Pin the tail on the auditor

By James D. Gottfried, CPA, Chair, The Ohio Society of CPAs

As CPAs, we are charged with defending the public interest. We are responsible for conducting ourselves according to professional standards and ethics. But how far does that responsibility extend? Are we now blindly assigning responsibility beyond what is appropriate?

There is increasing pressure from the Public Company Accounting Oversight Board (PCAOB) to have auditors be responsible for more than opining on financial statements and internal control over financial reporting. Last June, the PCAOB unveiled a proposal outlining a major overhaul of the auditor’s reporting model that represented the most significant changes in more than 50 years. It is intended to increase the value and transparency of the report for investors, but there is room for it to go far beyond that. PCAOB Chair James R. Doty has been outspoken in his opinion that the audit report is not offering enough to protect investors. But is that the primary function of the audit and auditor? As a profession, we are charged with providing a level of assurance, but we aren’t detectives.

The PCAOB Investor Advisory Group went even farther, calling the current audit report “deficient as a communications vehicle.” They called for the auditors to include their assessment of the judgment of management and the quality of the accounting practices.

As more judgment is employed on behalf of corporate management, the PCAOB Investor Advisory Group would like auditors to give their opinion on the validity of those judgments and the completeness of the information shared.

In August, the PCAOB issued a concept release calling for mandatory audit firm rotation, arguing that such a change would enhance “auditor independence, objectivity and professional skepticism.”

I understand the issues around the call for greater transparency, and I am not saying that maintaining the status quo is the only acceptable answer to this. Some changes might be appropriate, but I would like to see specific solutions that don’t create bigger ancillary problems than the issues they are intended to solve. The PCAOB identifies issues with certain audits, and those need to be addressed. But is it appropriate to extrapolate these concerns as broad based issues that require changes across the board, as suggested by the PCAOB? Do the actions of a few needs to impact all?

Beyond the impact on auditors and our profession, such changes will sharply increase the cost of an audit.

In a struggling economy, is it prudent to increase the cost of doing business? Do the long-term additional costs really provide a greater or even corresponding benefit?

Let’s also make sure that we aren’t mixing issues. Some issues I see appear to be financial disclosure issues and not audit issues. If greater financial disclosure issues need to be addressed, then let’s address them as such. In doing so, let’s make sure the market place is driving the needs and not the perception of a small group of regulators.

These are important issues for our whole profession. Do not ignore public company issues and changes driven by regulators under the premise that they don’t impact non-filers or privately held entities. History shows the likelihood that such changes will eventually be forced on non-filers or privately held directors or the market place is almost guaranteed.

There is still time to comment on the PCAOB Concept Release on Auditor Independence and Audit Firm Rotation (deadline: Dec 14, 2011) and the Proposed Rule to Improve Transparency Through Disclosure of Engagement Partner and Certain Participants in Audits (Deadline: Jan 9, 2012). Comment now at http://pcaobus.org. Also, OSCPA’s Accounting & Auditing Public Company Subcommittee is submitting comments on behalf of all of us. One of the benefits of OSCPA membership is the clout that comes from all of us speaking as an organization on issues that impact our profession. Please direct any comments you would like included to OSCPA staff liaison Laura Hay, CPA at LHay@ohio-cpa.com.

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