The Decline in Global Audit Quality
IMGCAP(1)]Ask any practicing CPA who cares about the profession, and they’ll tell you about the need for continuous improvements when it comes to a public accounting firm’s system of quality control policies and procedures.
This need is at the very heart of the dynamic world of auditing, where subjectivity and the professional judgment of the auditor meet. There are some who understand what needs to be done at the grassroots level and are taking proactive steps. However, even while the American Institute of CPAs recently released details on the next version of the CPA Exam, including robust changes on how candidates will be tested, more needs to be done at the present time to ensure audit quality will remain high, reliable and relevant globally.
And there are issues with auditing on that level.
Let’s start by considering the stern warning issued by the former chair of the International Forum of Independent Audit Regulators and current board member of the Public Company Accounting Oversight Board, Lewis Ferguson, two years ago when he said that public accounting firms needed to work harder on increasing cross-border audit quality. More recently, a KPMG report noted even darker clouds on the horizon by reporting that a full 74 percent of 1,500 audit committee members in 35 different countries stated that their job was becoming more demanding. A further 51 percent said that the job was growing harder with each passing year. IFIAR’s current chair, Janine van Diggelen, recently addressed some of the issues in fair value measurements, risk assessment internal control testing and revenue recognition.
With more issues being brought to light, the question becomes, what needs to be done? Are more rules and regulations necessary?
It’s important to recognize that the deficiencies lie on several fronts, and a multi-level approach — including the way an accounting firm manages its assurance practice, the type of culture it has and the “tone at the top” message conveyed to the professionals working in these organizations — is necessary.
A significant part of the problem is a breakdown at the managerial level and the substandard way institutional knowledge and practices are being passed down. Management needs to be more “hands-on” to ensure they are passing along the appropriate information. Auditors are not receiving the appropriate training of applying the standards and procedures in practice and this only serves to make the problems worse.
Public accounting firm professionals also need to take ownership of their careers by reading and understanding all professional standards, the AICPA’s Code of Professional Conduct and related regulatory and industry requirements on their own. Independent, well-rounded professionals need to be proactive critical thinkers because having a dependency on partners and senior managers telling them what the requirements mean and how they apply to any specific job is unacceptable. Due diligence and the instinct to question and challenge at any and all levels is critical so auditors can be professionally satisfied the work is getting done properly. Ronald Reagan once used a phrase that should resonate with the profession: “Trust but verify.”
On-the-job training is important to ensure the proper message is being conveyed consistently across all offices, especially as a firm starts to expand. It’s also important to supply a motivational environment. Today’s CPAs are constantly looking to increase their experiences and this means management must encourage expanding development and engagement and stop looking at their charges in a one-dimensional/technical way.
Public accounting leadership needs to see where individual talents lie beyond business and technical aspects — does the CPA excel at representing the firm? Does he or she have excellent teaching and/or negotiating skills? Looking under the hood of your professional staff also helps any organization’s leaders find those best suited to address new high-risk growth areas that need to be handled with a special attention to detail.
A holistic and determined effort from the top down is what’s needed. The right infrastructure in global auditing is framed with the right human capital, and too many public accounting firms today are skipping this important ingredient in the blind pursuit of profits. Without this mixture in the right proportions, your modus operandi will break down and cause lost business, risk to reputation, litigation entanglements, or even penalties from regulatory bodies like the Securities and Exchange Commission.
A full knowledge of industry standards is essential. While it’s the “American way” to be entrepreneurial and I’m not suggesting that should change, firms and professionals need to do their homework before jumping into new areas, especially high-risk ones. Protecting the public interest and its importance to the auditing profession is paramount.
While reaching out to subject matter experts is a good way to learn more about a new industry or accounting treatment, one of the big traps is a sense of complacency — the misguided belief that, because no regulator has come knocking at your door, you’re doing everything properly.
Bringing in an outside perspective is another way to steer clear of any potential issues, because many organizations are doubling down on the mistakes inherent in their systems when they work exclusively with their own people. Inviting well-respected consultants into your organization offers a fresh perspective that is otherwise missed.
ENGAGED AND PROACTIVE
Being successful in auditing is also about being engaged and proactive, and developing a set of both technical and “soft skills” (e.g., business development, public speaking, writing articles, branding, marketing, etc.) to complement the technical and analytical side of the profession. Astute auditors take the time to understand their clients and what the industry demands from them as both an auditor and as an independent advisor.
It comes down to having the right mindset. There’s no substitute for an accurate self-assessment to determine your strengths and weaknesses. Finally, a professional who is fully engaged in the profession understands the standards and framework.
Changes are needed. As a profession, we need to address these undercurrents of failure immediately before we reach a point of no return.
Salvatore A. Collemi, CPA, is the managing member and founder of Collemi Consulting & Advisory Services LLC, serving CPA firms, litigation attorneys, valuation specialists, boards and audit committees of private and publicly traded companies. Reach him at email@example.com.