Closing arguments were held on April 13 in the bench trial of audit whistleblower Mauro Botta vs. PricewaterhouseCoopers. Botta, a former PwC senior manager, claims that he was wrongfully terminated by PwC in retaliation for making a whistleblower report to the SEC. Botta’s whistleblower report alleges that PwC had compromised its independence by acquiescing to […]
Your biggest busy season assignment is a public company audit. The audit looks well-staffed six months before fieldwork starts. But by the time fieldwork begins, the staffing has completely unraveled. The in-charge has left the firm. You get a battlefield promotion to be the in-charge. High staff turnover in the office and the demands of […]
Next up in the parade of 2019-20 Financial Reporting Council audit quality inspection reports is the black and yellow float of EY U.K. In the most recent inspection cycle, EY had a smaller audit sample size than Deloitte, PwC, and KPMG, and that was probably a good thing. The FRC noted in its EY report: […]
Yesterday we began our review of the seven audit quality inspection reports issued recently by the U.K.’s audit cops, the Financial Reporting Council, with Deloitte, which was found to have only four of 17 audits (23.5%) that weren’t up to snuff. Today’s victim is PwC. Let’s see how this stalwart of auditing did during the […]
A couple weeks ago the Financial Reporting Council in the U.K. released the results of its latest inspections of the Big 4 firms plus Grant Thornton, BDO, and Mazars, and it was the same ol’ story: audit quality is still really bad. How bad? Like one-third of the 88 audits reviewed during the 2019-20 inspection […]
Last week we let you guys know about a three-member independent committee EY recently created that will be tasked with advising senior leadership on how to strengthen audit quality. Not to be outdone, Grant Thornton announced Jan. 30 that it, too, has formed a three-member, mostly independent panel that will counsel the firm’s partnership board […]
If someone had told you that a Big 4 firm just created an independent committee that will advise the firm on how to improve the quality of its audits, you’d think it was KPMG, right? I mean KPMG partners stole confidential inspection information from a couple of rogue PCAOB employees because the firm’s inspection reports […]
Last week, seven hotshots in the world of accounting and auditing stepped up and put their name on a statement “reaffirming” the profession’s commitment to audit quality. As my headline so subtly suggests, it’s a good thing someone said something because honestly it’s kinda hard to tell they’re serious given all the audit scandals, PCAOB […]
For the last several years, one very interesting audit quality metric has not been widely reported in the media, and the largest audit firms barely mention it. It has been hiding in plain sight and could be a useful data point to audit committees or investors that are trying to understand the quality of audits. […]
"I can understand why the public at large might feel let down. In hindsight, it is tempting to wonder why auditors were not more alert to a possible financial crisis. If the diligence and expertise that underpin audit reports were more visible, public views of the profession would be far more favorable." – Isabelle Allen, […]
Times may change and fraud schemes may evolve with those changes but for the most part, the root cause and therefore the subsequent behavior of would-be fraudsters generally remains the same. As the Journal of Accountancy wrote way back in 2000: It’s said that accountants’ predecessors were the scribes of ancient Egypt, who kept the […]
Damn you, globalization, all this stuff was so much easier when we shopped at mom and pop stores, salted our own pork for the winter and conducted business in wampum while avoiding dysentary and snake bites. But oh well, time must go on… As we know, the PCAOB has back-burnered auditor rotation in the U.S. […]
This week, the ICAEW held an Audit Quality Forum debate on Should auditors do more to make audit reports reliable? Everyone sort of agreed that there's work to be done when it comes to audit quality but whatever work is done should be done slowly. Very, very slowly. Case in point: One of the key […]
Well this is fascinating research from across the pond. Do you mean to tell me the fact that four audit firms basically rule the roost is bad for audit quality? I'm shocked. Here's the scoop from Economia: According to the YouGov research which was carried out for the Financial Reporting Council, “Overall there is a fear […]
From Accountancy Age: Top Ten accountancy firm Baker Tilly has been told to review its audit methodology in light of continuing deficiencies in the quality of its audit work discovered as part of an inspection by the profession's watchdog. Baker Tilly was also criticised by the FRC for its reluctance to accept recommendations made by […]
"For new accountants, the focus on documentation can be a difficult transition — the world of texting, Facebook postings, and tweeting may not fully prepare you. And, of course, communication skills are important even beyond the accountant's documentation of audit procedures. Being able to express yourself effectively is key to your relationships with your co-workers […]
