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We precociously consume the risk we reduce Just as advanced automotivesafety technology makes for worse drivers the prevalence of governmentmandated auditors in the financial system has allowed us as investors toengage in riskier behavior than we would dare do otherwise After all apart from the few of us who are formally schooled infinance who really glances at a 10-K Earnings Statement Who reads theFund Flyers Who really has any idea where the money in the financialsystem goes when you decide to take 10000 out of a brokerage accountand use it to acquire stock in an IPO of say a hot new social mediastartup The idea we have in America is that you can ask your financialadvisor who in turn is going to reference the Prospectus which hasbeen carefully audited and attested to by a group of highlyknowledgeable and licensed accounting professionals The idea of audit probably needs some clarification owing to theconfusion created by the IRS When an individual is audited it refersto an audit done by the Internal Revenue Service and there is arequirement that they must be able to produce all supportingdocumentation for the previous seven years outlining proof for everyrepresentation or claim they made on government tax forms When abusiness is audited by which I mean audited by a public accountingfirm that they have hired according to SEC requirements it is nottypically held to this strict requirement Instead a reasonable levelof assurance is made using a certain percentage of documents that arerequested from different departments in the company Examining these andthe business processes in place are used to test the claims bymanagement and support that the documentation is in fact truthful That is a very crude simplification but works for our argument So why do we audit It comes from the idea that an individual willbehave differently when they believe they are being observed With astatistical chance that an indiscretion read lie will be caught anindividual is less likely to try to
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