GAO Criticizes PCAOB Approach to Audit Risk

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A series of freshly reconstituted “risk assessment” audit standards supported by the accounting industry have come under fire from the U.S. Government Accountability Office.

In voicing concerns about the Public Company Accounting Oversight Board’s proposal, GAO officials warned that the present approach could create confusion among auditors and drive up audit costs for accounting firms and their clients.

The standards focus on the risk assessment process and on the auditor’s response to identified risks in client financial reports.

In addition to offering auditors new guidance on dealing with “material misstatements” and other types of financial fraud by their clients, the standards are also intended to provide accountants with new guidance for planning and executing audits to address those problems.

In advancing the plan late last year, acting PCAOB chairman Daniel L. Goelzer called the standards “essential to affording investors reasonable assurance that financial statements are free of material error.”

Once finalized, Goelzer said, they would “serve as the bedrock for much of the board’s future standards-setting.”

The risk assessment standards were originally proposed in 2008, but in response to a flurry of comments offering suggestions for improvement, the PCAOB rewrote and re-proposed the plan last December.

While most observers consider the revisions a move in the right direction, the proposal is continuing to come under attack from a number of groups.

For her part, the GAO’s Jeanette Franzel expressed “serious concerns about the PCAOB’s approach to updating its interim standards,” and warned that the board’s approach may result in “duplication of and inconsistencies between its standards and those of other established independent auditing standard-setting organizations.”

Franzel, the GAO’s managing director for financial management and assurance, said that the board’s plan incorporated modified versions of other established audit standards without providing clear explanations for the purpose or meaning of those differences.

“This approach will increase the likelihood of misinterpretations, inconsistent application of the standards, and higher costs for all users with a disproportionate burden on smaller and midsized firms,” she told the PCAOB.

While major accounting firms voiced general support for the latest version of the standards, even supporters of the plan raised similar concerns about the board’s approach.

McGladrey & Pullen, for one, expressed appreciation for the changes made by the PCAOB in the revised standards, but nevertheless warned that “unnecessary differences between the board’s standards and those of other standard-setters increase the costs of performing all audits because firms must develop and maintain two, and even three, audit methodologies and training programs, with no corresponding benefit to audit quality.”

Worse yet, these needless differences in audit standards “can lead to confusion and misunderstanding by auditors of what is required of them and why, which potentially leads to an erosion of audit quality,” McGladrey & Pullen said.

The PCAOB’s risk standards came under even sharper criticism from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, which called on the board to withdraw the plan altogether and reevaluate its approach. Describing the proposed standards as “deficient,” the Center predicted that their implementation would “foster uncertainty” and may “result in material losses for investors and businesses.”

Those criticisms were in stark contrast to the positive response from pillars of the accounting community, many of whom quibbled with parts of the approach but endorsed the board’s efforts.

PricewaterhouseCoopers told the PCAOB, “We fully support the board’s objective to update interim standards regarding risk assessment,” while BDO Seidman said the revised plan would “largely achieve” the goal of helping auditors reach “an appropriate conclusion” with respect to risk assessment. Officials at the Institute of Internal Auditors described the proposed standards as “high quality” and said the changes made by the PCAOB have “aided in the improvement” of the standards.

Not all auditors were so supportive, however,

Oakton, Va.-based CPA Patrick Montgomery told the PCAOB that the revised standards failed to “strike a good balance,” and might make it more difficult for auditors to perform their duties.

“After all,” he told the board, “auditors have a difficult enough time dealing with significant accounts and disclosures so the PCAOB should minimize theory-oriented distractions to how accountants operate and financial statements are prepared in the real world.”

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