Per Jim Doty, The Firms Think PCAOB Inspections Improve Audit Quality

Last week the PCAOB announced that it was getting serious about audit committee communication after it was revealed that Ernst & Young kinda sorta didn’t think the Repo 105 sitch was worth brining up to the Lehman Brothers audit committee. Granted, Dick Fuld is pretty scary dude and has probably eaten plenty of Big 4 partners for breakfast in his day but avoiding the awkward convo this time around almost resulted in everyone fighting over stale hot dog buns in the street.

Oh sure, the PCAOB has been kicking this around for awhile but something needed to happen to get their motors going and it appears that the LEH/E&Y fallout has done the trick. We might be completely wrong on this but it’s becoming increasingly obvious that the PCAOB has lost faith in auditors to do their jobs and will continue to inundate them with rules until they get an “Uncle.”

How about that statement? It’s the typical press release whathaveyou including quotes from the bigshots:

“The proposed standard on audit committee communications is intended to enhance the relevance and effectiveness of the communications between an auditor and audit committee throughout the course of an engagement,” said PCAOB Acting Chairman Daniel L. Goelzer.

“The proposed standard contains appropriate requirements to achieve effective, two-way communication between the auditor and the audit committee, which we believe would improve audit quality,” said Chief Auditor, Martin F. Baumann.

So if we take Goelzer and Baumann at their word, audit committee communication has been pretty ineffective up to this point? That’s good to know.

And here’s the gist of the required communication:

• Communication of an overview of the audit strategy, including a discussion of significant risks, the use of the internal audit function; and the roles, responsibilities, and location of firms participating in the audit;

• Communication regarding critical accounting polices, practices, and estimates;

• Communication regarding the auditor’s evaluation of a company’s ability to continue as a going concern; and,

• Evaluation by the auditor of the adequacy of the two-way communications.

So there’s your checklist people. Sorry to ask but were these items not being discussed previously? One could assume that since these items are on the list, they weren’t always being discussed in practice. Does standard audit committee communication revolve around Gossip Girl? Tiger Woods’ mistresses?

This really appears to be an example of the PCAOB taking away auditors’ “professional judgment” and making them “professional inquisitors.” Further, as Jim Peterson has pointed out, checking off required communication will do nothing to protect auditors from liability in the future, “there is no legal defense or ‘safe harbor’ in American law based on proof of compliance with professional standards – box ticked or otherwise.”

In other words, make all the professional requirements you want, auditors are still going to get sued and claiming “But we checked the box!” will not work as a defense. So the rationale must have been checklists are fun and easy to follow? Sigh. You’ve got until May 27th to get your thoughts in on this thing before it gets rubber stamped. Get on it.

Press Release [PCAOB]