Grifco Inc (GFCI)

[cyofish]

GFCI and audited financials.

I took a continuing professional education class for Auditing and Attestation as part of my professional requirement. Part of the topic covered was auditing standards and auditor responsibility.

In a nutshell, there are specific guidance in the professional and quality control standards for auditors that states that if a management is of questionable character and/or management is dominated by one individual who is also the majority shareholder, the auditor should withdrawal from engagement. The risk of material misstatement is too high and the audit risk is too great to go forward with the engagement. There is too large of an opportunity for concealment and misstatement.

So how do Audit firms stay on the straight and narrow and adhere to standards? Most Public Accounting firms are made up of people with high moral character. All audit firms are peer review every other year by a member CPA who is independent of the firm they're reviewing. If the auditor firms are found to veer from the said professional standard they will be written up, may be placed on probation, PCAOB may withdraw them from a list of approved audit firms, or worst yet a suspension of their license.

So hows does this pertain to GFCI?
1. Management's character (e.g. Jim Dial) - fail
2. Management dominated by one person who is also majority shareholder (Jim Dial) - fail

While there are many other specific items the above 2 reasons alone will be a good reason for an Audit firm to withdrawal from engagement. It is likely that Grifco had hired a firm to audit their books like they said in the PR, but after the initial evaluation the auditors probably withdrew from the engagement. If Grifco was somehow audited (I seriously doubt it), my guess is that the results were less than favorable.