Public Company Accounting Oversight Board member Jay Hanson spoke about some of the challenges faced by auditors, including the excessive number of hours they are forced to work, and how the PCAOB is trying to address them.
During a keynote speech Thursday in New York at Baruch College’s Financial Reporting Conference, Hanson discussed several of the board’s proposed standards for enhancing auditor independence, objectivity and professional skepticism, including a concept release proposing mandatory audit firm rotation. The European Parliament’s Legal Affairs Committee recently voted for a draft law that would require public companies to rotate their auditing firms after 14 years, or 25 years if certain safeguards are in place (see European Parliament Votes for Audit Firm Rotation).
“Recently, many have speculated about whether something should be done to improve auditor objectivity and skepticism,” said Hanson. “One idea that has received a great deal of attention is mandatory audit firm rotation. In my view, auditor objectivity and skepticism—manifested in the auditor's ability and willingness to challenge management—depends on a variety of factors. Does the auditor have the technical competence to know what to challenge? Is the topic a complex area and the auditor lacks the confidence to insist on an adjustment or expanding the scope of audit procedures? Were the time pressures associated with tight filing deadlines creating an incentive to avoid "stirring up trouble"? Were there pressures to reduce hours and fees? Does the auditor have the right personality and temperament to jump into a contentious situation?”
Hanson said he is concerned about the number of hours that auditors are requited to work. “One exceptionally troubling issue that I sense is getting worse is the sheer number of hours that audit teams are expected to work,” he said. “Most professionals understand and accept the need for long hours during the ‘busy season.’ If I were an audit committee member, I would be highly concerned if the work plan called for significantly more than 55 hours per week or if the actual sustained hours were much higher than that. How do you function if you are working 16 hours per day on a continual basis? How do you perform basic tasks, much less conduct the more difficult evaluations that require heightened skepticism and objectivity? How do you guard against the temptation to overlook difficult issues that will stretch out your work day even longer? If audit teams are working excessive hours, there is a problem.”
Hanson noted that an audit partner may not have scoped the work properly and the firm may not have enough resources deployed. “The firm may not be managing its people effectively,” he added. “Management may not be providing the auditor timely information to complete the audit. In the interest of audit quality, I urge audit committee members to place a maximum number of hours per week on the table for discussion with their auditors and investigate the reasons for excessive hours.”
Hanson said these are all factors that the PCAOB plans to consider in determining what actions may help to shore up auditor objectivity and skepticism. “Several of them, I fear, would be exacerbated, rather than improved, through mandatory auditor rotation.”
The PCAOB is also planning to re-propose its related parties standard seeking public comment on certain refinements of the previous proposal and well as information to inform the PCAOB’s economic analysis.
The PCAOB has scheduled an open meeting for 9:30 a.m. on Tuesday, May 7, to consider reproposing for public comment the related parties auditing standard. The PCAOB also will consider related amendments, including those regarding significant unusual transactions. The reproposed standard and amendments would revise auditor performance requirements in areas that could pose significant risks of material misstatement in company financial statements.
The PCAOB initially issued a proposed standard and amendments on Feb. 28, 2012.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access