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1997-07-14 00:00:00


CPA Firms Will Begin Waffling on Audits in 1998


The question of earnings has to be considered when considering a rational stock market (or at least rational investors). This letter from a subscriber refers to the decisions of CPA firms regarding the costs of repairing y2k.

If you're still in the stock market, consider the sources of information that are mentioned by the author.

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- You might want to check with Partners of the main CPA firms. It is a standard audit requirement by the AICPA that public accountants must consider the "going concern" feasibility of all organizations, and ensure that there is adequate disclosure of any problems in conjunction with the financial statement audit. I have contacts in 4 of the Big 6. All of them tell me that they are dreading looking at going concern issues. Some firms are going to start evaluating Year 2000 compliance from a going concern perspective in conjunction with 1997 year-end audits. I have some indication that at least one firm is already realizing that this is going to substantially reduce the number of unqualified opinions that they can issue. I would expect a large number of poor or qualified audit opinions for 1997 FY, and a flood in 1998. This is what will capture the attention of the financial community. The auditors will be required to publicize the viability questions of noncompliant companies, and no doubt this will trigger a reaction in the markets. It is my understanding that the CPA firms are developing internal guidance on this question. Of course, they will try to evade as much as they can because there will be a lot of unsatisfied companies. (I don't know if the AICPA, the SEC, or the FASB for that matter are drafting any overall guidelines on this issue. I'll check into this and let you know.) I think that the CPAs will blow the lid of this problem earlier than you think, so it will be 1998 when the public panic will hit.

- From what I've seen, you're focus on the impossibility of acheiving Year 2000 compliance has focused on application systems (e.g., too much code, too many different languages, too few programmers, too little time). This is true and valid. However, at my company, we're finding that an even bigger challenge is dealing with system software and utilities. From cataloguing all known sources, my company has purchased products from hundreds of different vendors. There are close to a thousand different products that we have purchased from these vendors--everything from hardware, system software products, utilities, middleware (e.g., for interfacing mainframe to client/server systems), etc. There is absolutely no way that all of these products can be validated for Year 2000 compliance. Some of the vendors are out of business, some won't respond to our inquiries, some vendors acknowledge that they are not year 2000 compliant and don't know when they will have a compliant version of the product. There are a few that claim to be compliant, but we don't have the man power to test even these for confirmation. The only attempt at testing any of these will be some massive full system testing that is scheduled to take place in the end of 1998.

- There are a lot of companies that are going overseas to get the labor for Year 2000 programmers. There are firms in India, Israel, and South Africa in particular that are strategically aligned with US CPA firms to perform massive amounts of conversions. Many companies, like mine, are banking on these companies catching and fixing 98% of all the Year 2000 defects. The project plans (the ones that show the companies being done and ready for full blown testing by 1/1/99) don't allow much time to fix problems identified during system testing. However, I have it on good authority that most of these overseas firms with their automated scanners really achieve only about a 85% success rate. They miss 15% of the problems to be fixed, but companies aren't budgetting enough onsite labor to fix these problems to prepare for the big cycle testing in 1999.

- I don't know if you have already tried these sources, but the Information Systems Audit and Control Association (ISACA) might have an interesting information for you. This is the professional association for auditors charged specifically to be watchdogs over corporate computer systems. I'm haven't been on their website for a while, but it might have some useful information. The watchdogs usually have some pretty bleak things to say.

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