Home > Uncategorized > Comments about James Doty’s Speech – A Poor State of the Audit . . . and the Profession

Comments about James Doty’s Speech – A Poor State of the Audit . . . and the Profession

Comments about James Doty’s Speech – A Poor State of the Audit . . . and the Profession

David Tate, Esq. (San Francisco), http://davidtate.us, https://davidtate.wordpress.com

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.

More to follow. . . .

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