Monday, December 19, 2022

Here's Another I-Told-You-So

The reaction to last night's poll from Elon Musk on whether he should step down as CEO of Twitter has mostly provoked amusement, but his subsequent tweets suggest he's belatedly coming to recognize what I've been pointing out for the last several weeks, that Twitter is in such bad shape that in fact its auditors should have issued a statement that there is substantial doubt about the entity's ability to continue as a going concern. The link explains an auditor's responsibility in reviewing this circumstance:

Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Ordinarily, information that significantly contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.

I've had a fair amount of experience working with both internal and outside auditors as a representative of several corporations' data security and contingency planning programs. This was fairly routine for me, in some part because when I was directly implementing those programs, there were few problems, and the auditors didn't need to spend much time on them. On the other hand, as an active participant in the industry, I was aware of the constant threat that auditors could in fact report that either the data security or contingency planning programs at a company were so deficient that the auditor could issue an opinion that the company cannot continue as a going concern. (On the other hand, I've never heard of such an opinion actually being issued on that basis.)

But on Saturday, I quoted a whistleblower report by Twitter's former data security head, Peiter "Mudge" Zatko, that alleged

[A] series of cascading datacenter problems did put Twitter at risk of “permanent irreparable failure,” and was only prevented by the herculean efforts of a team of Twitter engineers. Every account, every bit of code, every tweet, like, retweet, quote-tweet, DM—everything that constitutes the company, platform, and community known as Twitter—was nearly lost forever during this incident. A key piece of the global information system, poof, gone, and with no way to bring it back. A multibillion-dollar company obliterated in an instant, the biggest 404 error in history, caused not by hackers, but by incredible negligence.

In effect, the company's entire product, its platform, its archive of all past tweets, its valuable user data, its reputation and good will, were at risk of simply disappearing. The equivalent might be roughly characterized as every Ford car, every dealership, every parts inventory, all the company's engineering and research, all its plants, all its user data, and all its credit accounts simply disappearing one day in a puff of smoke. This would include every driver and passenger in a Ford car suddenly dumped in the middle of the street or freeway with no way to continue the journey.

It sounds to me as though Twitter's auditors should have been aware of this and should have been investigating it. Certainly my interviews with outside auditors, as well as bank examiners in some cases, involved them assuring themselves that there was no equivalent threat in the cases of the companies where I worked. It sounds as though there was major negligence in Twitter's case, not just within the company, but from its auditors,who should have actually issued a going concern statement in their prior audits.

The Enron failure also led to the failure of Arthur Andersen.

In 2002, just nine months after the [Enron] scandal broke, the firm was found guilty of crimes in the auditing of Enron. By that time, Arthur Andersen had lost most of its business and two-thirds of its 28,000 employees, and was facing multi-million dollar lawsuits. On August 31, 2002, the company surrendered its licenses to practice as certified public accountants in the United States, effectively putting the company out of business. In 2005, the United States Supreme Court unanimously reversed Arthur Andersen's conviction due to errors in the trial judge's instructions to the jury that convicted the firm. Despite this, the damage to Andersen's reputation was so great that it has never returned as a viable auditor even on a limited scale.

The Hot Air commentator in the first link above concludes,

If [Musk] honestly believes that the company is heading for bankruptcy and nobody could “keep Twitter alive,” might he actually be thinking about pulling the plug? If so, this would wind up being the most expensive “experiment” in the history of global business. Musk spent $44 billion of his own money to purchase the company and take it private. If he shuts down the platform entirely, the value of the company will be fairly close to zero.

I've kept saying here that Twitter is a lot closer to FTX than anyone thinks, and a lot more will collapse with Twitter. Instead, we get this: This is the state of David Brooks's meritocratic New American Upper Class. Just focus on great engineering and increasing the amount of love in the world. Hey, wasn't that Sam Bankman-Fried's formula?

posted by John Bruce @ December 19, 2022   0 Comments