We'd say you heard it here first, kids but actually you heard it from CFO Journal: U.S. securities regulators are wary that pressure to reduce auditor fees could lead to worse audits. Regulators grow “worried” when auditor fees appear to fluctuate with economic cycles, Paul Beswick, chief accountant at the Securities and Exchange Commission, said […]
Colin buried this in ANR this morning but I'm pulling it out and tossing it at you all like a zookeeper flings raw meat at his wild tigers ifyoufeelme. Emily Chasan writes in CFO Journal: This year, financial executives say their external auditors are requesting far more documents and details than usual on everything from […]
Seems legit. Let's exercise some professional skepticism here and ask ourselves if there is any conflict of interest in a bunch of guys who head up audit for KPMG telling us that audits are valuable: As the world picks up the pieces following the global financial crisis, the value of audit and its role […]
Exhibit A: Deloitte works w/ global regulators to shape policy and standards to help develop audit of the future #GR2013 http://t.co/3oZLBxB7kc — Deloitte (@Deloitte) January 6, 2014 This is courtesy the Big 4 firm that brought you Parmalat, Bear Stearns, MG Rover, Taylor, Bean & Whitaker… you get the point. But hey, shit happens […]
Let's discuss. This just came out of his mouth not 5 minutes ago. Doty: "the firms tell us that they believe PCAOB inspection has improved audit quality." #aicpaSEC — Adrienne Gonzalez (@adrigonzo) December 9, 2013
Have we mentioned how much we enjoy the PCAOB releasing inspection reports and/or making big announcements the week leading up to a major holiday? No? Oh yes, it's right up there with root canals and saddle sores. But it's their labor of love so we'll share the news with you. Today, the Board released the 2012 […]
When it comes to Big 4 bustin', UK regulators have proven the most willing to throw poo at a wall to see what sticks. Specifically, the Queendom's Competition Commission has decided that the Big 4's stranglehold on the FTSE is a little too tight for their liking and have been trying to come up with […]
On December 21st, long after most people had given up on the world coming to an end and just about the time everyone on the east coast was about to check out for the rest of 2012, the PCAOB conveniently released the 2011 inspection reports for Deloitte, Grant Thornton, and Ernst & Young. The timing […]
It's more or less understood by everyone, with a few exceptions, that pursuing mandatory auditor rotation is a giant waste of time. There has been much discussion of the issue — from the hallowed walls of a PCAOB open meeting to the slums of the Going Concern comment section — and while there has been […]
PCAOB Board Member Jeanette Franzel, CPA, CIA, CMA, CGFM, gave a speech at University of Tennessee Corporate Governance Center today that discusses "Current Trends and Issues in Public Company Auditing." That's nice and all but the first half of the transcript is more or less a history of auditing and the PCAOB. The second half finally gets […]
BDO International CEO Jeremy Newman is a little concerned about the trend of lowball audit fees out there. Now, those aren’t his exact words, in fact he calls it ‘‘extreme downward pressure on fees’ which still seems far more than honest than “my US colleagues call ‘fee compression.’”
He’s worried because he thinks that all this slumming around for any little opining job will lead to shoddy audits:
There is increasing evidence that fees are being forced down to such an extent that one worries this will encourage audit firms to ‘cut corners’ to reduce their own costs and thereby reduce audit quality – particularly given that the buyers of audit services (ie clients) do not monitor or determine audit quality which is a role taken on by regulators who are not involved in the pricing discussion between the client and the audit firm.
Yes, the man has evidence, courtesy of:
Canadian Public Accountability Board – “CPAB has learned that certain audit committees are pressuring firms to significantly reduce audit fees. This stance may be incompatible with the audit committees’ important role … in helping to ensure the integrity of financial reporting.”
Australian Securities and Investments Commission – “We will also focus on audit quality for new or existing audits where audit fees appear low or appear to have been reduced for reasons other than changes in the underlying business of the entity being audited.”
And he rounds it out with a quote from a speech given by Stephen Hadrill, the Chief Executive of the UK’s Financial Reporting Council, “There is a role for the market in setting higher expectations of auditors. So far the market has not played that role. Quite the opposite. It is more likely to applaud lower audit fees than higher quality.”
So if you’re desperate to retain some business or provide “client service” through the Wal Mart method, you’ll be on your own. As long as Newman is running the ship at BDO, they will be choosing quality over quantity, “despite the pressure on us to reduce costs,” no matter what other firms (read: Igbay Ourfay) are doing.
