Discussant's response to how not to communicate material and immaterial weaknesses in accounting controls;

              Discussant's Response to
How Not to Communicate Material and
Immaterial Weaknesses in Accounting Controls
Alan N. Certain
Price Waterhouse
Born, I believe, in response to the SEC's post-FCPA proposal to require management and auditor reporting on internal accounting controls, principally to provide the Commission an objective summary of the likely results of any rule it might adopt, Dr. Wallace's survey lives on to explain the difficulties management and auditors face when trying to describe internal accounting controls to the "stakeholders" of a business enterprise.
To cynically summarize the survey (in words somewhat different from those of Dr. Wallace), I read it to give evidence supporting four points:
Point one—When given facts about control conditions within an enter­prise,
people—even such sophisticated users of financial and accounting data as the nine groups surveyed—place greatly varying interpretations on the facts.
Point Two—Point One doesn't matter, because people—even such sophisticated users of financial and accounting data as the nine groups surveyed—don't want the facts. They want a summary overview or opinion from someone else.
Point Three—-When "someone else"—and so far this has been manage­ment,
through the new breed of responsibility reports that proliferated after the recommendations of the Cohen Commission and the FEI— does summarize an enterprise's control responsibilities, it is likely to be in language that is sometimes technically incorrect and always subject to the same varying interpretations as are the underlying facts.
Point Four— Point Three is not surprising, since the survey evidence supporting Point One demonstrates a great diversity of opinion about the facts of the effectiveness of internal controls and about the effects of various so-called control weaknesses, even among the preparers themselves, the preparers of the responsibility reports cited in Point Three.
Overall, Dr. Wallace's survey and analysis bear out the title of her paper. None of the methods implemented so far to disclose information about an enterprise's internal accounting control—whether a recitation of control weaknesses, a report by management of strengths and weaknesses, or an opinion by management—is likely to be successful in communicating a uniform message. One suggested communications device—an auditor's opinion—has yet to be tested in practice, but I'll have more to say about that device.
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