What to Do About the Audit Function?

What to Do About the Audit Function?

Over the past few months, several members of the Public Company Accounting Oversight Board, including new chair James Doty, have expressed concerns about the usefulness of the current audit process. “Looking ahead,” Doty noted in an April speech to the Council of Institutional Investors, “our audits and audit reports ought to better reflect investor needs.”

At the same time, he added that “many forces prevent auditors from seeing investors as their direct or even ultimate masters.” For one thing, the company being audited pays for the audit. While audit committees hire the audit teams, “in too many companies, the audit committee still is a rubber stamp for the CFO and CEO,” says Joseph Carcello, an accounting professor at the University of Tennessee, Knoxville, and a member of the PCAOB’s Investor Advisory Group.

Even more troubling: Some audit committees see their mission as negotiating the lowest fee. “That’s not consistent, if done excessively, with high quality audits,” Carcello says. (Carcello and the others quoted in this article are speaking on their own behalf, and not for their respective boards or employers.)

‘Watchdogs for Investors’

To be sure, not all assessments are as bleak. “The independent directors are the watchdogs for investors, and independent of management,” says Gary Kabureck, vice president and chief accounting officer with Xerox Corp., and a member of both the PCAOB’s Standing Advisory and Investor Advisory Groups. If large numbers of investors lack confidence in the directors, that’s a call to question just what their role is, he adds.

And if the companies being audited didn’t hire the auditors, some ask, who would?

One alternative is to have the auditors become offshoots of the PCAOB, and paid by the government. “I don’t think that’s necessary or practical,” Kabureck says. Another is to require each investor – since they benefit from the audit – to pay a fee that is pooled and used to cover auditor fees. However, that still leaves open the question of who would choose the audit team for each firm.

Another concern is the depth -– or lack of it -– of the audit opinion. “The PCAOB is engaged in a broad dialogue with investors, auditors, audit committees, preparers and others to consider how the auditor’s report can be changed to provide more useful, relevant and timely information,” Doty said in a May address at Baruch College.

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