According to the Public Company Accounting Oversight Board, your auditor may be making big mistakes during your audit. A company’s outside auditors are often looked at as an authority on accounting rules and issues. But the sad truth is that they may know far less than you think.
For starters, the audit field work is performed primarily by auditors with little experience. Auditors come out of college and go straight into the field, and they’re expected to check a company’s books, ask good questions, and identify problems. That’s unrealistic, considering most of those new graduates have had little real-world experience with financial statements and company operations.
In charge of supervising those new auditors are “experienced” auditors, who typically have 2 to 4 years of experience working on audits. How experienced can that really be with so little working history?
Sure, there are managers and partners who oversee auditing engagements, but the reality is that they are absent for most of the engagement. They show up for an afternoon or a day, spend most of their time talking with the client and then they take a quick look at the audit work papers. Is this real quality control?
Since the inception of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) has been in charge of keeping tabs on auditors. They have been conducting “inspections” of audit firms in order to determine if the audit procedures are sufficient to support audit opinions on financial statements.
From the PCAOB’s work in 2004 through 2006, the organization identified 11 quality control issues for audit firms. These issues were published earlier this week, and are intended to provide guidance on improving independent audits.
The 11 areas which frequently had audit deficiencies (i.e. audit procedures were insufficient) were:
- Revenue Recognition – Audit firms have failed to perform adequate tests to substantiate revenues, have failed to adequately examine contracts and terms, and have failed to test whether revenue was recognized in the proper accounting period.
- Related Party Transactions – Firms have failed to identify and address the lack of disclosure of related party transactions, and have been deficient in testing the nature, substance and purpose of the related party transactions.
- Equity Transactions – Audit firms have not evaluated whether clients have appropriately determined fair values assigned to equity-based transactions.
- Business Combinations and Impairment of Assets – The auditors have failed to identify the accounting acquirer in a transaction, and have failed to identify situations in which the issuer did not follow all accounting and disclosure requirements.
- Going Concern Considerations – Some audit firms have failed to perform adequate audit procedures in order to identify condition that may affect a company’s ability to continue as a going concern.
- Loans and Accounts Receivable – Auditors failed to adequately confirm accounts or to perform other procedures to verify the accounts.
- Service Organizations – Some auditors have relied on the controls of outside services providers, failing to test the data and reports provided by those services to the company under audit.
- Use of Other Auditors – Audit firms should assess their participation and that of outside audit firms when performing an audit engagement, and determine which firm is actually the principal auditor.
- Use of the Work of Specialists – The auditors’ use of specialists to perform certain procedures relative to an engagement must include an evaluation of the relationship between the client and the specialist, an understanding of the procedures of the specialist, and adequate testing of the specialist’s work.
- Independence – Firms have failed to comply with independence requirements of the SEC and PCAOB.
- Concurring Partner Review – For some engagements, the concurring partner does not have sufficient expertise and experience to provide an adequate review of the engagement, thereby negatively impacting the audit firm’s quality control.