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When You Presume, You Make a “Pre” out of “You” and “Me”

on 08 October 2019

I have altered a joke made popular by the 1973 television series “The Odd Couple”, when Tony Randall, as Felix Unger, is in court and rebukes a witness by saying “never assume”. The writer for the show credited the line to a teacher in his typewriting class; a Google Books search finds an obscure 1967 reference in publications of the US National Safety Congress.

Like the problems with assuming, presumption has its challenges. I have heard the term in two different contexts related to accounting and audit.

(click on the title to read the full article)

The first usage deals with audit procedures. Confirming banking relationships, in the audit sense, was a rebuttable presumption – you had to do it unless you could provide evidence to the contrary, that it wasn’t necessary. The PCAOB’s AS 2310: The Confirmation Process still speaks about accounts receivable confirmation as a presumption. The IAASB considered the pros and cons of rebuttable presumptions back in 2004 and more recently with ISA 540 (Accounting Estimates).

The second usage deals with reliance on the auditor’s report. Although I’ve never seen it in print, I was told that – at least in the US – there is a presumption that an investor relied on the auditor’s report, and was therefore able to seek damages against an auditor if there was loss – whether or not they actually read the financial statement or read the auditor’s report. An advertorial in the Journal of Accountancy in 2015 noted, “approximately one-quarter of audit claims asserted against CPA firms in the AICPA Professional Liability Insurance Program are brought by third parties.”

It is the latter presumption that was one of the items in my blog entry “Oh the Places We’ll Go!”, which mentioned a number of personal goals I had for the Extensible Business Reporting Language (XBRL). My more recent 3 September 2019 entry touched on the the area of Data Level Assurance. 

I became involved in the World Wide Web Consortium’s XML Encryption effort with the hope of using XBRL messages, digital signatures and XML Encryption so that investors could securely and anonymously register their reliance on an auditor’s opinion, and then be able to prove it in court if necessary. The world of blockchain provides even easier means to do so. Using a (free!) resource such as OriginStamp.org, an investor can anonymously capture information showing reliance on a report. When going to court, they can provide cryptographic proof of the document and time.

Why go through all of this effort? Right now, the insurance companies are paying out for anyone who says they relied on the auditor’s report. If those who prove reliance can get a lot more, and those who can’t get a lot less, the insurance companies and audit firms should wind up both being more accountable while making everyone more accountable in the process.

 

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