, of course, the Biden administration could directly defy it. That seems to be where this administration is headed. It’s extremely dangerous.

A ruling for the defense and against the injunction would be a catastrophe. It would invite every government agency to exercise direct control over all media and social media in the country, effectively abolishing the First Amendment.

Close watchers of the court have no clear idea of how this will turn out. But watching President Biden glare at court members at the address, one does wonder. Did they sense the threats he was making against them? Will they stand up for the independence of the judicial branch?

Maybe his intimidation tactics will end up backfiring. After all, does the Supreme Court really think it is wise to license this administration with the power to control all information flows in the United States?

The deeper issue here is a pressing battle that is roiling American life today. It concerns the future and power of the administrative state versus the elected one. The Constitution contains no reference to a fourth branch of government, but that is what has been allowed to form and entrench itself, in complete violation of the Founders’ intentions. Only the Supreme Court can stop it, if they are brave enough to take it on.

If you haven’t figured it out yet, and surely you have, President Biden is nothing but a marionette of deep-state interests. He is there to pretend to be the people’s representative, but everything that he does is about entrenching the fourth branch of government, the permanent bureaucracy that goes on its merry way without any real civilian oversight.

We know this for a fact by virtue of one of his first acts as president, to repeal an executive order by President Trump that would have reclassified some (or many) federal employees as directly under the control of the elected president rather than have independent power. The elites in Washington absolutely panicked about President Trump’s executive order. They plotted to make sure that he didn’t get a second term, and quickly scratched that brilliant act by President Trump from the historical record.

This epic battle is the subtext behind nearly everything taking place in Washington today.

Aside from the vicious moment of directly attacking the Supreme Court, President Biden set himself up as some kind of economic central planner, promising to abolish hidden fees and bags of chips that weren’t full enough, as if he has the power to do this, which he does not. He was up there just muttering gibberish. If he is serious, he believes that the U.S. president has the power to dictate the prices of every candy bar and hotel room in the United States—an absolutely terrifying exercise of power that compares only to Stalin and Mao. And yet there he was promising to do just that.

Aside from demonizing the opposition, wildly exaggerating about Jan. 6, whipping up war frenzy, swearing to end climate change, which will make the “green energy” industry rich, threatening more taxes on business enterprise, promising to cure cancer (again!), and parading as the master of candy bar prices, what else did he do? Well, he took credit for the supposedly growing economy even as a vast number of Americans are deeply suffering from his awful policies.

It’s hard to imagine that this speech could be considered a success. The optics alone made him look like the Grinch who stole freedom, except the Grinch was far more articulate and clever. He’s a mean one, Mr. Biden.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Mon, 03/11/2024 - 12:00

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International

Chinese migration to US is nothing new – but the reasons for recent surge at Southern border are

A gloomier economic outlook in China and tightening state control have combined with the influence of social media in encouraging migration.

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Chinese migrants wait for a boat after having walked across the Darien Gap from Colombia to Panama. AP Photo/Natacha Pisarenko

The brief closure of the Darien Gap – a perilous 66-mile jungle journey linking South American and Central America – in February 2024 temporarily halted one of the Western Hemisphere’s busiest migration routes. It also highlighted its importance to a small but growing group of people that depend on that pass to make it to the U.S.: Chinese migrants.

While a record 2.5 million migrants were detained at the United States’ southwestern land border in 2023, only about 37,000 were from China.

I’m a scholar of migration and China. What I find most remarkable in these figures is the speed with which the number of Chinese migrants is growing. Nearly 10 times as many Chinese migrants crossed the southern border in 2023 as in 2022. In December 2023 alone, U.S. Border Patrol officials reported encounters with about 6,000 Chinese migrants, in contrast to the 900 they reported a year earlier in December 2022.

The dramatic uptick is the result of a confluence of factors that range from a slowing Chinese economy and tightening political control by President Xi Jinping to the easy access to online information on Chinese social media about how to make the trip.

Middle-class migrants

Journalists reporting from the border have generalized that Chinese migrants come largely from the self-employed middle class. They are not rich enough to use education or work opportunities as a means of entry, but they can afford to fly across the world.

According to a report from Reuters, in many cases those attempting to make the crossing are small-business owners who saw irreparable damage to their primary or sole source of income due to China’s “zero COVID” policies. The migrants are women, men and, in some cases, children accompanying parents from all over China.

Chinese nationals have long made the journey to the United States seeking economic opportunity or political freedom. Based on recent media interviews with migrants coming by way of South America and the U.S.’s southern border, the increase in numbers seems driven by two factors.

