Auditor Recommendations Offered in Time for SEC Hearings

The Panel on Audit Effectiveness, which was appointed by the SEC to evaluate the way in which audits are performed and the effects of such audits on the public interest, has issued its final recommendations in anticipation of next week’s SEC hearings.

The panel has been studying audit effectiveness for two years, and now offers the following suggestions which will be discussed at the next two SEC public hearings on September 13 and September 20.

  • Auditors should perform some "forensic-type" procedures on every audit to enhance the prospects of detecting material financial statement fraud.

  • The Auditing Standards Board should make auditing and quality control standards more specific and definitive to help auditors enhance their professional judgement; in certain specified areas, audit firms should review, and where appropriate, enhance their audit methodologies, guidance, and training materials; and peer reviewers should "close the loop" by reviewing those materials and their implementation on audit engagements and then reporting their findings.

  • Audit firms should put more emphasis on the performance of high quality audits in communications from top management, performance evaluations, training, and compensation and promotion decisions.

  • The POB, AICPA, SEC Practice Section of the AICPA (SECPS), and SEC should agree on a unified system of governance under a strengthened POB that would oversee standard setting (for auditing, independence, and quality control), monitoring, discipline, and special reviews.

  • A majority of the members of the Independence Standards Board (ISB) should be from outside the profession, and the SEC should encourage and support the ISB in carrying out its mission.

  • The SECPS should strengthen the peer review process, including requiring annual reviews for the largest firms, and the POB should increase its oversight of those reviews.

  • The SECPS should strengthen its disciplinary process by requiring member firms to take actions regarding partners involved in certain alleged audit failures.

  • Audit committees should pre-approve non-audit services that exceed a threshold amount and should consider certain specified factors when doing so. The ISB should identify the factors.

  • The International Federation of Accountants should establish an international self-regulatory system for the international auditing profession.

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