Berkshire Hathaway Letters to Shareholders: 1965-2024

by Warren Buffett

In my opinion, audit committees can accomplish this goal by asking four questions of auditors, the answers to which should be recorded and reported to shareholders. These questions are: If the auditor were solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management’s argument and the auditor’s response should be disclosed. The audit committee should then evaluate the facts. If the auditor were an investor, would he have received — in plain English — the information essential to his understanding the company’s financial performance during the reporting period? Is the company following the same internal audit procedure that would be followed if the auditor himself were CEO? If not, what are the differences and why? Is the auditor aware of any actions — either accounting or operational — that have had the purpose and effect of moving revenues or expenses from one reporting period to another? If the audit committee asks these questions, its composition — the focus of most reforms — is of minor importance. In addition, the procedure will save time and expense.