Auditors are entrusted with a duty to assess REASONABLY presence of material misstatements in financial statements. Materiality hair cut the threshold amount, procedures are adapted as per accepted accounting and audit procedures.
Even if we are given the process document and working papers (I am talking about non accountants) we will not able to understand much. This is a area of SME and will remain there.
The format of audit report is designed such a way to alert you:
- Adverse opinions
- Qualified opinion ( opinions expressed with or without substantive procedures)
- Matters of attention (in notes to accounts)
A share holder or any other stake holder is suppose to understand format of audit report, notes to accounts while considering for investment evaluation purpose.
Let is forget past which is gone. Accountants have been vocal about media accounting practices, same with financial services dealing with underlying instruments. How many shareholder understand how media revenue is recognised? What is the contingent liabilities in case of underlying financial instrument? How does license fees stripped out for derecognition? Still people invest in these companies, because investing itself is game of probability not certainty!
Why so much ambiguity in accounting practices then? Simply because accounting is a reflection of business process. With new business models business practices are far more complex than before. E.g. multiple product arrangement, oil and gas inventory, amortisation of research etc. Also accounting practices give flexibility so that management exercise certain judgments which is more objective based than rule based. By the in developing accounting practice its not only the accountant who is involved. It includes process experts, legal fraternity, actuary etc.
Jim is a short seller, he is right 50% and wrong 50% (which is exceptional track record by the way). A short seller makes money when he is able to anticipate bad things before they surfaced. He calls Alibaba accounting hoax, Tesla may hit the wall. Out of so many calls some will come true always. Again there are much more reasons behind Enron collapse and Jim had not provided specific reasons before collapse apart from short selling Enron. He short sold quite a few in 2001, this one collapsed and others didn’t. There were bigger whistle blowers in Enron including their own internal audit head! But again no one was sure, or else Enron couldn’t have collapsed in first place. Boils down to hindsight post event.