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The short answer is “no”

Forbes asks “Will social networks on the web ever make money?

No, and here’s why.  Social networking is built around the Mother of All Web Business Models—if you give away junk for free, you will build up a huge user base.  Then you just have to figure out how to get them to pay for it.  Unfortunately that is the exact opposite of a sound business plan.  First, figure out something people are willing to pay for.  Then market the hell out of it and get a good customer base.

On the web, nobody ends up paying for free crap.  Because when free junk goes payware, some other entrepreneur with a pocketful of angel investors will come up with the next big free junk idea, everyone will sign up, and later on down the road, will abandon it when it goes payware.  It’s all a part of the Great Circle of Life, like antelopes eating the grass, lions eating the antelopes, and bugs turning the lion carcass into fertilizer for the grass.

Right now the social networking sites that make money are doing it the old-fashioned way—crappy ads plastered all over anything.  Which you should be filtering out at the router, by the way.

No other model seems to work.

See, that wasn’t so hard.

Category: Finance, Web/Tech  2 Comments

Canadians still successfully ignoring elephant in the room

So, potential iPhone customers in Canada will get the shaft, via the carrier’s wireless data plans.  Don’t be too surprised—we’ve been getting gouged (relative to our southern neighbours) on dairy products like eggs, milk, butter and cheese for decades.  And we’re all much more likely to buy any of those items.  Yet dairy lacks the sex appeal of cell phones, so instead of getting angsty about the essentials, people get angsty about the toys.

I am a little sympathetic to the situation, since I am also required to be a hostage to the nation’s only GSM service provider. But I’m not going to blame Rogers for taking advantage of their monopoly situation, which was, after all, blessed by the CRTC and thence by politicians.  Companies, large or small, always adapt to market conditions—otherwise they go out of business.  It has always been thus.  More appropriate targets for popular agitation and reform might be:

  • Various federal politicians and their departments, who protect sectors of Canadian industry from the hurly-burly of unfettered interaction with foreign competitors.
  • Voters, who have consistently elected protectionist politicians.  There is still a widespread notion across all major parties that Canadian firms cannot hope to survive against global competitors.  They must therefore be protected by the regulations and restrictions of our artificial economic hothouse.

On a global playing field, you can have protectionist safeguards to preserve local industry, incurring potential costs of stagnation and non-competitive pricing.  Or you can have innovation and competitive pricing at the potential cost of losing your local industry.  It is an either/or proposition.  You can’t have protectionism accompanied by innovation and competitive pricing, because competition is the very thing that spurs companies to innovate and stay nimble.

To be blunt: lack of competition is a structural problem afflicting large sectors of the Canadian economy.  The CPRP and OECD say so.  It is not mere avarice on the part of one company, or even one industry.  It is the natural, logical result of trying to protect companies from the very catalyst that forces them to improve.

So by all means, write angry letters to Rogers, the CRTC, your MPs, et cetera.  But don’t expect an awful lot of change unless you’re prepared to let certain sacred cows die first.

Category: Amor Patriae, Finance, Industria  Tags:  Comments off

Finally, a paid vacation of our own

Ontario could get equalization payments within 2 years: TD

I’m claiming seasonal employment, because it’s damned inconvenient to work from January through March, when you might have to wear a hat.

From the same article:

Time to rework equalization formula?

The authors also say that Ontario is still a net contributor to federal coffers and likely will be in the future. Based on the most recent 2005 data, they say Ontario residents contributed $21 billion more to Ottawa than they got back in federal spending.

So if Ontario does end up getting equalization payments, “Ontario residents will, in effect, be paying the equalization tab with their own money,” according to Drummond and Burleton.

Well, it beats paying every else’s equalisation funding with our money, doesn’t it?   Isn’t it time we got to keep some?  Why does it seem like the baseline economic assumption is always “Ontario shells out”?

Category: Finance  Tags:  Comments off

Andy Rooney time

atm_queue I went to the ATM to withdraw some money today.  Two ladies, a little older than me, had occupied the automatic tellers with positively archaic tasks.  One was busy paying bills.  The other was getting her bank book updated.  Suddenly I had the suspicion that I had been transported back in time thousands of years, and a Tyrannosaurus Rex was likely to come crashing out of the verdant Cretaceous rainforest.  Paying bills at an ATM?  Bank books?

