Author: Gaylen R. Hansen, CPA, NASBA Director-at-Large (Guest Blogger)
Last year, NASBA's ethics committee was asked to take a look at the impact of audits conducted for significantly less than an audit firm’s cost and the impact, if any, on independence. As the chair of the Ethics and Strategic Professional Issues Committee, I worked with Ray Johnson, who chaired a subcommittee who took on the project. Ray is also the chair of the Oregon State Board of Accountancy and has been nominated to serve as NASBA's Pacific Regional Director next year. The subcommittee also included Bobby Creech, Rick David, Gary Forte, Jeff Leiserowitz, Kurt Kofford, Larry Nunn and Rona Shor.
We received a lot of input from state boards, presented our thinking on the matter at NASBA's regional meetings and then published a white paper. That generated a lot of conversation and fair amount of attention within the professional community because it's a controversial topic — a lot of people don't feel like there's a problem, and others feel very strongly that there is.
At NASBA, we serve as a forum for the state boards of accountancy that regulate CPAs. The question about loss audits is that if CPAs are not performing, or don't spend enough time on engagements as a result of fee constraints, we frequently see the same CPAs facing disciplinary proceedings. So, this project is very consistent with the mission of NASBA and the state boards. Despite resistance from some quarters, we believe the issue we raised resulted in a very appropriate and healthy debate. That's why Ray and I wrote the piece featured in the August 2011 issue of The CPA Journal.
While this was all being worked out, the Public Company Accounting Oversight Board (PCAOB) has been raising some similar questions during the economic downturn. They have some concerns about fee cutting and were asking whether or not auditors were really spending the amount of time on engagements as a result of the pressure they were under from clients. If a client was threatening to leave for the next lowest bidder, were they rushing the job as a result of cutting fees?
Our concern isn't so much with the fees and whether or not there's a loss per se, but rather whether or not CPAs are spending a reasonably appropriate amount of time to comply with the professional standards.
This is not a new issue, low-balling has been going on for as long as I have been in the profession. Some people would like to deny there is an issue and that independence is not a risk factor. Hopefully there will be more frank discussion about the problem, both within NASBA's committees and throughout the CPA community in general. The PCAOB is currently taking on a new independence project and there are heightened issues here as well as in Europe as to whether auditors are really challenging their clients or have become too chummy with them.
We just wanted to make sure through this article, that people know that NASBA is aware of the issue and that they are considering the conceptual framework suggested in the article to make sure that low fee threats are being addressed adequately. It's very simple: We want to ensure that CPAs are not taking on work that they're not willing to spend the time on to comply with ethical standards.
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