How high should the bar of expectations be set, ahead of the meetings of the Public Company Accounting Oversight Board set for April 2-3, where a series of panels are to consider its proposal of last August addressed to the auditors’ reporting model?
Based on the modest heights scaled by the agency over the course of its dozen-year history, shin guards are recommended.
Consider these steps, halting and slow:
- The PCAOB admits that its audit firm inspections are still barred by unresolved claims of confidentiality or national sovereignty in some 15 countries, importantly including China, Hong Kong, Ireland and Italy.
- It also lists affiliated firms of the largest global audit networks that have not been inspected in these and such other major economies as France, Germany and Spain, for four or more years.
- Three years after re-launching its elaborate series of proposals, hearings and road-shows on the never-supported proposition for mandatory limits on auditor tenure, PCAOB chairman James Doty finally folded his losing hand in February – not with a forthright admission that the notion was ill-founded from the outset, but with the budgetary cavil that “We don’t have an active project or work going on within the board to move forward on a term limit for auditors.”
- The entire edifice of auditor quality evaluation lies exposed to PCAOB member Jay Hanson’s trenchant criticism of the agency’s basic measuring stick – its own peculiar definition of an “audit failure” – that is, in the agency’s view only, if “the auditor did not do enough to know whether (financial statements were fairly stated).”
As Hanson diplomatically summarized in his March 18 speech, the agency’s self-referential definition “appears to have caused confusion among investors, audit committees and others…,” because it is neither consistent with the same term as used, e.g., by the US Government Accountability Office, nor are its “findings” causally related to actual problems in an issuer’s financial statements or restatements.
- And finally, the PCAOB shows such disrespect for the memory and acuity of its audience that its March 20 release actually touts the participation of members of the Bush-era’s long discredited Advisory Committee on the Auditing Profession. That callous exercise in political spin, by US Treasury Secretary Henry Paulson, yielded up a final report in October 2008, so tangled in internal posturing that it was unable even to achieve consensus on the existence of a stability threat to the very model for audit services to the world’s largest companies.
Instead, the Treasury Committee’s lack of credibility was measurable by its straight-faced but ludicrous suggestion that the partners of the large audit networks would, if facing existential threats from litigation or law enforcement, stabilize their firms by abdication -- surrendering their leadership to rescue teams of replacement management standing by in the wings.
- Aside: to its modest credit, the Committee was not altogether lacking in substantive insights – high-lighting, for example, the stunning short-coming in the oversight of the audit profession, that “No formal forum currently exists where auditors and other market participants regularly share their views and experiences relating to fraud prevention and detection in the context of fraudulent financial reporting.”
Other significant business and professional sectors provide effective models for the opportunity to engage and learn from “failure study” – engineers, air traffic safety, emergency hospital procedures, for example. The crying absence of such a forum around the subject of “audit failure” dooms the entire community of financial statement users to the blinkered limitation that “You can’t hope to improve, if you can’t tell whether you’re good or not.”
At the core of the PCAOB’s current audit report initiative is its proposal that auditors should discuss so-called “Critical Audit Matters.” The main effects of this marginal exercise – as abundantly spelled out in comment letters already in the PCAOB’s hands -- would be disruption of the appropriate allocation of reporting and disclosure responsibility resting on public-company management teams and their boards and audit committees, the fostering of further boilerplate reporting language, and the propagation of hindsight second-guessing by regulators and litigants about whether a particular matter was indeed “critical.”
Under all these conditions, those seeking to locate the expectations bar for the upcoming PCAOB meetings are best advised to approach it on hands and knees.
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