There are a lot of counter pressures to encourage auditors to be diligent and do a good job. Here’s a short list:
- Risk of censure by the SEC – This includes publicity, personal fines, or being banned from working on SEC clients.
- Litigation – Huge loss in time and energy to deal with the case, reputation damage, increased insurance cost in future, dollar losses from settlements. You can put losing your home or retirement account in this category.
- Board of accountancy – disciplinary hearings, fines, penalties, public rebuke, reputation damage.
- Wall Street Journal test – Do you want to see your name on the front page of the WSJ? Want to read about this audit in Forbes? Want to have columnists and reporters from the WSJ, Forbes, Financial Times, and Fortune calling you for comment? Want to see your name in Going Concern as an object of ridicule? Maybe we can call this the Going Concern test.
- Lose your ability to make a living – The SEC or state board could effectively void your college degree and CPA certificate. Just how will you pay your kid’s college bill if you take a mid-level job in another career field?
- The internet is forever – Mess up really bad and your grandchildren can read all about it in 20 years when they start researching family history.
If those pressures don’t motivate you to do a good job, then mandatory rotation, disclosing the names of the partner, and new-nifty-idea-to-make-auditors-get-serious-that-will-be-floated-next-month will be completely irrelevant to you.
Sometimes counter pressures don’t work
On the other hand, those countervailing pressures don’t seem to be a big deal for everyone.
I am aware of one big firm partner whose demonstrated attitude was that he was co-insuring his risk with 1,000 partners. His decisions showed that he was only taking 1/1000th of the risk of his audits.
At CPE classes, there are usually a few people sitting in the back row who spend the entire class reading a magazine or taking care of e-mail. No mandatory requirement for 40 hours of CPE will force them to learn anything new.
The risk of having the world fall on your head didn’t stop an Arthur Andersen partner from agreeing to legal counsel’s advice to ‘clean up’ the workpapers, which involved shredding several tons of documents. The consequence? A mere 20,000 people lost their jobs.
I’m aware of other CPAs that have ‘cleaned up’ the workpapers before an inspection or peer review. I have no doubt that somewhere there is a CPA who would clean up workpapers in the midst of litigation or before another firm takes over the audit.
In fact, the peer review program requires one engagement to be selected as a surprise. Obviously the people who designed the program know that sometimes CPAs will do dumb things.
The dangers of CPAs feeling a halo effect or cleaning up workpapers or compromising their independence is very real. Those dangers need to be addressed by the profession, by every firm, and by each individual auditor.
Finally, in every newsletter from the California Board of Accountancy, there are pages and pages of discussion of CPAs who ignored the professional rules. You can read at length their mistakes and the detailed list of penalties.
My point throughout this series of posts is that mandatory rotation won’t do anything at all to address those dangers and risks.
When doing an audit, you have to try. Really, really try.
Next post, the conclusion. Finally.