As social activity is reduced to transaction and translated into monetary value, the gatekeepers’ (e.g., auditor, regulator) roles are describable in the following component variables:
- Counting (e.g., are the amounts of cash in the depository institutions accurately totaled?)
- Measuring (e.g., is the fair value of the financial instrument calculated according to generally accepted accounting principles – GAAP?)
- Estimating (e.g., is fraud risk mitigated?)
These variables become more stubborn and resistant to attestation. For example, independently checking the reported cash through bank statements is simpler than evaluating the level 3 (q.v. mark-to-model GAAP) fair value calculations, which is less complex than foreseeing the effectiveness of fraud detection and prevention control activities. Also, the occurrence of past success, whether real or apparent, tends to generate present success (e.g., if program P reported without noteworthy challenge results Q in a prior period, the methods and assumptions underlying inputs P & outputs Q tend to be accepted currently notwithstanding the caveat that past performance is not a guarantee of future performance). Understandably, gatekeepers do not reinvent the wheel.
Gatekeepers do not apply the scientific method used in the hard sciences; i.e., they neither verify nor falsify managements’ statements in this strong sense. Instead, they are like social scientists that take samples of data from the organization under examination and from the environments in which the organization operates, to assess the reasonableness of managements’ assertions, actions, and plans. Though reasonable individuals may differ for any given issue, this differentiation is often not significant (e.g., credit rating agencies may produce somewhat different grades assessing the risk of credit default of a given debtor or financial instrument, but the range of these opinions is usually not wide). This “regression to the mean” tendency of skilled expert opinion explains much of the inadequacy of notice received by the public at large from financial catastrophes such as Enron, AIG, etc.
Addendum: collectively, the variables identified above comprise analysis of accounting and corroborative | conflicting data.