SINGAPORE (July 29): Shortly after starting my first job as an analyst in Kuala Lumpur almost three decades ago, one of my senior colleagues sat me down and explained how to navigate a public-listed company’s annual report. He went through the balance sheet, profit-and-loss statement and cash flow statement line by line, and gave me advice on how to interpret the notes to the accounts. He also walked me through the other sections of an annual report, and explained why they were there. When he got to the independent auditors’ report, he simply said, “This just tells you the books are okay.”
It would be several years before I gave the role of auditors another thought. The way I saw it, even when auditors were doing their job properly, they could not be relied upon to distinguish “good” companies from “bad” ones. And, it seemed that the seal of good housekeeping from independent auditors wasn’t difficult to obtain. Some of my industry colleagues who started out as auditors often told me stories of how they had mostly taken their former clients at their word, and had conducted only the most cursory of checks in the course of their work.
By contrast, as analysts, these same people seemed to try much harder to uncover the truth, simply because it was expected of them. They would gather information on companies they covered from the suppliers and competitors of those companies, and try to find explanations for why a company’s financial metrics were better or worse than other companies in the same field. From the perspective of investors, analysts played a much more important role than auditors, or so I thought.