“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.
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“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.