First, the most common path for immigration for Chinese nationals is through a student visa or H1-B visa for skilled workers. But travel restrictions during the early months of the pandemic temporarily stalled migration from China. Immigrant visas are out of reach for many Chinese nationals without family or vocation-based preferences, and tourist visas require a personal interview with a U.S. consulate to gauge the likelihood of the traveler returning to China.

Social media tutorials

Second, with the legal routes for immigration difficult to follow, social media accounts have outlined alternatives for Chinese who feel an urgent need to emigrate. Accounts on Douyin, the TikTok clone available in mainland China, document locations open for visa-free travel by Chinese passport holders. On TikTok itself, migrants could find information on where to cross the border, as well as information about transportation and smugglers, commonly known as “snakeheads,” who are experienced with bringing migrants on the journey north.

With virtual private networks, immigrants can also gather information from U.S. apps such as X, YouTube, Facebook and other sites that are otherwise blocked by Chinese censors.

Inspired by social media posts that both offer practical guides and celebrate the journey, thousands of Chinese migrants have been flying to Ecuador, which allows visa-free travel for Chinese citizens, and then making their way over land to the U.S.-Mexican border.

This journey involves trekking through the Darien Gap, which despite its notoriety as a dangerous crossing has become an increasingly common route for migrants from Venezuela, Colombia and all over the world.

In addition to information about crossing the Darien Gap, these social media posts highlight the best places to cross the border. This has led to a large share of Chinese asylum seekers following the same path to Mexico’s Baja California to cross the border near San Diego.

Chinese migration to US is nothing new

The rapid increase in numbers and the ease of accessing information via social media on their smartphones are new innovations. But there is a longer history of Chinese migration to the U.S. over the southern border – and at the hands of smugglers.

From 1882 to 1943, the United States banned all immigration by male Chinese laborers and most Chinese women. A combination of economic competition and racist concerns about Chinese culture and assimilability ensured that the Chinese would be the first ethnic group to enter the United States illegally.

With legal options for arrival eliminated, some Chinese migrants took advantage of the relative ease of movement between the U.S. and Mexico during those years. While some migrants adopted Mexican names and spoke enough Spanish to pass as migrant workers, others used borrowed identities or paperwork from Chinese people with a right of entry, like U.S.-born citizens. Similarly to what we are seeing today, it was middle- and working-class Chinese who more frequently turned to illegal means. Those with money and education were able to circumvent the law by arriving as students or members of the merchant class, both exceptions to the exclusion law.

Though these Chinese exclusion laws officially ended in 1943, restrictions on migration from Asia continued until Congress revised U.S. immigration law in the Hart-Celler Act in 1965. New priorities for immigrant visas that stressed vocational skills as well as family reunification, alongside then Chinese leader Deng Xiaoping’s policies of “reform and opening,” helped many Chinese migrants make their way legally to the U.S. in the 1980s and 1990s.

Even after the restrictive immigration laws ended, Chinese migrants without the education or family connections often needed for U.S. visas continued to take dangerous routes with the help of “snakeheads.”

One notorious incident occurred in 1993, when a ship called the Golden Venture ran aground near New York, resulting in the drowning deaths of 10 Chinese migrants and the arrest and conviction of the snakeheads attempting to smuggle hundreds of Chinese migrants into the United States.

Existing tensions

Though there is plenty of precedent for Chinese migrants arriving without documentation, Chinese asylum seekers have better odds of success than many of the other migrants making the dangerous journey north.

An estimated 55% of Chinese asylum seekers are successful in making their claims, often citing political oppression and lack of religious freedom in China as motivations. By contrast, only 29% of Venezuelans seeking asylum in the U.S. have their claim granted, and the number is even lower for Colombians, at 19%.

The new halt on the migratory highway from the south has affected thousands of new migrants seeking refuge in the U.S. But the mix of push factors from their home country and encouragement on social media means that Chinese migrants will continue to seek routes to America.

And with both migration and the perceived threat from China likely to be features of the upcoming U.S. election, there is a risk that increased Chinese migration could become politicized, leaning further into existing tensions between Washington and Beijing.

Meredith Oyen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Government

Is the National Guard a solution to school violence?

School board members in one Massachusetts district have called for the National Guard to address student misbehavior. Does their request have merit? A…

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Every now and then, an elected official will suggest bringing in the National Guard to deal with violence that seems out of control.

A city council member in Washington suggested doing so in 2023 to combat the city’s rising violence. So did a Pennsylvania representative concerned about violence in Philadelphia in 2022.

In February 2024, officials in Massachusetts requested the National Guard be deployed to a more unexpected location – to a high school.