I can’t even remember the last time I wandered out to an ATM with a sheaf of bills in my hand.  You can deal with this crap online or by phone, without the people in line behind you being able to see that you’re 90 days overdue.

And those itty-bitty bank books—Great Caesar’s ghost.  I haven’t touched one of those since my second year of high school.  It’s wonderful that there are people still using bank books, meticulously keeping them up-to-date and carefully balancing their checkbooks against them on the back of a brown paper bag.  That’s much simpler and more reliable than learning how to click the mouse two or three times so your bank statements get downloaded into Quicken.

Reminds me of my grandparents’ generation, who would cheerfully waste an hour at the bank, conducting all transactions in person,  receiving a little bank-stamped piece of paper for everything.  Didn’t trust ATMs, of course, because people—unlike machines—are never prone to human error.

Wake up fellas.  Plug in the effin’ abacus and get online.  We’ve long since passed the point where electronic fund transfers are not only routine, but essential to ordinary, everyday operation in many (most?) sectors of industry.  Put it this way—if by horrible catastrophe the banks lose all ability to transfer and track funds electronically, little stamped pieces of paper aren’t going to resurrect our financial security.

Category: Finance, What Really Grinds My Gears  Comments off

Film board’s “strategic plan” falls short on strategy, planning

The local film board says that it needs a certain centre of mass here in Toronto, and that only government intervention can provide it.  Apparently governments of other jurisdictions are encouraging the growth of the same media/entertainment industries elsewhere, and are prepared to provide better incentives.  Businesses, like every form of organisation, flora or fauna, will go where the conditions are most favourable.  What a shocker.

Susan Murdoch, co-chair of the Toronto Film Board, told Toronto city council Tuesday that regional production encouraged by the CRTC, the Canadian Television Fund and other instruments of government policy effectively undermine the city’s potential as a world class production center.

“Other levels of governments have promoted regional incentives that encourage production going to other provinces. As an industry, to compete at a high quality level, domestically and internationally, you need to have a certain critical mass to keep our service business and local product at the top of the industry,” Murdoch told councilors.

— Etan Vlessing, “Regional production hurts Toronto, says group“. Playblack, September 4th, 2007.

What’s the solution?  Government intervention, of course!

Murdoch argued the federal and provincial governments, including Ontario’s own, are being short-sighted by insisting that jobs be created by spreading film and TV production coast-to-coast, away from Toronto and Montreal.

Unless we have companies [in Toronto] that can conceive and finance and market the projects, you don’t have an industry. You have a cottage industry that will rise and fall according to outside circumstances,” she warned.

Promoting regional production centers only dilutes Canada’s potential as a film and TV production powerhouse, Murdoch argued.

“It’s best to concentrate an industry in Toronto as a means to making Canada a world leader,” she told city councilors…

“We can’t compete with Mexico and South Africa in terms of hard costs. We want to compete on excellence,” she argued.

[emphasis mine]

Ms. Murdoch hits the nail on the head precisely here, but then fails to make the necessary connections.  The problem with Canadian media industry isn’t that it’s getting diluted by all the talented folks moving out of Toronto and Montreal.  We have had massive media concentration in these two cities for a couple of generations and have yet to turn out anything really outstanding.  You don’t have to aim for the heights of Shakespeare here, I’d be willing to settle for the Canadian version of Harold & Kumar Go to White Castle.

From where I sit, the problems are, as she has stated:

  1. Toronto lacks companies that can “conceive, finance and market” entertainment projects.
  2. Those companies that do exist are, apparently, lacking in excellence.

I’m not sure how government regulation or incentives are going to address points one or two.  Point one requires creative talent and people willing to chuck a lot of speculative or investment dollars into these ventures.  Point two requires a certain amount of dedication and proficiency in the craft by individual practitioners.

The creative folks are only going to last so long in the tiny Canadian market.  Sooner or later Hollywood is going to come knocking and make them an offer they can’t refuse.  And what talented upstart would refuse an offer to play their A-game for better pay in Hollywood?

Investors, on the other hand, generally only do so if there’s a pretty good chance they’re going to make money on that investment.  Name five contemporary Canadian-content media productions that you personally would be willing to throw ten grand of your own savings at.

How about Corner Gas?  And… uhm…

There’s your problem.

Toronto was attractive because it was cheap (in US dollars) to film here, at least compared to places like Los Angeles.  And there was—and is—a relatively large and stable population of production professionals who practice their craft.  Whether they are excellent or not is not for me to say.  But now that they’re no longer cheap, Hollywood’s not interested.

