by David Tate
Many comments have already been made about the speech by
James Doty (Chair, PCAOB) on June 2, 2011 at the SEC and Financial Reporting
Institute 30th Annual Conference. See the speech at http://pcaobus.org/News/Speech/Pages/06022011_DotyKeynoteAddress.aspx
I lend some of my thoughts as Mr. Doty's speech paints a
disturbing and poor evaluation of the state of the audit, and of the state of
the audit profession. Mr. Doty also provides notice that related remedial
actions by the PCAOB will be forthcoming, and soon.
Essentially, in a nutshell, based on examinations and
information that has been obtained by the PCAOB during its audits of the
auditing firms, the PCAOB believes that there are serious, sufficiently
numerous and ongoing lapses or failures of independence and skepticism by CPAs
who are performing audits at the major auditing firms. The situation is
sufficiently serious that Mr. Doty states that the comments in his speech are "
. . . issues that occupy the PCAOB today."
As I learned long ago when I became a CPA, independence
and skepticism (along with diligence and competency) are the corner stone of an
independent audit, without which it certainly can be argued that the audit has
no value, and shouldn't be paid for. It should also be noted that for
some time the auditing profession also has been discussing ways to try to make
the audit more relevant and to add value, but without much apparent sense of urgency.
Issues or potential issues of auditor independence and
skepticism, and of competency and diligence, are not new as they have always
been present. I find the great majority of accountants and auditors to be
conscientious, reputable, and well-meaning. However, it must be
acknowledged that an obvious argument can be made that there is or can be a
natural tendency for an auditor to partially subordinate his or her
independence, skepticism or diligence in favor of the client that is paying for
the auditor's services. Sarbanes-Oxley eliminated some of these
pressures. Mandatory audit firm rotation (such as every three years) has
been one of the significant proposed changes, and has been on the table for
over 10 years, but without enactment.
I do not believe that mandatory rotation would be a
cure-all as, for example, there still might be pressure to underbid the
services to obtain the audit work, and then related audit firm pressure to
contain the costs of the services to be performed. However, it appears
clear that mandatory rotation would serve to significantly reduce independence
and skepticism pressures as the auditor would know that the audit services for
that company would be ending by mandate in relatively short order, and that a
new auditor would be reviewing some of the prior auditor's work.
Further, considering the prime importance of the
auditor's independence and skepticism, on that basis alone I would have
expected the auditing profession to voluntarily accept or even advocate for
mandatory audit firm rotation. And, who knows, perhaps mandatory rotation
would provide new opportunities for auditing firms that are smaller than the
big four-when I became a CPA it was the big eight-the unfortunate consolidation
in the profession has been dramatic.
Mr. Doty states that the PCAOB will be issuing several
relevant policy documents in the near-term. He also provides some
comments about possibilities for providing additional context for audit
committees, and possible ways to increase audit transparency. These and
other related issues will be further discussed in later blogs. I might
add, there appear to be at least several important areas in which the standard
audit can be improved, and in appropriate circumstances discussions in these areas
could include discussions about the value, actions, inactions and interactions
of other important people or functions that might be involved such as internal
audit, compliance and ethics, the executive officers, the board, the audit
committee and regulatory agencies. For example, I have commented that
some SEC actions or complaints would allow the opportunity for the SEC to
provide additional background information about who did and did not do
what. Of course, the PCAOB's function is more limited; nevertheless, it
would appear that opportunities exist.
Tate's Blog: Law - Governance - Risk - Business for more articles about
corporate governance, risk management, and other corporate law topics.
For more information about
LexisNexis products and solutions connect with us through our corporate site.