Auditors Who Need Babysitters

I was relieved to see no bigger firms on this list but, what a client public relations disaster. In the firms’ weak defense, I am sure there are some paperwork problems involved. The registration process is not just filling out a form and paying a fee.

For example, in addition to providing detailed information about the kinds of services the firm provides, to whom and by whom in the firm (a substantial task depending on the size of the firm and the lack of sophisticated systems in most of them…) it was the quality management provisions that got stuck in the craw of many of the firms, including the large ones.

“Your discussion of quality control policies should be a summary description presented in a clear, concise and understandable format. You should not provide us with your entire internal quality control manual in response to this Item, but should prepare a brief document that addresses your quality control policies as they relate to the areas reflected in the Board’s interim quality control standards (see Board Release 2003-006, Establishment of Interim Professional Auditing Standards).

Specifically, the description should provide an overview of your firm’s policies with respect to independence, integrity and objectivity; engagement performance; personnel management; acceptance and continuance of clients and engagements; and monitoring.”

Why was this part of the process such a challenge? Because so many of the firms, even the larger ones, didn’t have formal, documented quality management programs, as has been discussed in earlier posts.

In fact, one particular large firm had big problems getting their international “affiliate” firms to register and provide this type of information. They resisted spending the money to put the data together, resisted coming under the umbrella of US partners and systems that would monitor their clients and partner activities, and just generally resisted the intrusion of US regulators in their operations. This resistance came even though the foreign “affiliates” either audited foreign-based listed companies or wanted to continue to participate in the lucrative global audits of the US based listed companies with foreign subsidiaries and significant operations.

For the smaller firms, all these new requirements have imposed a significant burden. But, it’s not unreasonable in my mind for the SEC to have some type of control over firms that produce the audited financial statements for our listed companies.

It’s amazing that so many firms either skipped this step or lapsed and now have really screwed their clients. Of course, the blame will be put on big, bad old Sarbanes-Oxley instead of where it belongs – square on the shoulders of incompetent “professionals”.

At least they weren’t performing surgery: SEC charges 37 audit firms with failing to register

The Securities and Exchange Commission charged 37 audit firms and 32 individuals with issuing audit opinions on corporate financial statements without being registered with the Public Company Accounting Oversight Board today. The firms and individuals were responsible for 60 audit reports on 53 unnamed companies between November 2003 and October 2005.

“When these auditors failed to register with the PCAOB, they violated one of the key requirements of Sarbanes-Oxley and evaded the PCAOB’s oversight authority,” said Linda Chatman Thomsen, director of the SEC’s enforcement division, in an SEC news release.

Since the PCAOB was created by the Sarbanes-Oxley Act, all firms conducting audits of public companies listed in the U.S. have been required to register with the regulator. To date, 1,806 firms have done so.

“Firms have to register,” said Christopher Conte, associate director of the SEC’s enforcement division in an interview. “The rule is the lynch pin to PCAOB oversight of the accounting firms.”

…Given that the audit opinions were included in SEC filings, the public companies involved will have to get another opinion from a registered auditor.

“If they want to maintain their current status with the SEC, they need a new opinion,” said Mr. Conte.

If they don’t care about that status, they likely face delisting…