The Economic Meltdown and Transparency Reporting by Auditors

In the beginning, Smith, Ricardo, Friedman, Keynes, and the whole lot of the acclaimed fathers of economics gave the world Deflation and Inflation as the economic problems faced by economies of the world. Later, it was further expanded to include Depression and Recession. And as if that was not enough, Stagflation and Hyper-Inflation were added. As the world was trying to find better ways of solving these economic problems, pigeonholing it to fit into any of the above recognised problems, the Politicians have now introduced the current Economic Meltdown as the present economic problem faced by the World.

From mid 2008 till date, the phrase has been gaining prominence around the world with various analysts trying to out do each other in providing an appropriate definition to the phrase. The word meltdown connotes the existence of a solid matter that gradually melts probably because it’s exposed to heat beyond its endurance levels. In Economic parlance, it simply means panic in political and business circles occasioned by imminent financial, economic, and monetary collapse of the world economies.

In an economic meltdown, resource flows and capital flows around the world are frozen up (Soludo, 2009a). Individuals and governments are collectively affected; the individual suffers job insecurity and general decrease in consumption levels to bare essentials due to unavailability of funds occasioned by job loss or reduced earnings. The governments on the other hand are exposed to econo-socio-political problems of social unrest, reduced revenues from taxes resulting from reduced company and personal taxes, decrease in GDP arising from reduced income from goods sold, balance of payment problems etc. such a situation would lead to rampant breakdown of infrastructures and society, with drastic food shortages, would lead to hostile levels of civil strife and violence (Leigh, 2009). With special emphasis to Nigerian, the Governor of Central Bank of Nigeria, Prof. Chukwuma Soludo further stated that:

“….. the impact of the global crisis on the Nigerian economy to include 'confidence trap' in stock market with trillions of Naira already lost, including associated 'wealth effect' on domestic aggregate demand, collapse of commodity prices (especially oil) leading to reduction in export earnings and revenue. Other effects, according to him, are demand pressure on the foreign exchange market arising from divestment and repatriation of capital and dividend by foreign investors, as well as de-cumulation of foreign reserves and pressure on exchange rate (Soludo 2009b).”

Governments the world over, and international financial institutions has generally accepted the fact that the world is on the brink of a major financial crisis which necessitated various solutions to the problems. From American to Europe, Africa to Asia, politicians and economists, and even central bank chiefs have all advocated various solutions to the problems. The main thrust of these solutions is the restoration of confidence in the system and boosting individual consumption power and government earnings. Top on the list of available solutions are: Stimulus plan and bailout economic recovery packages (Obama, 2009); remove uncertainty and issue clear and consistent policy directions (Okonjo-Iweala, 2009); develop and boost tourism to increase internally generated funds (Raji, 2009); conserve foreign exchange and shore up the value of the local currency (Soludo, 2009a); IMF special drawing rights, and G20 leaders agreement on economic meltdown; development of natural resources and other internally fund generation activities (Okonkwo, 2009); a spending culture by governments in line with the current meltdown (Saraki 2009); speedy government intervention and copying tested solutions from other economies (Ugweje, 2009); deficit spending by governments (Babalola, 2009); government intervention in interest rates and foreign exchange market (Oshimole 2009). The list is certainly endless.

All the above suggested solutions to the economic meltdown, however good they may be, have consciously overlooked an important player in the world financial circles – the Auditor. Due to the current economic problems, Auditors and corporate governance are under great pressure to maintain or even improve on past performances, and such may lead to behaviours that may be considered improper or not totally acceptable. Acts that might eventually, if not checked, compound the present crisis. To forestall such there is need for greater transparency on part of Auditors. Unless, the current problem isn’t a financial problem, but if it is, then, the Auditor has an important role to play in finding its lasting solution. Generally speaking, Auditors handle financial issues and problems, and since the present world crisis is of a financial nature, Auditors must be invited or included in finding its solution. There is no denying the fact that Auditing profession has a great part to play in bringing about a solution, after all, they (Auditors) cannot wash their hands completely off the problems, memories of Enron, WorldCom etc are still fresh with us. The level of financial loss to investors with the collapse of Enron and other such companies occasioned the call for greater transparency on auditors. Given the high level of scandal caused by Auditors and the level of loss to the economy, the audit profession as a matter of necessity should be more transparent

Transparency of audited financial statements are in no doubt highly essential to the efficient allocation of resources in capitalist economies. And if resources were efficiently allocated, the world would not be experiencing the present meltdown, because transparency makes for intelligent decision making. In a globalize economy like ours, crisis in one financial centre can easily ripple and affect other economies, the call for transparency has become more universally urgent, and a necessary solution to the present meltdown.

What is Auditor transparency?

Auditor transparency involves the provision of accurate, true information especially to investors and creditors in published / audited accounts. It includes the following: true, timely and accurate information; presentation of events, transactions, accounts or other significant information in its true form, without any form of bias; application of internationally acceptable accounting and auditing standards to financial statements, so that they can be universally comparable; complete disclosures of all relevant and material information in compliance with the materiality concept; principles of consistency in preparing financial statements so that no marked departures exist from one accounting period to the other.

