June 20, 2002
Table of Contents
Quote of the Week
- YOUR INPUT PLEASE!
Featured Resource - KEYWORD LIVE
Staff Article -
ANDERSEN/ENRON REVISITED - ARE AUDITS MEANINGLESS?
Marketing Tip of the Week
Guest Article -
DEVELOPING THE RIGHT ATTITUDE FOR MAKING MONEY ONLINE
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Quote of the Week
Patience and perseverance
have a magical effect before which difficulties disappear and obstacles
-John Quincy Adams
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- ARE AUDITS MEANINGLESS?
by: Cary Christian
You may recall reading our story about the Andersen/Enron debacle a few
weeks ago and the potential affect on auditing public companies in this
country. The Senate Banking Committee voted 17 to 4 yesterday to adopt a far
reaching legislative response to the Enron collapse that promises to change
the way public companies are audited in this country. The Senate bill will
go much further than the proposed House bill.
The groundswell has begun. Changes are on the horizon. That's good news. But
I want to concentrate tonight on what an audit really means. If you rely on
financial statements for any purpose -- such as investing, evaluating a
business you'd like to purchase, or sizing up a joint venture partner -- you
need to understand what an audit does and does not tell you.
WHAT DO AUDITORS ACTUALLY LOOK AT?
Many people think an audit involves looking at every transaction a company
enters into during the year. For a company of any size at all, this is
literally impossible. Auditors use statistical sampling to review a portion
of the transactions in a given year to provide comfort that particular
accounts are properly stated. For many accounts, a particular audit "scope"
is set whereby the auditors will only look at transactions that exceed a
specific dollar level. For a company the size of Enron, that scope will be
very high, say $100,000 to $1,000,000 depending on the account and how much
risk is involved with that particular type of account.
There are two concepts in that last sentence that highlight two major areas
of risk in any audit:
1. If the auditors use the same or similar scopes each year for the audit, a
company official who desires to process misleading transactions can do so
through a series of transactions that each individually fall below the audit
scope. Yes, auditors do some random testing of transactions that are below
scope to attempt to catch this type of activity, but it is not likely that
2. The auditors set the scope on various accounts based on THEIR assessment
of the inherent risk related to that account. This is a judgment call. There
is no science involved. If the auditor's judgment is faulty, the entire
audit can be rendered meaningless.
THOSE IRRITATING GRAY AREAS!
The entire audit process, which in Enron's case cost millions of dollars in
professional time each year, culminates in a simple, standardized two or
three paragraph report. This report states that the company's financial
1. Fairly present the company's financial position in accordance with
Generally Accepted Accounting Principles,
2. Do NOT fairly present the company's financial position in accordance with
3. Fairly present "except for" certain transactions which are then briefly
Again, whether or not the financial statements fairly present the financial
position of the company is a judgment call BECAUSE there are so many
judgment calls required during the detail portions of the audit. That's
where the gray areas come in. Just as the application of tax laws is rarely
black and white, the application of accounting principles is also subject to
As an example, most larger companies maintain a LOT of reserve accounts. A
reserve account is set up to book an estimated liability where the company
knows there will be a liability of some magnitude, but the amount of the
liability is not known.
Let's say the company sells products under warranty. Under Generally
Accepted Accounting Principles, the company is required to record a
liability for warranty services it must provide free of charge in the
future. The company has no way of knowing what the exact amounts will be, so
the amounts must be estimated based on historical warranty claims and sales
It can be difficult to "certify" that these reserves are adequate,
particularly since the auditor does not know the business as well as the
company does. A company with hundreds of different reserve accounts can
overstate its income very easily if these reserves are understated by just a
few percentage points.
Of course, there are hundreds of other areas where material misstatements of
income can occur, but we do not have the time or space to go into more in
SO HOW CAN YOU TRUST ANY AUDIT?
The key to properly analyzing audited financial statements is to know where
the "risk areas" are with any particular industry. If you understand the
risks in an industry and understand the effect they might have on the
company you are reviewing, you will see the financial statements in a whole
Under current auditing and reporting standards, YOU have the responsibility
to learn what to look out for or to hire another accountant to interpret for
you. Having your own accountant do this for you is a very good idea. But
there is something else that should be done and this is where the
"editorial" piece of this article comes in.
In addition to the audit report, the auditors usually prepare a "management
letter" that covers areas of concern raised during the audit. This document
is not available to the general public, so the auditors tend to bring up
every single major risk area they have identified and provide management
with recommendations for minimizing the risk and improving controls. These
documents, or something very similar, should be required to be issued
publicly with every audit opinion issued. Management will take these
recommendations much more seriously if they know the public is watching.
Accounting firms, securities firms and corporate executives are going to be
lobbying feverishly for as little change from the status quo as possible.
