Audit Industry Cleans Itself Up, With Push From Congress

The Wall Street Journal reported last week on substantial progress made since 2002 in righting some of the wrongs in the accounting and auditing industry that came to light following a spate of corporate scandals.

Some changes have been forced by Congress, including the creation of the Public Company Accounting Oversight Board (PCAOB), which took the setting of U.S. auditing standards away from the American Institute of Certified Public Accountants (AICPA). The Sarbanes-Oxley Act, which mandated the creation of the PCAOB, also required auditors to attest to the quality of their client’s internal controls, the Journal reported.

Other changes have occurred within the companies charged with carrying out the audits and there’s been a shift in the fundamental attitudes auditors bring to their work. PCAOB staff members have called on the industry to take another look at its longtime policy of not being responsible for finding fraud.

The board's chief auditor, Douglas Carmichael, speaking at a December AICPA conference, said that "auditors should recognize that detection of fraud is clearly an important objective of an audit. That has been true for over 60 years, but the literature of the profession had not forthrightly acknowledged that objective," the Journal reported.

The Big Four accounting firms are making substantial changes to their approaches to audit work by choosing clients more carefully, spending more time on each audit and dramatically increasing staff training. They are also changing what had in the past been known as the "risk-based audit" approach, where they focused most of their time and attention on areas they suspected to be highly susceptible to fraud. Now auditors are giving much more attention to less obvious fraud sources.

The risk-based approach "is an effective and appropriate model," Charlie Perkins, Ernst & Young LLP's spokesman, told the Journal. Nevertheless, he adds, "it is vitally important" to "strive for enhancements and changes that would improve the quality of our audits." Ernst & Young has trotted out 30-year-old training manuals and provided staff with hundreds of thousands of hours in training.

Timothy Flynn, vice chairman of audit and risk-advisory services at KPMG LLP, told the Journal "there has been a shift back to more detailed testing and more substantive" procedures. Deloitte & Touche LLP told the Journal that its auditors are performing more substantive tests of transactions on a quarterly basis, rather than waiting until year's end.

Last June at an audit partners meeting, James Quigley, Deloitte’s new chief executive, recognized three partners for leaving a client that they had issues with. "We celebrated that with the same volume as we would have a new win," he told the Journal.