Here’s more—same reporter, different outlet, slightly more detail.

To restore Toronto’s competitiveness, Murdoch also urged that the Ontario and federal government speed up payments to foreign producers of tax credits based on local labor costs. Traditionally, foreign producers have had to wait up to two years before being reimbursed for certain labor costs after filing tax returns.

She also urged the Ontario government to consider providing 85% of the tax credit for indigenous producers up front so producers no longer have to turn to bank financing to cover production costs as they wait to receive their tax credits.

— Etan Vlessing, “Toronto Film Board pleads incentives case“. Hollywood Reporter, September 5th, 2007.

Looks like the major policy prescriptions being advocated are:

  • More rapid payment of tax credits
  • Tax credits up front

That doesn’t sound a whole lot like fostering a culture of excellence.  It sounds a lot like competing with cheaper markets based on hard costs, something Ms. Murdoch indicated the city couldn’t realistically do.  What happened to that whole “compete on excellence” schtick?

Maybe if Canadian media producers cranked out stuff the Canadian public would gladly pay to see, betting on home-grown productions wouldn’t be such an unpalatable risk.  And a little excellence never hurt anyone, either.

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Sound Advice

Canadian Capitalist highlights Dilbert’s Financial Plan, with a key modification for Canuck audiences.  Now you might think that Dilbert author Scott Adams writes an awful lot of stuff tongue-in-cheek, and you’d be right, but this is in earnest.  It’s worth reading, and more than that, it’s worth putting into practice.

  1. Make a will
  2. Pay off your credit cards
  3. Get term life insurance if you have a family to support
  4. Fund your RRSP to the maximum
  5. Buy a house if you want to live in a house and can afford it
  6. Pay down your mortgage (if you have one) as fast as possible
  7. Put six months worth of expenses in a money-market account
  8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
  9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

Like Canadian Capitalist, I haven’t written up a will yet, so I suppose I should put that on the near-term To-Do list.

Category: Finance  Comments off

Notes on Personal Finance

I don’t talk a lot about personal money matters on this blog, but there are folks out there who write about nothing else.  They are generally listed in the “Board of Trade” links section (along with business writers and blogs) in the left sidebar.  The best of the personal finance bloggers, in my opinion, is the fellow from Ottawa who writes Canadian Capitalist.  His posts are generally short but sweet, examining saving and investing strategies for the average middle-class Joe.  Practical, helpful stuff for the investing neophyte and the veteran.

By way of his blogroll I stumbled across another personal finance blog, Money and Investing.  There are a couple of good posts on how to develop a basic savings and investment strategy, known as 10+/10/10 or “paying yourself first”.  The idea is that you chuck 10+% of your income into retirement savings, 10% into long term (or growth) savings, and 10% into short term (or emergency + fun stuff) savings.  Once you have enough to cover 6 months of expenses built up in the emergency reserve, you can redirect the remainder to growth and save even more.  This is the strategy I generally try to employ (although I have not always been able to do so).  These days I am able to put 18% into RRSPs, 10% into long-term savings, and 10% into short-term savings while maintaining emergency savings of 6 months salary.  And no, I don’t make a six-figure income, but I did have to pay down debts and make some occasionally painful budget adjustments to eliminate a lot of unnecessary spending.

Another interesting Money and Investing post is about class distinctions, i.e. lower, middle and upper.  As he says:

“I almost laugh every time someone says that they or someone they know are ‘Upper Middle Class’.  I wonder what they really mean with that.”

He goes on to say that there are effectively no intra-class distinctions, like lower middle versus upper middle; everyone at pretty much every strata of society can afford some luxury items (i.e. TV, Nike shoes, iPods, etc).  The real difference between the class strata is their approach to wealth management.  The poor cannot put a roof over their head, clothes on their back, and food in their belly even with maximum effort.  The middle class can cover basic expenses via work and generally only frets about the amount and type of luxury items they can afford.  The rich can cover expenses indefinitely and concern themselves with preserving wealth for succeeding generations.

“I prefer to keep the labels to real needs. Either you can survive or
you are in peril (Middle vs. Poor). Either you worry about how to live
today or you are at a stage in which you worry about how your
descendants will enjoy life in the future (Middle vs Rich).”

