The Conference Board's power-packed Commission on Public Trust and Private Enterprises released a report that adds to the pressures facing audit firms today. The report studied causes of declining public and investor trust and recommended that best practices include rotation of audit firms in some circumstances and relinquishing of certain types of tax work by audit firms.
Specific best practice suggestions include the following:
- To ensure the independence of audits, audit committees should seriously consider rotating outside audit firms when some or all of the following circumstances exist: (1) the audit firm has been employed by the company for a substantial period of time, e.g. over ten years; (2) one or more former partners or managers of the audit firm are employed by the company; and (3) significant non-audit services are provided to the company – even if approved by the audit committee.
- The business model, strategies and focus of the Big Four should ensure that quality audits are their number one priority. Each Big Four firm must be sure it represents a "gold standard" in auditing. To arrive at this standard, these firms must ask themselves tough questions, such as: Is the huge financial conglomerate the right business model for firms providing professional audit work? Can huge auditing firms be managed in a way to ensure quality audits? Can a culture of professional values be maintained in organizations that, in some cases, have over 100,000 employees?
- Public accounting firms should limit their services to performing audits for clients and closely related services that do not put the auditor in an advocacy position. Examples of services that result in advocacy positions include novel and debatable tax strategies and products that involve income tax shelters and extensive off-shore partnerships or affiliates.
A special subcommittee also prepared recommendations on accounting principles. The recommendations include more timeliness in setting accounting standards, a change in funding for the U.S. share of the International Accounting Standards Board to one involving the issuer assessments outlined in the Sarbanes-Oxley Act, and some changes in the composition, role and function of the Financial Accounting Foundation, the organization that oversees the Financial Accounting Standards Board.
Members of the Public Trust panel include John Biggs, former chairman and CEO of TIAA-CREF and former nominee for the chair of the new accounting oversight board; Charles Bowsher, former chairman of the Public Oversight Board; Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, and Paul Volcker, the former Federal Reserve Board Chairman who tried to rescue Arthur Andersen and currently serves as chairman of the trustees of the International Accounting Standards Committee (IASC) Foundation.
Download the full report.