PCAOB Pushes Auditing Standard 5 – How’s That Working Out For You?

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Hot on the heels of Christopher Cox”s emphasis on Auditing Standard 5 at the recent US Chamber Briefing,  Compliance Week reports that the PCAOB will be making sure that auditors are using the new standard with their clients and using it well, via its inspection process.

Well… Call me skeptical.  

Ok, fm, you’re skeptical.
Although I was surprised and pleased to see Auditing Standard 5 so high on Cox’s agenda when he spoke, I realized it was because he was advertising for the study his economists are working on to measure costs and benefits of Sarbanes-Oxley, not because of the merits of the standard itself.   He spoke at length about Auditing Standard 5 as an antidote to high costs of Sarbanes-Oxley. Companies have been complaining and the SEC is nothing but responsive to corporate executives and, theoretically,  (and I mean a long way down the road,) the investors that are paying the bills. Someone forgot that the Act was intended to protect investors from these same executives.  

The PCAOB is conducting crash courses for its inspectors in AS5, teaching them how to spot whether judgment and a risk-based approach was used in conducting the audit and internal controls assessment which is now embedded in it. They are charged to call out any rote, tick-the-boxes type of audits and cite them in inspections of auditor’s work.

Unfortunately, Auditing Standard 5 assumes a level of confidence and trust in the company’s controls that will allow auditors to depend on that company’s decisions regarding vendors to support them, their organization of the projects required to complete SOx documentation and testing, their tone at the top, the controls over their IT organization, assuming they have sufficient IT infrastructure for their business, and their past record, or lack thereof, of quality financial reporting.

Since many companies are still new to the process and many more will cycle in and out as their status as listed companies changes, there will always be stubborn holdouts to “the program.” Hell, there are still multibillion dollar companies that are stubborn holdouts to “the program”, still kicking and screaming about someone forcing them to have policies and procedures, adequate internal controls over financial reporting and executives that walk the talk. 

So what makes the SEC and the PCAOB think that the auditors are going to trust these problematic clients as far as thy can throw them if the auditors are in the bull’s eye for both the inspections by PCAOB and potential shareholder lawsuits if something is or goes wrong?  

The auditors are going to keep doing as much work as they deem necessary to cover their tush, unless or until they get liability relief.   And when the PCAOB cites the first firm for doing not enough work because they followed AS5 and trusted their client instead of doing additional tests and procedures, you’ll hear the auditors yell and scream about being stuck between a rock and a hard place.

And they are. 

Sorry to say. 
It’s not an easy job being an auditor of public companies. Just as it’s not an easy job being an officer or Director of a public company. But those that choose to serve are well compensated and are doing, hopefully, the job that realizes their talents in the best way.   And it’s never easy to do a job well, beyond reproach, best in class. Many company executives are working on the “just good enough” principle. Do only enough, just good enough, so we can take some money out of the market and I can get mine. 
And some auditors are working on the same principle. After I make partner, do my ten to fifteen years, stay out of trouble, make no trouble, then get the hell out. No more long hours, no more clients, no more headaches, and hopefully still the respect of my peers and the community. It’s when they worry too much about getting their money out during these partner years, worry about earning as much or more money as some of their clients, that their values become skewed. Most auditors will never make as much as either their clients or the lawyers of the same age that are suing them. (That’s why some of them were, and still are, naively attracted to becoming “consultants.”)  

Are the auditors required to implement Auditing Standard 5 even when a client isn’t ready for it? It sure seems like it from this article. However, I highly doubt that they will. The auditors hold the final judgement over the financial statements and it’s the only real card they hold. They should use it judiciously to bring more companies “on the program” and all of our lives will be easier. When audits go back to being routine commodities, like in the 90’s before dot-com, the audit firms will find something else to make money on.

If they ever do and if the audit firms are still around.

PCAOB Promises Hard Push on AS5

With year-end financial reporting now winding down, audit inspection teams are hitting the ground under strict orders to see whether Auditing Standard No. 5 is indeed taking root at audit firms.

The Public Company Accounting Board went so far as to hold a special two-day training session for its inspectors in April to indoctrinate them in the ways of AS5. They will now be checking audits of 2007 financial reports to assess how auditing firms embraced the standard, which was issued last year to alleviate companies’ struggles with Sarbanes-Oxley compliance.

This will be the first round of audit firm inspections following the arrival of AS5. Given the backlash against its much-maligned predecessor, Auditing Standard No. 2, the PCAOB is under pressure to get things right this time around.

“There’s been some effort to make sure everyone is singing from the same hymnal,” PCAOB board member Daniel Goelzer admits. “We can’t just issue a standard and then sit back and see what happens.”


5 replies
  1. Anonymous
    Anonymous says:

    Love the blog.

    At some point, I would like you to summarize why you think that you can’t give a clean opinion on the financial statements without giving an opinion that the internal control process is effective. I don’t think I’ve ever had a client that didn’t have significant deficiencies or material weaknesses, but I’ve always thought the financial statements with materially correct.

  2. Francine McKenna
    Francine McKenna says:

    @Anonymous Well, given that AS5 integrates the opinions into one, it makes it a little more difficult. Which was the gist of my question to Cox at the forum a few weeks ago. But why don’t you give me some examples of the significant deficiencies and material weaknesses your clients have and I will try to explain my position in a new post using those examples.

Trackbacks & Pingbacks

  1. […] by the eight largest domestic registered audit firms in 2007 and 2008. In the Spring of 2008, the SEC sent their dog, the PCAOB, to hunt firms who were not implementing Auditing Standard 5 in their […]

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