I think that’s a pretty sensible approach to it all, and any difference between supposed lower or upper middle classes is really just a matter of how many toys one can afford while still being short of the holy grail of financial independence.

Category: Finance  3 Comments

No audit? No problem!

First published 24 March 2006.

Cooking the books just got easier

The Ontario Securities Commission just dumped internal control audit requirements for Canadian public companies, as Professor Steve Salterio wrote in Tuesday’s Financial Post:

    On Friday March 10, 2006, the Ontario Securities Commission (OSC) decided that investors in Canadian public companies would be second-class citizens in the post-Enron era. The OSC (through the Canadian Securities Administrators) decided to dump its proposal to require Canadian public companies to provide an audit report on the effectiveness of their internals controls over financial reporting. In its place, it announced a toothless requirement for the chief executive officer and the chief financial officer to certify they have such effective controls.

    — Steve Salterio, “SOX for Canada: Investors in Canadian public companies should not be denied the U.S.-style accountability provided by Sarbanes Oxley
Financial Post, 21 March 2006

Just a quick and overly-simplified primer here, so you know how the system works.  Companies whose shares are publicly-traded on Canadian stock exchanges have to release regular financial statements to their investors and the OSC.  These statements are vetted by an external auditor who is supposed to examine not just the financial statements, but the accounting processes and financial controls of the publicly-traded company.  The auditor also offers an opinion as to the soundness and integrity of the internal controls.  This opinion in turn helps investors gauge the accuracy of the company’s financial statements, and can have an effect on the desirability (or undesirability) of the publicly-traded company’s shares.

The push for greater accountability began in earnest with the Sarbanes-Oxley Act of 2002 (a.k.a SOX), which was the US Congress’ reaction to dodgy accounting practices covered up by executive malfeasance and negligence — exemplified in the collapse of large, publicly-traded firms like Enron and MCI WorldCom.  Section 404 of SOX requires company executives to assess and report on their firm’s internal financial controls, and also for the company’s auditor to gauge whether management’s assessment was factual and realistic.  A lot of companies complain about SOX 404 requirements being too onerous and expensive.  I think this attitude has sprung up in part because many companies reacted to the legislation in a panic and began keeping minute records of everything — down to every message in the lowliest cube-dweller’s email — instead of the truly significant.

The Ontario Securities Commission adopted similar requirements in their Multilateral Instrument (MI) 52-111.  Part 2 of MI 52-111 specifies management’s responsibility to examine and report on the effectiveness of their internal financial controls, and Part 3 specifies that an external auditor is to evaluate management’s assessment and determine whether that assessment is accurate.  Part 3 also specifies that the firm that prepares the internal control audit must be the same firm that audited the company’s financial statements — so no one can show one set of books and processes to the statements auditor, and another to the control auditor.  Note that the auditor that reviews the financial statements is required to fully examine and comprehend the company’s internal control metrics and processes, whether or not they report on their effectiveness.  Although it seems airtight, understanding another company’s controls and processes can be complex, particularly if it’s a very large firm and you’re just one out of team of a hundred or so accountants assigned to audit that client.

What the OSC has just done (via CSA Notice 52-313) is decline to adopt MI 52-111 — in other words, they have removed the proposed regulatory requirement for the external auditor to report an opinion on the publicly-traded company’s financial controls.  They describe this great leap forward in transparency and accountability in a press release of March 10th:

    Montreal – The Canadian Securities Administrators (CSA) announced today proposals that would require all publicly-traded companies in all Canadian jurisdictions to report on the effectiveness of their internal controls over financial reporting, as early as December 31, 2007.

    After extensive consultation, the CSA has decided not to proceed with an earlier proposal that would have required companies to obtain from their external auditors an audit opinion in respect of management’s evaluation of the effectiveness of internal controls over financial reporting.

    “All members of the CSA have agreed on an effective way to improve the quality, reliability and transparency of financial reporting for investors by requiring disclosure of the effectiveness of the internal controls that support the integrity of financial statements,” said Jean St-Gelais, Chair of the CSA, and President and Chief Executive Officer of Québec’s Autorité des marchés financiers.

Press Release, “Regulators Release Proposals on Harmonized Internal Control Reporting Requirements
Canadian Securities Administrators, 10 March 2006.  [emphasis mine]

Somehow the first paragraph and the middle paragraph don’t quite say the same thing, do they?  The OSC will require companies to report on the effectiveness of their internal controls… but not through an independent auditor.  How will this effectiveness be gauged?  Through management, as outlined in CSA Notice 52-313:

    After careful consideration of the feedback received and recent developments internationally, particularly in the US, we propose to expand MI 52-109 to include the internal control reporting requirements discussed below.

