April 7, 2007

AEI's Peter Wallison:

Although the public, the media, and even lawmakers seem to think that financial statements accurately record what happened in the past, financial statements prepared under Generally Accepted Accounting Principles (GAAP) are largely shaped by management estimates and forecasts about an unknowable future. Although the use of apparently unambiguous numbers gives the impression of precision, it is an illusion. This places auditors in an impossible position. They are unequipped to assess the accuracy of management estimates and forecasts, yet their standard opinion concerning financial statements suggests that they have. The Public Company Accounting Oversight Board (PCAOB) has the authority to change the format of the auditor's attestation, and thus to relieve auditors of liabilities they do not deserve and cannot avoid. PCAOB action could go a long way toward reducing the liabilities of the major auditing firms--one of the key dangers to the global financial system recognized in all the recent reports on the regulation of U.S. capital markets.