“Generally the firms at the margins might push back some on the findings, but by and large agree with us on our observations,” Hanson added.
“We’re already seeing the firms take actions in this area,” said Franzel.
The AS 5 standards were supposed to replace the older AS 2 standards, which many firms claimed were inefficient. “In my personal view, clearly there’s a pendulum that swings here,” said Hanson. “The original AS 2 was focused on a bottom-up approach, looking at the actual processing of transactions and building up, and AS 5 is the top-down approach. We think that there’s some of the blending and combination of the top-down and bottom-up that has mixed over time, and the firms are more focused on the top-down approach, but maybe haven’t been properly executing that top-down approach in terms of both identifying the proper top-down controls and then actually testing to see that the design and the actual implementation is working,”
Franzel noted that the PCAOB issued a report in 2009 on this topic, looking at auditing firms’ transition from AS 2 to AS 5 and concluded that the firms were making the transition successfully in many cases. “We did find some issues similar to the current report,” she added. “I think the top-down approach is difficult. It’s a difficult analytical exercise, so it’s not unexpected that we would still be finding some issues there.”
The PCAOB board members were also asked about the cutbacks in audit firm staff that may be contributing to the problem with audits of internal control, and whether firms are dedicating more staff members to more lucrative areas such as their consulting practices. “We don’t know where some of that staff may have gone and why the firms were cutting back, but we did notice in some of the engagements with deficiencies that in fact the staffing levels had been cut back, and that’s why it’s listed as a potential root cause,” said Franzel.
4 Comments
The root cause is the PCAOB is stepping up the expectations of what contitues an effective control (especially review type controls). Public companies have not received any formal mandate from the SEC to change or enhance such controls. So there is a disconnect. As with most regulated industries, the root cause is often a new interpretation of rules and practices that have existed for years. It would be helpful if the PCAOB and the SEC were coordinated releasing guidance to both public companies and their auditors.
Posted by: Anonymous | December 11, 2012 6:50 PM
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AS 5 was issued and effective in 2007. Seems odd that this is just now coming up as an issue in late 2012. Maybe it was b/c AS 5 was issued at a time when fee fatigue from SOX and AS 2 was very high, they needed some time to pass before pushing the auditors that the work was not sufficient.
Posted by: Anonymous | December 11, 2012 6:33 PM
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Outsourced accounting work to foreign countries, such as India, makes it very difficult to audit (both for internal control and for financial reporting), as you will need to rely on a developing countries accounting standard, the local auditors' quality of work, ethics, reliability, knowledge of US accounting standard used, honesty of all parties concerned, as well as the level of intelligence of those being audited. In my experience, the junior auditors here in the US are very innocent and have no clue on how the crocks work, thus making it even more difficult to find out problems. If you wants to engaged an auditing firm with all experience auditors in the team, or with members with forensic accounting expereince, the cost is much higher than you can afford. Just look at how HP has experience with their due diligence work, their internal audit, external audit etc. Those who wants to lie knows very well how to cover their tracks, at least, in short term. To improve the situation, accounting work should not be outsourced to oversea countries. If a high portion of it is being outsourced, it should be declared in their financial statement, stating that XX% of the accounting work and audit is being dependent on foreign sources, irrespective the foreign and domestic accounting firm are of the same company.
Posted by: apbbear | December 11, 2012 12:46 PM
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Aah yes, the next Monday morning quarterbacking report by the group having no client responsibilities and even less of a clue that our clients do not have the money to simply write us a check for an amount of our choosing to be determined later.
Recently sat through one of their live presentations. I would like to completely drop this end of our business (and wipe them off my Christmas list as well), but I just can't bring myself to abandon our clients.....yet!
Can't imagine how much fun it must be to put up with these folks as the managing partner of a Final 4 firm.
Posted by: topbeancounter | December 11, 2012 9:15 AM
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