  • The CEO and CFO of a reporting issuer, or persons performing similar functions, will be required to certify in their annual certificates that they have evaluated the effectiveness of the issuer’s internal control over financial reporting as of the end of the financial year. They will also be required to certify that, based on their evaluation, they have caused the issuer to disclose in its annual MD&A their conclusions about the effectiveness of internal control over financial reporting as of the end of the financial year.
  • As noted above, the issuer’s annual MD&A will include disclosure regarding its internal control over financial reporting.  This disclosure will include a description of the process for evaluating the effectiveness of the issuer’s internal control over financial reporting and the conclusions about the effectiveness of internal control over financial reporting as of the end of the financial year.

    The issuer will not be required to obtain from its auditor an internal control audit opinion concerning management’s assessment of the effectiveness of internal control over financial reporting.

    The board of directors and its audit committee, in consultation with management, may choose to consider whether they wish to engage the issuer’s auditor to assist in discharging their respective responsibilities for (i) the issuer’s internal control systems and (ii) review and approval of the issuer’s annual MD&A. However, engagement of the auditor will not be a requirement under MI 52-109.

    — Canadian Securities Administrators,
CSA Notice 52-313, 10 March 2006.

Management has the option of hiring a control auditor, but it’s not a requirement.  In other words, we’re back to pre-SOX, pre-Enron methods of gauging a company’s internal controls.  Think about that before you rush out to nab some newly-minted Tim Horton’s shares (TSX: THI) this morning.  All is not lost, however — Professor Salterio addresses the quandary:

    So if SOX 404 is too expensive, and management reporting over internal control effectiveness is unreliable without an audit, and the audit of financial statements does not necessarily provide any assurance directly over internal control effectiveness, then what is a regulator or standard-setter to do? The answer might be simple: Require the auditor to disclose whether he has relied on internal controls in carrying out the audit. Merely add a fourth paragraph to the auditor’s standard unqualified report (technically known as an emphasis of matters paragraph) that states: “Due to the size of XYZ Ltd., there is no regulatory requirement [that management report on the effectiveness of internal controls and] that we audit that report and form an opinion on the effectiveness of internal controls over financial reporting. Due to the [reason inserted here], we have not relied to any material extent on testing the operating effectiveness of internal controls over financial reporting in reaching our opinion on these financial statements.”

Steve Salterio, “SOX for Canada: Investors in Canadian public companies should not be denied the U.S.-style accountability provided by Sarbanes Oxley
Financial Post, 21 March 2006.  [emphasis mine]

I sure hope someone at OSC is listening.

Category: Finance, Industria  Tags:  Comments off

Requesting a do-over

First published 20 March 2006.

I am in general a booster of business, be it small, medium, or large.  I harbor no particular ill will toward the left’s pantheon of evil Canadian big businesses—banks, insurance companies, retailers (especially Wal-mart)—suspected of fleecing their unwitting customers left, right and centre.  I accept rational self-interest as a good and decent motive for commercial enterprise, per Adam Smith:  “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

Sometimes, however, companies can be blind to their rational self-interest.  Enron and MCI WorldCom are notable examples; for while the executives thought they had served their own selfish ends, in reality it served no-one’s interest for the whole company to go bankrupt and for the executives to be indicted.  These flameouts were spectacular and tragic, but they are also an aberration, not the norm.  Most companies go about their business without crooks at the helm, although they can, occasionally, be tone-deaf to public perception and earn a nasty reputation.  Sometimes the tone-deafness reaches heights that astound even their cheerleaders in business media.

    Nortel Networks Corp. has faced years of financial statement restatements, accounting crises, a roller-coaster stock price, and changes to executive management, but throughout it all, Deloitte and Touche LLP has been a constant.

    Deloitte, the world’s biggest accounting services firm, has held on to the Nortel account even in the company’s darkest times.

    During Nortel’s restatement years, Deloitte was paid $57-million in 2004 and $72.7-million in 2003 — for what amounts to the largest fees in those years for audit, tax and related services paid by any Canadian company.

    But after Nortel’s decision last week to restate its accounts for the third time in as many years, the issue that’s puzzling many is how Deloitte has held on to the Nortel account.

