The preliminary report of the U.S. Treasury Committee on the Auditing Profession was released in March.It’s a well-prepared wish list of how to improve the auditing profession. Unfortunately, the report envisions solutions that have little or no chance of being instituted any time soon.
A major concern of the report is that one of the Big Four accounting firms will be “Andersenized” — be forced to fold because of a major fraud. In anticipation of such an event, the Subcommittee on Concentration and Competition recommended a “mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.”
They described that adoption as “voluntarily, of a contingent streamlined internal governance mechanism that could be triggered in the event of threatening circumstances.”
What’s really called for is the creation of the “Big One,” a supersized, lean-and-mean organization that is trained and ready to go into action when or if one of the current largest firms appears ready to implode. That way they can keep the troubled larger public company auditing firm and its people together and continue to operate.
As it stands now, neither the Public Company Accounting Oversight Board, the Securities and Exchange Commission nor anyone else is in a position to act with the speed necessary to handle such a catastrophe.
The need for quality audits that are, hopefully, devoid of fraud, is trumpeted throughout the report. There is, however, hardly a suggestion in the report that the ethics of the larger firms must be enhanced or reviewed.
Audit quality will only be improved when the ethics of the leadership of the largest firms improve. When ethics are passed through the ranks of all employees of the firm, then ethics become the way of life of the firm.
In ancient days, ethics were taught and stressed as part of the accounting curriculum, and were continued as part of the “on-the-job training.” Somewhere along the line, leaders of the profession became jealous of the fabulous amounts of money that stockbrokers, insurance salespeople, consultants and financial planners were making, and looked for ways to increase their bottom line.
Auditing became the loss leader for more profitable consulting engagements. Shortcuts and shoddy supervision, the lack of continuity of audit team personnel from year to year, and the combination of high workloads, low experience and high turnover were not conducive to audit quality. It became part of the modus operandi of the largest firms.
The largest firms have the programs, the knowledge, the intellect, the talent and the dollars to uncover fraud. They don’t have the passion or the fortitude to do so.
The bottom line holds sway. Independent thought is frowned upon, Don’t think — just complete the checklists and get it done as quickly as possible.
The result of that mindset is shoddy audits and the easing of the opportunities to develop fraud. The subcommittee believes that the auditor’s report should communicate more clearly to the investing public the role of auditors in fraud detection, since there is an expectation gap between what the public perceives that the auditor does and what the auditor actually does.
It would appear that the auditors have given up on the ability to detect fraud, and opened a new area of the profession called “fraud examiners,” who have the ability to uncover frauds that the auditors can’t, or won’t, look for.
The advisory group’s Subcommittee on Human Capital suggested that a “market-driven, dynamic curricula” should be evolved for accounting students.
A fine and noble goal.
The function of the college education of accounting students is to introduce them to the concepts of accounting and business, not to make them into great auditors upon graduation.
Students and new hires learn to perform high-quality audits by careful, proper, on-the-job training. Schools such as Northeastern have developed internship programs as part of the curriculum. Students actually work in the field for CPA firms as part of their education.
Most colleges and universities appear loathe to develop such programs. They have invested a great deal of time, energy and dollars to bring the 150-Hour Rule to an operational level and are not anxious to go further. Perhaps the committee could encourage greater access to internship programs to develop better accountants.
The use of cross-sabbaticals is a fine suggestion. College and university leaders decry the diminishing numbers of doctorate instructors on staff. Encouraging cross-sabbaticals with CPA practitioners could help prospective CPA candidates to learn the business of accounting as well as the theory,
The preliminary report of the Advisory Committee on the Auditing Profession is 28 pages long. I wonder if many CPAs — other than partners at the larger firms — have the time to spend on this fine presentation.
Ed Kliegman is the founding partner (retired) of Marcum & Kliegman CPAs. He organized and founded the Nassau/Suffolk Chapter of the National Conference of CPA Practitioners and was elected its first president.
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