This is unfortunate. If investor confidence is to be rebuilt, massive
changes must occur and now is the time to commit to them.
I do not know how many of you ever get worked up enough to write to your
Congressman, but if you do, this is a good issue to write about. It is
important and it affects us all. If you are so inclined, write and tell your
Congressman to keep the pressure on for meaningful change. If you need
assistance crafting your letter, let us know and we'll be glad to help.
Copyright (c) 2002
(For those new subscribers who might not have read the previous issue that
discussed Andersen and Enron, Cary started and spent the first eleven years
of his career as a tax and systems consultant with Andersen).
Tip of the Week
You've probably all heard that it takes about
100 targeted visitors on average to make a sale from your website. It also
takes about 1,000 non-targeted visitors to your site to make a sale. Ever
wonder how effective different types of advertising is? Here's some "rule of
thumb" numbers for you based on a 1:100 sales to visitor ratio:
Pop-under ad - 1 sale for 2500 to 3000 displays
Banner ad - 1 sale for about 100,000 displays
PPC Engines - 1 sale for 100 visitors
Search Engines - 1 sale for 100 visitors
FFA Submissions - 0 sales for millions of submissions
Bulk Email - Just don't do it!
Safelists - 1 sale per 165,000 postings
If you can get your visitors to subscribe to additional information via
autoresponder before they leave your site, your sales conversion ratio can
get a lot better. A good autoresponder series can produce up to a 15%
conversion ratio of sales to subscriptions! If you can't get the sale this
time, get them to sign up for your autoresponder before they leave.
THE RIGHT ATTITUDE FOR MAKING MONEY ONLINE
By Terry Dean
Do you really want to make
money online? Do you want to develop a business which can make money for you
24 hours a day 7 days a week almost automatically?
I am sure you do...Or else you wouldn't be reading this ezine right this
minute. I have good news...and bad news for those of you desire this for
The Good News is...YES, you can do it. Many others have created full-time
incomes while only working part-time online. It is within your grasp. Plus,
many of them have started with little or no money!
The Bad News is...Many of you will need a change of attitude before you will
be able to reach your goals.
That's right...Even with the right information and the right foundation,
many people have still failed in their online ventures just because they did
not develop the right attitude. An old statement that comes to mind right
now for me is "Your Attitude determines your Altitude."
Your success in life cannot bypass your attitude about life. If your mindset
is that you are poor and always will be poor, it will show itself in
anything you do. No matter what you do, your results will be poor in your
Having a positive mentality about yourself and about your business is a part
of this right attitude, but that is not what I want to focus on in this
section. I want to focus on your reasons and vision for your business.
If your vision for your business is to just make enough money for a little
extra income or to just produce a full-time income for yourself, you will be
severely limiting your results. If that is you, you need a change of
Those who are the most successful people in business are the ones who LOOK
for problems and develop solutions to them. They have a vision which is
bigger than just to make a little money. They have a vision to solve
problems for others.
YES, you need to learn about Internet Marketing Techniques and about how to
write killer ad copy. Yes, you need to know how to produce sales, BUT what
is it that you are selling?
Are you selling just another product OR are you selling a SOLUTION to
people's problems. Are you just in business to make a little money or do you
honestly care about helping other people? The ones who become the most
successful in their business are the ones who find a NEED and fill it. They
develop the answer that people need.
This factor is true and can be applied no matter what type of business you
are in. For example, if you run a network marketing site, are you just
trying to hype people up in your program OR are you becoming a source for
information on how they can succeed through this method of distribution.
LOOK for problems...
People are frustrated with learning how to submit to search engines!
People are frustrated with learning how to use certain software!
People are frustrated with not being able to produce sales!
People are frustrated with health problems!
Look for these types of problems and frustrations and develop or find
products which have the answers. In other words, DON'T just try to think of
new ways to make money...Think of ways to solve more problems for more
people! Then, the money will come once you learn the marketing side of the
Too often we want someone to just hand us a completely developed business or
a business-in-a-box. The truth of the matter though is that most of the
time, these types of plans just don't exist. Any type of business you get
involved in will require you to begin thinking of new ways to advance it if
you want to be as successful as possible.
The Good News is that all you have to do is start changing your attitude
over to being a problem solver. What problems are still out there in your
specific market? What problems do people have when they order from your
competition? What can you do to make your product or service a better answer
to people's needs?
When you ask yourself these types of questions you are often taking the
first step to success. You are recognizing the problem. Now, with the right
attitude, you can start looking for the solution. You have the question.
Now, Apply the thinking, brainstorming, research, and work to find the
Terry Dean, a 5 year veteran of Internet marketing, will Take You By The
Hand and Show You Exact Results of All the Internet Marketing Techniques he
tests and Uses Every Single Month" Click here to Find Out More:
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