While the flow of high-quality information is critical to the functioning of capital markets, many are coming to see the independent audits that vouch for that information as irrelevant, according to Public Company Accounting Oversight Board Chairman James Doty.

“Our markets rely on trust,” Doty said in a keynote address at the American Institute of CPAs’ 41st Annual National Conference on Current SEC and PCAOB Developments. “Independent audits provide that trust, and thus bridge the gap between entrepreneurs who need capital and lenders and investors who can provide capital.”

However, he noted that the public, which is always angry when fraud goes undetected, “has trouble discerning the difference between one audit and another. With little information about particular audits, a conventional wisdom is gradually developing that the audit is largely irrelevant to the investment process today.”

He went on to explain that the PCAOB is combating that impression in several ways, not least by proposing that firms publicly identify the engagement partner on an audit, and by monitoring what he described as the “regeneration” of consulting services at major firms.

Of the former proposal (see PCAOB Tries Again to Require Disclosure of Audit Partners), Doty said, “It holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public.” And while firms might claim that their internal processes keep all partners to the same high standard, he revealed that PCAOB inspections have found that firm quality controls often do not provide for consistent performance. “And inspectors have found that knowing the identity of the engagement partner is valuable -- so why wouldn’t investors?”

Regarding the recent resurgence of consulting services, Doty said that it raised a number of questions regarding its possible affect on the audit function, including, “What will firm management do to meet the compensation and cultural challenges that destabilized Arthur Andersen?”

In response to an audience question about whether the board had found any specific evidence that consulting services had compromised audit quality, Doty said, “As a regulatory body, we are expected to look over the hill and see what’s coming. We’re not doing our job if we’re not concerned about the regeneration of consulting services, given what went before. We can’t ignore the facts of 1999, 2000 and so on, and we can’t say that since we have no current evidence of a problem, ‘Don’t ask.’ We have to ask. It’s our job.”

PCAOB developments

 “It’s been a busy year at the PCAOB,” Doty said. “We’ve pressed forward on both near- and long-term initiatives, and taken a hard look at how we serve the capital markets for the investing public,” he said.

Among those initiatives were:

  • Identifying the need for, and developing, changes in standards;
  • Re-examining the inspection process for faster and more informative inspections;
  • Bringing the remediation process into real-time; and,
  • Doing more outreach, particularly to audit committees.

He also mentioned the PCAOB’s creation of the new Center for Economic Analysis (see PCAOB sets up Center for Economic Analysis), and its proposals to make significant updates to the auditor’s report to make them more meaningful and useful to users (see Changes Proposed to Auditor’s Report).

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