The Nature of Scepticism

I've been fascinated recently by the dearth of critical thought in the financial community. I still haven't found the time to read The Big Mo, but I have suggested an official Devil's Advocate, and tried to stimulate at least a little lateral thought by suggesting we allow an independent regulatory agency to short sell. I've also been interested in proposed reforms to the role of ratings agencies and audit firms. So imagine the thrill I experienced on seeing that the Auditing Practices Board of the Financial Reporting Council has issued a "Feedback Paper" that summarises the responses to its "Discussion Paper" called... [trumpets]

"Auditor Scepticism: Raising the Bar"

The feedback? Well, surprise surprise:

“While responses to the Discussion Paper demonstrate widespread agreement on the critical importance of auditor scepticism to audit quality, there is less agreement on the nature of scepticism and its role in the audit."

In other words, the accountants aren't really sure what the word "scepticism" means.

Well, for those of you up the back, the Oxford English Dictionary defines a "sceptic" as "a person inclined to question or doubt accepted opinions." So, I'm thinking "scepticism" might be... the inclination to question or doubt accepted opinions. Surely one does not need to be more specific.

However:

"In light of the responses to the Discussion Paper, the APB has decided to distribute copies of the Oxford English Dictionary to all audit practitioners undertake work in the following areas:

* Ensuring that there is a consistent understanding of the nature of professional scepticism and its role in the conduct of an audit.
* Reviewing ISAS (UK and I) for possible ambiguities in relation to the nature and importance of professional scepticism, and proposing such changes as may be needed to make sure the position is clear.
* Reviewing ISQC (UK and I) 1 to ensure that it has sufficient requirements and guidance relating to the need for firms to have appropriate policies and procedures for promoting the competencies that underlie professional scepticism.
* Considering how the application of scepticism can be made more transparent.
* Considering, with other parts of the FRC, whether there is a need for guidance on the approach to be taken by auditors when considering the presentation in the financial statements of matters that have been the subject of significant challenge by the auditors."

The situation is so dire in the audit world, that they have to teach auditors to be sceptical.

What next - teach coppers not to believe everything suspects tell them?

You could not make this up.

Image from The Philosopher's Magazine.

The Price of "Free" Software

The recent Open Source Summit, alerted me to the fact that perhaps relatively few business people realise the commercial implications of relying on open source software.

A glance at the excellent programme shows why this should come as no surprise: there's an awful lot to get your head around just to understand what open source software is in the first place.

But, let’s not lose sight of the wood for all the trees (the history and philosophical debate between the Open Source Initiative and the Free Software Foundation, the vast array of licences and nor the complexities of GPL2 vs GPL3 and AGPL3).

The fact is that software developers can easily import any computer code via the Internet without fully understanding the licence obligations. What seems "free" code can actually come with an obligation to licence the source code for you proprietary product to the world, free of charge.

So, as Kat McCabe of Black Duck explained, sophisticated buyers of businesses are now requiring an audit of the source code for the target's IT systems and products in an attempt to exploit the target's inadvertent use of open source software, and reduce the price for acquiring the business. Overseeing that due diligence is Jim Markwith's legal role at Microsoft. And it explains the incredible degree of licensing rigour imposed on Nokia's open source programme by Dietmar Tallroth.

This is not an argument against using open source software. But anyone with an eye on the value of their business ought to get a handle on how their developers are operating and consider regular audits of their source code.