Doty named three forces at work impacting auditors vis-à-vis maintaining the public trust:
- the payment model: the auditor is hired and fired by the company itself. The Sarbanes-Oxley Act's reform to shift hiring and oversight of the auditor from management to the audit committee may in practice have proved insufficient to counteract that conflict and others facing the auditors. As with management, audit committees may see their job as negotiating the lowest audit fee, not championing auditor objectivity and independence from management. In this environment, not surprisingly, the scope of the audit has not grown, even if society's expectations have. As the guardian of a cultural value, the audit is arguably as important as electricity or water. But if it is to retain that lofty status, auditors and the PCAOB need to do our best to make sure the audit is useful.
- The statutory franchise… [which] protects the profession as a whole from the risks of obsolescence, thereby reducing auditors' need to adapt to investor needs. As a result, auditors don't have a natural incentive to evolve their reports to what investors want.
- Conflict of interest…[and] the incentives of others in the environment auditors operate in … deter the profession itself from innovating the audit to meet public expectations the way, say, a technology company would, or a properly incentivized service company would.
Too Big To Fail? Too Important To Leave Unregulated
Saying, “There is no silver bullet to address these challenges,” Doty added, “There are as many or more problems with structural alternatives such as a third-party payor or insurance-based system; and in a dispersed ownership society, eliminating the audit requirement would be impractical and outright reckless. Therefore, our initiatives should go to reducing risks that follow from these conflicts and challenging incentives that weaken investor protection by applying counter-weight."
Referencing a recent statement in a report published by the U.K.’s House of Lords, that “There is inevitably a connection between the assessment of the Big Four's performance and the question . . . of market concentration,” Doty countered: “I do not believe that the global audit firm networks themselves pose systemic risk to our economy. But initiatives to shrink the global firms would likely further weaken their ability to audit the large, multi-national companies that may themselves be systemically important.”
“The global audit firm is not too big to fail, it is too important to leave unregulated,” said Doty. He continued, “To protect investors, governments should regulate such firms, not cripple them.”
Concept Release Coming in “Early Summer” on The Auditor’s Report
Doty noted, “The PCAOB is engaged in a broad dialogue with investors, auditors, audit committees, preparers and others to consider how the auditor's report can be changed to provide more useful, relevant and timely information. The central questions emerging in our dialogue are: What should auditors' responsibilities to the investing public be? What can auditors be expected to do? And, how do we close the expectation gap in a meaningful way? "
He added, “We expect to issue a concept release in the early summer summarizing and analyzing the input we've received. That concept release may result in the first substantial changes to the reporting model in more than half a century. The release will explore various possibilities and seek specific feedback.”
Among the standard-setting initiatives outlined by the PCAOB Chairman were:
- improving audits of fair value measurements,
- improving communications among affiliated firms in global networks engaged in multi-national audits
- global quality controls, and
- improving auditors' communications with audit committees.
Also addressed in Doty’s remarks were matters relating to PCAOB oversight and inspections of US and multinational audit firms.
If you are interested in the subject of audit regulation, check out a program being offered by the Stan Ross School of Accountancy at Baruch College on Monday May 9: Changes in the Regulatory Environment and their Effects on Audits and Auditors. Featured speaker at the program, which will take place from 5:30-6:30 pm, is Peggy Wood, Professional Standards Partner at Grant Thornton LLP and President of the New York State Society of Certified Public Accountants. Pre-registration is required; there is no fee to attend.
Further reading on the subject of audit regulation can be found in Francine McKenna’s Re:The Auditors Blog (McKenna is always interesting, always controversial) and Jim Petersen’s Re: Balance Blog (Petersen’s point of view is formidable, with his background as a former senior in-house lawyer and partner at one of the largest global audit firms.)
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