The Treasury Department's Advisory Committee on the Auditing Profession on May 5 issued a draft of its final report. It is broken down into a number of sections, each with detailed recommendations with regard to auditing and the auditing profession.
I really don’t want to write this column so quickly after the draft report’s issuance, but I don’t have a choice, as there only is 30-day period for comments. I wish there was more time to publicize the report so interested parties that were underrepresented on the advisory committee could absorb and study the recommendations and state their views. To help those parties, here is my Rorschach reaction to the six recommendations in Section VII, Concentration and Competition. My colleague, Bill Carlino, commented on one of the other sections in his column yesterday
Recommendation 1. Reduce barriers to the growth of smaller auditing firms consistent with an overall policy goal of promoting audit quality. Because smaller auditing firms are likely to become significant competitors in the market for larger company audits only in the long term, the Committee recognizes that Recommendation 2 will be a higher priority in the near term.
Reaction: Unfortunately, a throwaway recommendation that deserved much more immediate study, with a discussion needed of out-of-the-box possible immediate solutions.
Recommendation 2. Monitor potential sources of catastrophic risk faced by public company auditing firms and create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.
Reaction: A type of insurance desired by Big Four to protect against a similar demise `a la Andersen following expected future catastrophies.
Recommendation 3. Recommend the PCAOB, in consultation with auditors, investors, public companies, audit committees, boards of directors, academics, and others, determine the feasibility of developing key indicators of audit quality and effectiveness and requiring auditing firms to publicly disclose these indicators. Assuming development and disclosure of indicators of audit quality are feasible, require the PCAOB to monitor.
Reaction: A new, additional roadmap for litigation against an auditor.
Recommendation 4. Promote the understanding of and compliance with auditor independence requirements among auditors, investors, public companies, audit committees, and boards of directors, in order to enhance investor confidence in the quality of audit processes and audits.
Reaction: Not really a recommendation, more a comment on a continuing many-year effort that hasn’t been successful.
Recommendation 5. Adopt annual shareholder ratification of public company auditors by all public companies.
Reaction: A useless rubber stamp unless it specifically limits investors from suing auditors.
Recommendation 6. Enhance regulatory collaboration and coordination between the PCAOB and its foreign counterparts, consistent with the PCAOB mission of promoting quality audits of public companies in the United States.
Reaction: Not necessary to state; simply combine with efforts at convergence with international accounting standards.
If you want to make any comments on the report, hurry up. You are more than a week into the 30-day time period for comments.
The 150-page report is at www.treas.gov/offices/domestic-finance/acap/agendas/draft_report_05-05-08.pdf
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