    — Duncan Mavin, “How Nortel, auditor became joined at hip
Financial Post, 17 March 2006.  [emphasis mine]


From Nortel’s perspective, having to restate earnings is a negative, but not unheard-of.  Having the same auditor conduct a review of the restated earnings will undoubtedly cause some grumbling amongst the shareholders, who will be justifiably skeptical about the auditor’s thoroughness and competence.

From Deloitte’s perspective, having a client restate earnings casts some doubt on the efficacy of one’s auditing, not to mention the slight embarrassment of having to make corrections to numbers that the firm’s own accountants blessed in prior years.  And how willing would Deloitte be to highlight its own past errors, which may have been pivotal?

Some of Mavin’s sources echo this concern:

    Nevertheless, the audit process at Nortel has “made a laughing stock of the [audit] industry,” said Anthony Scilipoti, executive vice-president at Veritas Investment Research. Mr. Scilipoti is also a chartered accountant and a member of a key accounting-issues committee at the Canadian Institute of Chartered Accountants.

    Nortel said the latest restatement is the result of a thorough review of sales contracts that showed the company was recording revenue in the wrong periods. The company will now be able to record higher revenue in future years.

    There have been no significant changes in accounting standards to force a change in policy. Some observers said yesterday the restatement shows either Deloitte and Nortel still haven’t got the numbers right despite all the hundreds of thousands of billable hours, or the auditors are not able to stand up to Nortel’s management on decisions about accounting treatments.

    “It brings the audit process itself into question, and that’s saddening for me. It’s the equivalent of a historian going back to re-write history,” he said.

    — Duncan Mavin, “How Nortel, auditor became joined at hip
Financial Post, 17 March 2006.  [emphasis mine]

Before I go much further, I should note that I am employed with one of Deloitte’s Big Four competitors, and I mean this as no slight against them or any of our competition — it is an unpleasant situation which any of the major accountancies could easily find themselves in.

A prime concern for the Big Four is that their auditors must always maintain a high degree of independence from the client.  Independence in this context meaning that the auditor is free of any authority, control or influence exercised by others — especially the client.  The auditors are required to maintain not just the fact of independence (such as refraining from personal investments in their firm’s audit or advisory clients), but also the appearance of it.  The dangers of lost independence are clear — witness the late Arthur Andersen firm.  When the public perceives you are no longer objective and trustworthy, your customer base evaporates.  And worse, if you have actually done wrong, forensic accounting will unquestionably bring the truth to light.

I don’t think Nortel or Deloitte have anything to hide, but I am perplexed that they can be so incredibly blind to the optics of the situation.  One party must surely recuse the other until the matter is settled equitably by a third party, and then confidence in all may be restored.  There’s more at stake here than mere dollars; there’s the reputation and future profitability of two large companies.  A proper audit must be done and also be seen to be done; neither firm is serving their own rational self-interest by pretending that this present course is wise.

UPDATE 202213Z MAR 2006: A slightly contrarian view from inside the industry, which I find myself in agreement with:

    Much of the debate around the world has been about auditor independence, including the contribution from professors Mano, Mouritsen, and Swearingen. Auditor independence is important, of course, but it is not all-important. Auditor independence is but a means to an end. The United Kingdom takes this issue seriously and has stringent measures in place, based on some very well understood principles. But what really matters is the quality of the audit, which, above all else, is itself dependent on the quality of the people who conduct it…

    It is worth remembering that most audit failures arise because of a failure by the auditor to understand the wider business dimensions, the areas of risk inherent in the business, or to see the big picture. Few if any audits fail because detailed procedures were not followed or because of a lack of independence. Thus, a broadly based business understanding is essential to good auditing. This will undoubtedly best be obtained in a multidisciplinary firm environment.

    The recent years’ scandals have, of course, undermined investor confidence. Because perception matters as much as reality, restoring that confidence requires not only that the right actions be taken, but also that the right actions are seen to have been taken. An improvement in perception, however, will be no more than a short-term victory if the reality is a fall in the quality of auditing. Instead, I would suggest that most of the steps necessary to restore confidence have already been taken.

    — Peter Wyman, “Is Auditor Independence Really the Solution?
The CPA Journal, April 2004.

None of which necessarily obviates the concern about Deloitte and Nortel.  On the contrary, one can easily surmise that the quality of the audit was less than stellar when a restatement of earnings is required.

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