A Bizarre Market [CEO Insights]
There’s a bit of a tiff going on over at my former place of employment as a result of the cover story in the latest issue of CFO Magazine on the recent fall in auditor’s fees.
Some critics seem to fear that the phenomenon will be encouraged by a new benchmarking tool the website unveiled on April 1.
For a fee of $1,200, the tool allows companies to compare the fees that their peers pay for auditors. The process should be both quicker and more comprehensive than the requests for proposals now put out by many companies trying to figure out what they should be paying.
Accounting mavens David Albrecht and Lynn Turner, however, seem to worry that such an exercise will lead to the further commoditization of audits, and so to lower quality financial reporting, even though there’s no evidence the increased fees we saw in the wake of the Sarbanes Oxley Act did anything to improve its quality. Lehman Brothers, anyone?
Yet after the article appeared, Turner sent around comments on his list serve saying it contained several “factual inaccuracies” and that “a firm cannot do the same amount of work with these lower fees without seeing a huge reduction in profits.”
One problem here, it seems to me, is that we’re talking about an oligopoly, which invariably skews the normal effects of supply and demand. Albrecht concedes that the industry is an oligopoly but doesn’t make a cogent point about the significance of that. And he misses the other complication, which is that SarBox not only required auditors to review a company’s internal financial controls as well as its financial results, but also prevented auditors from offering audits as loss leaders for their more profitable consulting services. Now auditors can’t offer both services to the same clients. So audits have to stand on their own two feet.
Turner gets this point, though he confuses the chronology of the regulatory events involved. And he seems to suggest the article is flawed in the conclusion it draws about it, without saying how.
Here’s the point. If, in fact, the extra work SarBox required inflated auditors’ profits, why shouldn’t CFOs be able to make sure they’re getting what they pay for?
And the apparent assumption that benchmarking will inevitably lead companies to push for lower fees seems a bit shaky to me. As CFO.com’s editorial director Tim Reason points out, the process may instead merely keep auditors on their toes. Are Albrecht and Turner arguing that opacity is necessary for the public good, so auditors can pad their fees with impunity? Sorry, but that just doesn’t compute.
In an email to me this morning, Tim wrote: “We think finance executives and audit committees will benefit from having an independent, trusted editorial source provide them with a quick way to benchmark their fees-and make sure they are neither too high nor too low.”
Too low? Sure. You get what you pay for.
Tim also points out that there are no advertisers or sponsors for the tool. “It is a pure editorial offering being made directly to our readers, giving them information they’ve been asking us for years.”
Now there’s a radical idea.
Our friends across the pond have put it out there that as it stands, an audit report is an audit report is an audit report. Regardless of the firm doing the work, the end product is the same and the Professional Oversight Board (POB) wants audit firms to produce, “more quantitative data to better equip investors and companies with the tools needed to scrutinise their auditors.”
It’s long been popular to call an auditor’s product a “commodity” and this appears to be the Brits’ attempt to dispel that notion. The talk of asking auditors to somehow quantify quality has already garnered support in the investing community in the UK:
Michael McKersie, assistant director capital markets at the [Association of British Insurers], said he would welcome more comparative information. “The relative lack of hard quantitative reporting data on the audit firms and global networks has been… a concern. Comparability is really important and we have, in the past, seen no n-comparability [sic] here as a problem.”
Fine idea, although there’s not a single indication of how the quality could be measured and the director of auditing at the POB even admits that ‘The challenge is how can auditors demonstrate quality and those that use their services assess it.’
This whole idea of “comparability” came up because of a POB inspection of showed, “some firms were rewarding staff for attracting business at the expense of promoting audit quality.” So the answer to this problem — from the POB’s point of view — is to slap together a “rate this audit from 1 to 10” system and the firm with the highest score has the best audits?
Audit firms will always claim that their work is of the highest quality regardless of the circumstances but now regulators want them to put that in some quantifiable form. And because we like to keep the pace with our friends in the UK, it probably won’t be long before an ambitious bureaucrat Stateside (e.g. new PCAOB Chairman) will insist on a similar approach.
If there’s any wonky auditors out there that have some ideas how this could be done, we’re all ears but for now we’re firmly in the skeptical camp.
Clients blind on audit quality [Accountancy Age]
Also see: You mean the Big 4 aren’t transparent? [Tax Research UK/Richard Murphy]