Brockton High School has been struggling with student fights, drug use and disrespect toward staff. One school staffer said she was trampled by a crowd rushing to see a fight. Many teachers call in sick to work each day, leaving the school understaffed.

As a researcher who studies school discipline, I know Brockton’s situation is part of a national trend of principals and teachers who have been struggling to deal with perceived increases in student misbehavior since the pandemic.

A review of how the National Guard has been deployed to schools in the past shows the guard can provide service to schools in cases of exceptional need. Yet, doing so does not always end well.

How have schools used the National Guard before?

In 1957, the National Guard blocked nine Black students’ attempts to desegregate Central High School in Little Rock, Arkansas. While the governor claimed this was for safety, the National Guard effectively delayed desegregation of the school – as did the mobs of white individuals outside. Ironically, weeks later, the National Guard and the U.S. Army would enforce integration and the safety of the “Little Rock Nine” on orders from President Dwight Eisenhower.

Three men from the mob around Little Rock’s Central High School are driven from the area at bayonet-point by soldiers of the 101st Airborne Division on Sept. 25, 1957. The presence of the troops permitted the nine Black students to enter the school with only minor background incidents. Bettmann via Getty Images

One of the most tragic cases of the National Guard in an educational setting came in 1970 at Kent State University. The National Guard was brought to campus to respond to protests over American involvement in the Vietnam War. The guardsmen fatally shot four students.

In 2012, then-Sen. Barbara Boxer, a Democrat from California, proposed funding to use the National Guard to provide school security in the wake of the Sandy Hook school shooting. The bill was not passed.

More recently, the National Guard filled teacher shortages in New Mexico’s K-12 schools during the quarantines and sickness of the pandemic. While the idea did not catch on nationally, teachers and school personnel in New Mexico generally reported positive experiences.

Can the National Guard address school discipline?

The National Guard’s mission includes responding to domestic emergencies. Members of the guard are part-time service members who maintain civilian lives. Some are students themselves in colleges and universities. Does this mission and training position the National Guard to respond to incidents of student misbehavior and school violence?

On the one hand, New Mexico’s pandemic experience shows the National Guard could be a stopgap to staffing shortages in unusual circumstances. Similarly, the guards’ eventual role in ensuring student safety during school desegregation in Arkansas demonstrates their potential to address exceptional cases in schools, such as racially motivated mob violence. And, of course, many schools have had military personnel teaching and mentoring through Junior ROTC programs for years.

Those seeking to bring the National Guard to Brockton High School have made similar arguments. They note that staffing shortages have contributed to behavior problems.

One school board member stated: “I know that the first thought that comes to mind when you hear ‘National Guard’ is uniform and arms, and that’s not the case. They’re people like us. They’re educated. They’re trained, and we just need their assistance right now. … We need more staff to support our staff and help the students learn (and) have a safe environment.”

Yet, there are reasons to question whether calls for the National Guard are the best way to address school misconduct and behavior. First, the National Guard is a temporary measure that does little to address the underlying causes of student misbehavior and school violence.

Research has shown that students benefit from effective teaching, meaningful and sustained relationships with school personnel and positive school environments. Such educative and supportive environments have been linked to safer schools. National Guard members are not trained as educators or counselors and, as a temporary measure, would not remain in the school to establish durable relationships with students.

What is more, a military presence – particularly if uniformed or armed – may make students feel less welcome at school or escalate situations.

Schools have already seen an increase in militarization. For example, school police departments have gone so far as to acquire grenade launchers and mine-resistant armored vehicles.

Research has found that school police make students more likely to be suspended and to be arrested. Similarly, while a National Guard presence may address misbehavior temporarily, their presence could similarly result in students experiencing punitive or exclusionary responses to behavior.

Students deserve a solution other than the guard

School violence and disruptions are serious problems that can harm students. Unfortunately, schools and educators have increasingly viewed student misbehavior as a problem to be dealt with through suspensions and police involvement.

A number of people – from the NAACP to the local mayor and other members of the school board – have criticized Brockton’s request for the National Guard. Governor Maura Healey has said she will not deploy the guard to the school.

However, the case of Brockton High School points to real needs. Educators there, like in other schools nationally, are facing a tough situation and perceive a lack of support and resources.

Many schools need more teachers and staff. Students need access to mentors and counselors. With these resources, schools can better ensure educators are able to do their jobs without military intervention.

F. Chris Curran has received funding from the US Department of Justice, the Bureau of Justice Assistance, and the American Civil Liberties Union for work on school safety and discipline.

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