Transparency strikes at the heart of efficient financial management. A key element of transparency is the timely availability of accurate information for those who makes decisions, how they are made, the objectives being pursued, the outcome expected and how the relate to each other. Transparency can therefore significantly alter a way an economy or business is managed, bringing with it accountability as an engine to drive improvements and efficiency and growth.

The Sarbanes – Oxley Act of 2002

Any discussion on Auditor transparency will be incomplete if the Sarbanes-Oxley Act of 2002 is not mentioned. This law enacted in the wake various business scandals that cost investors over $500 billion dollars (Rezaee 2005) was enacted to help protect investors from the excesses of auditors and corporate governance. Many provisions of the Act require the SEC and other regulators to adopt additional regulations aimed at (1) creating a new regulatory framework for accountants; (2) establishing higher standards for corporate governance; (3) improving quality and transparency of financial reports; (4) enhancing effectiveness of audit functions; (5) imposing far-reaching requirements on public companies and their executives; and (6) increasing criminal penalties for violations of securities and related laws and regulations. However, many rules pertaining to the implementation of provisions of the Act are yet to be finalized which meanwhile causes considerable uncertainty regarding its eventual impact (e.g. the extent to which the new oversight board will issue audit standards).

Benefits of Transparency

Akerlof (1970) emphasizes the alternative possibility that, when information is hard to verify, dishonest behaviour may drive honest behaviour out of the market. Corporate governance are yet to fully appreciate the benefits inherent in full transparency. Transparency can have wide reaching positive results. Some organizations believe that being transparent will add to their cost of operations, but this is false, because transparency as a matter of fact increases the competitive advantage, and levels the playing field for all concerned.

Global poverty will be the ultimate result of the current meltdown. Poverty usually results in situations where government is not people oriented. Transparency is a necessary condition for sound economic governance. As government policies and actions are critically examined, transparency increases, unsustainable policies are detected and rejected

Financial transparency would shed light on business activities and potentials; this would allow the public and potential investors to understand both the prospects for successful new entry onto their market, and possible obstacles to it.

Increased transparency would inform potential investors of the possible economic rewards of entry into the market.

Conclusion

All through this write up the economic meltdown has been analysed and its effects both to governments and individuals detailed and explained. Suggested solutions from experts and politicians alike has been given. But what this write up is all about is the inclusion of Auditors by governments, international monetary organizations and individuals in finding a lasting solution to the crisis. This urgent call arises because, Auditors by their profession are in a better position to contribute to a lasting solution to the current economic meltdown. Whatever suggested solution advocated, will of necessity be recorded and its effects analyzed by Auditors, if transparency is lacking on the part of Auditors, then, all the efforts at finding a lasting solution will be an exercise in futility, as reported financial statements will be misleading which ultimately will affect the efficient allocation of resources. Auditor transparency will go along way ensuring that what is recorded and analyzed provide a true and fair view of financial positions of organizations, to avoid a repeat of earlier scenarios where companies collapsed from auditor collusion with management.

References

Akerlof, G. A. (1970). ‘The market for lemons: Quality uncertainty and the market mechanism’ Quarterly Journal of Economics, LXXXV, 488–500.

Babalola, R (2009) 'Govt unfolds ways to shield banks from meltdown' in Marcel Mbamalu THE GUARDIAN Tuesday March 31.

Leigh, J (2008) 'Economic Meltdown in America Saves the World from Peak Oil' ENERGY BULLETIN October 9

Obama, B. (2009) ‘Consumer confidence called key to combating economic meltdown’ CNN Friday February 3

Okonjo-Iweala, N (2009) ‘Debt Relief Saved Nigeria: Yar’Adua must show consistent policy directions’ in Olawale Olaleye, THIS DAY March 29.

Okonkwo, E. (2009) 'How to Survive Global Economic Meltdown’ THIS DAY March 29.

Oshimole, A (2009) 'Govt unfolds ways to shield banks from meltdown' in Marcel Mbamalu THE GUARDIAN Tuesday March 31.

Raji, A. (2009) ‘Economic meltdown: Oyo moves to boost tourism’ in DELE OGUNYEMI CHAMPION March 30

Rezaee, Z (2005) ‘Causes, consequences, and deterrence of financial statement fraud’ Critical Perspectives on Accounting 16 277–298

Saraki, B (2009) ‘Meltdown: New Spending Policy Under way’ in Hammed Shittu THIS DAY March 28

Soludo, C. (2009a) ‘FOREX: Has the CBN tamed the parallel market mafia?’ in Enitar Ugwu & Adeyemi Adepetun THE GUARDIAN Wednesday March 25.

Soludo, C. (2009b) 'Govt unfolds ways to shield banks from meltdown' in Marcel Mbamalu THE GUARDIAN Tuesday March 31.

Ugweje, O. (2009) 'Experts list ways to cushion meltdown in ICT' in Adeyemi Adepetun THE GUARDIAN Wednesday March 25.