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State Board Report

December 2012

Audit costs have become a commodity, Public Company Accounting Oversight Board Chairman James R. Doty told the CUNY Baruch College “Ensuring Integrity: 7th Annual Audit Conference,” held November 29 and co-sponsored by the NASBA Center for the Public Trust. Citing the stagnation of audit fees, while the large audit firms’ revenues from consulting are growing at 15 percent a year, he sees this as weakening the strength of the audit practice in the firms overall.

The PCAOB’s release on auditor independence and audit firm rotation highlights the risk to independence stemming from the client-pays model, he observed. While the PCAOB’s firm inspectors have found all of the largest firms and many of the smaller ones to have strong technical auditing skills, they have also found serious deficiencies that could not be ascribed to technical weaknesses. He pointed to the firms’ policies that direct partners to price audits lower in order to establish long-term relationships with clients.

Mr. Doty said he is opposed to rushing to decisions. Reports on auditor independence and professional skepticism have been issued in the Netherlands, France, Germany and Switzerland. He stated: “I want to influence the debate worldwide, by broadening its scope and getting beneath the surface of generalities, coming to grips with the practical.”

Also speaking at the Baruch/CPT conference, Jennifer Rand, PCAOB Deputy Chief Accountant, reported the PCAOB will be moving forward with two exposure drafts, rather than a combined one, that will cover (1) disclosing the name of the engagement partner in the financial report and the form filed with the PCAOB and (2) naming firms doing more than 3 percent of the work on an audit. Moderator Douglas Carmichael, Professor of Accounting at Baruch College, questioned if the PCAOB had noted a split in the comment letters between the viewpoints of auditors and those of investors on the providing of additional information. Ms. Rand said on transparency and on the audit report a split had been observed. “Investors believe transparency is helpful. It is sunshine – and they believe it will improve accountability.” For the auditors, “Liability is a concern. It is hotly debated.”

Ms. Rand told the conference a practice alert on professional skepticism was slated to be released by the end of 2012. In fact, “Staff Audit Practice Alert No. 10: Maintaining and Applying Professional Skepticism in Audits,” was released on December 4. The PCAOB had previously issued a concept release on this topic and received more than 700 letters in response.

“PCAOB inspectors continue to observe instances in which the circumstances suggest that auditors did not appropriately apply professional skepticism in their audits,” the Alert states.

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