@Going Concern “Can I Have Your Autograph?”

My new post is up @Going Concern.

“The PCAOB approved Auditing Standard No. 7, Engagement Quality Review on July 28, 2009. They also issued a Concept Release on requiring the engagement partner to sign the audit report.  The comment period closed September 11th and boy oh boy were there a lot of comments. The firms came out en masse to denounce the proposal.  I described their strategy to a friend:

“Representatives from each firm got together at CAQ HQ over dinner.  (Well, maybe a conference call since everyone is tightening belt these days…) They listed all the possible objections, split them up, one each, and agreed to write the comment letters.” 

Jim Hamilton’s World of Securities Regulation has a great summary of their arguments followed by a little input from yours truly…”

11 replies
  1. ClownCollege
    ClownCollege says:

    Maybe it’s just me, but I place more credence in an audit opinion from “Ernst & Young, LLP” than I do an audit opinion from “James Smith”.

    Are you privy to knowing this was the audit firms’ strategy, or is this purely conjecture?

  2. ClownCollege
    ClownCollege says:

    The rebuttals are entertaining, for sure, if not a bit mean-spirited. But no one has made a compelling case as to the BENEFIT of having a partner personally sign an opinion. Yes, we all know of the recent audit failures and pending litigation, and that’s a problem. But how will having an audit partner individually sign the opinion ADDRESS THE PROBLEM? Instead of pointing fingers and re-iterating the problems, I wish someone could stay on point and talk about this specific topic.

  3. Tony Rezko
    Tony Rezko says:

    Loved your responses to each firm’s comment – wish someone would recite them to the respective CEOs.

  4. Tony Rezko
    Tony Rezko says:

    ClownCollege – why have CFOs and CEOs sign off on the effectiveness of internal control? Now, it is a little different, but the arguments are similar in terms of asking an individual to accept responsibility for his/her work. And as I am somewhat skeptical of the way SOX is done at some companies, I could write your post at #2 replacing ‘partner’ with CEO/CFO and make essentially the same point.

    So you say there’s no proof of the benefit – how could there be? Would it require that much more effort from partners that we couldn’t just find out?

  5. ClownCollege
    ClownCollege says:

    If you’re a skeptic of the audit industry, I’d assume one of your positions would be that there is a dearth of excellent partners within the Big 4 firms. Why would you then be in favor of legislation that would naturally tend to push people away from wanting to be a partner at an audit firm?

    I’m not a lawyer, but I suspect there is far greater legal liability to an individual for them signing an audit opinion, as compared to having the partnership sign it. Is the solution to improving the audit industry really going to be to discourage people from wanting to become a partner?

  6. Anonymous
    Anonymous says:

    “Is the solution to improving the audit industry really going to be to discourage people from wanting to become a partner?”

    no, but part of it is to hold partners accountable for the adequacy of their engagements.

  7. Tony Rezko
    Tony Rezko says:

    CC @ 5- That’s a fair point, but I have worries of my own if this will really drive some potential partners away. I also don’t know the legal specifics of how this impacts personal liability for partners. I want transparency and accountability, but I’m not sure that the accountability side should change much.

    I would hope it has the effect of making partners more cognizant of what the firm is signing and more involved in the details. But you’re right, it’s hard to quantify the benefit.

  8. fm
    fm says:

    @Tony Rezko @Clown College

    The discussion of the benefit of an audit partner’s signature should include the source of this recommendation: The Treasury’s Advisory Committee on the Auditing Profession, which included some of the most renowned experts on the profession and its standards, report is dated October 6, 2008. On this topic, they said:

    “…The Committee believes that the engagement partner’s signature on the auditor’s report would increase transparency and accountability. Therefore, the Committee recommends that the PCAOB undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report. The Committee notes the signature requirement should not impose on any signing partner any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of an auditing firm.”

    Notice they say that no further liability should be imposed than whatever a partner has as a member of an auditing firm, a partnership. The audit firms are not corporations where all liability for bad acts imbues to some anonymous corporate entity. The firms are still partnerships of equity partners who accept liability for each other’s acts in return for being able to share profits amongst themselves alone. The transparency is not only for the benefit of shareholders, their client, via a public duty and the public franchise, but their own partners who should want individual accountability for errors, omissions, fraudulent and negligence on the part of their brethren.

    Think about it in terms of a fraternity. Although the whole organization may stand behind a brother even when they make a mistake, there is still the individual responsibility that must be accepted and which can be imposed, if not financially (for example they can kick him out, ban him from fraternity benefits) then at least on an ongoing basis via monitoring and ongoing peer pressure to behave and live within the rules for the good of all. An individual signature on an audit report encourages acknowledgement of that obligation both in front of the public but also in front of their fellow partners. There is no hiding from their client or their colleagues.

  9. ClownCollege
    ClownCollege says:

    Understanding how a partnership shares liability, there is no guarantee that a judge or a jury would agree with The Treasury’s Advisory Committee on the Auditing Profession when deciding a case. If I were a partner, I would not put my faith in my livelihood in a “should not” from an advisory committee.

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