The independence, or lack thereof, of auditors and valuation experts arose as participants discussed Goodwill (not the thrift store, the financial concept). After learning Goodwill is the “plug” between the asset value of an acquisition and the price the acquiring company paid, participants questioned whether Goodwill’s true value could be accuracy assessed on an ongoing basis.
“Isn’t there a conflict because the company who’s Goodwill is being evaluated pays for the evaluation?” A participant asked.
“Yes,” I answered.
“It’s similar to the drug approval process, though, isn’t it?” another person said. “We pay the FDA to evaluate the drugs we submit. But at least that’s a government agency, rather than a private one.”
“Yes,” I said, “and there’s a conflict there too.”
“But, for the most part,” a third participant interjected, “the system works. Given all the audits and Goodwill appraisals being done, there really aren’t many problems. I’m unsure additional government regulation would make the process any better.”
In terms of auditors, valuation experts and government regulation, everyone will have an opinion on whether more or less independence would be beneficial. The key to financial literacy is understanding conflicts exist and asking questions about the financial statements one reviews.