More good stuff for auditors – 3-12-14

A few links and comments of interest to auditors. Big firms book increasing amount of consulting work and whether the PCAOB’s definition of audit failure a bit too broad.

3/3 – Accounting Onion – Accounting Complexity: What if “Truth in Labeling” were and Accounting Principle? – If we applied ‘truth in labeling’ to property, plant, and equipment, we’d have to call it something like

undepreciated cost stated in ancient units of purchasing power.

If we did that, what in the world would be a truthful label for right of use asset under the proposed lease rules?

Here’s a simpler question: How do I explain to my clients booking a right to use asset from a several-year office lease? My clients will be shaking their head at us silly accountants as they post the adjustment.

3/4 – Wall Street Journal/CFO Journal – Auditors Draw Some Clients Closer – In the land of really big audit practices, the annual audit can run around $40M at HSBC or a mere $3.7M at Target (according to the article). In that world, the amount of fees for various consulting are increasing in relation to the audit fee. That issue is again drawing attention from various regulators around the world. Said issue of fees compromising the auditor’s integrity was presumably fixed after Enron,, but the issue is slowly returning.

2/27 – CFO – PCAOB’s ‘Audit Failure’ Rate Is Highly Suspect – Professors Mark Peecher and Ira Solomon take exception to the comments from PCAOB that 35% to 40% of audits they inspect are ‘audit failures.’  Here’s my characterizations of their reasons for why that is so misleading:

The PCAOB selectively picks audits for inspections. If you look for places there may be problems, you chances of finding problems skyrockets.

Equating audit deficiency with audit failure. The PCAOB definition is cited in the next article I’ll mention. Essentially if the audit team missed significant documentation, or missed an improper disclosure or skipped certain audit procedures, it isn’t just a deficiency. It is an audit failure. 

Inspections are obviously done after the audit is complete. That allows hindsight bias. When you know how major estimates turned out, or what products thrived or failed, or what customers tanked, it is easy to see where something was ‘missed.’

Check out the article for their explanations.

3/4 – Going Concern – Is the PCAOB’s “Audit Failure” Rate Really a Little Dramatic? – Yes. Next question.

Calls attention to the above opinion piece at CFO.  Here’s a quote in the article from a PCAOB board member on their definition of audit failure:

It is a deficiency of such significance that the firm, at the time it issued its audit report, failed to obtain sufficient appropriate evidence to support its audit opinion on the financial statements and/or on the effectiveness of internal control. Under the definition, deficiencies include instances where a firm did not identify or address appropriately financial statement misstatements or improper disclosures, as well as failures by the firm to follow auditing standards.

That is a really broad definition.

3/7 – CPA-Scribo – A Ruler for Your Computer Screen – I don’t do tech tips, but will make an exception. Ever wished you could have a virtual ruler for your desktop like we used to have rulers to keep straight a line of fine print on paper? Well, Charles Hall points out a free ($1 donation requested) ruler can be added to your desktop. Just downloaded it myself. Could be handy to have around.

2 thoughts on “More good stuff for auditors – 3-12-14”

  1. After reviewing several audit files over the course of five years whilst working for the Financial Reporting Council, an equivalent of PCAOB in the UK, I noticed an argument put forward by the auditors repeatedly. The argument was that the audit inspectors use hindsight as a tool, for example if a fraud was discovered at a client, not by the auditors, the audit inspectors were accused of using the recent information to look back and question the the sufficiency of audit procedures used by the auditors at the time of audit. Personally, I have some sympathy with auditors but the overwhelming evidence which I found during the inspections was the lack of challenge put forward by the auditors to management’s underlying assumptions related to various estimates. For instance the growth rates used by clients in goodwill impairment reviews were not challenged or even discussed by the auditors with their clients. At best I found a memo written by the audit manager basically agreeing with the assumptions used in the impairment review. The purpose of having a concurring or an independent partner on the listed audits was to ensure that the audit team was kept honest. In my experience of five years as audit inspector I never found any challenge put forward by the independent partner to the audit team on key audit judgments. Therefore, I don’t necessarily agree entirely with the definition of audit failure used by the PCAOB but at the same time I could see the logic of such definition used by the PCAOB. The audit partners, especially the big four partners have egos and their ego can only be deflated or managed by an agency like PCAOB which appears to have teeth. The threat of audit failure classification by PCAOB should ensure that the auditors are using appropriate audit procedures and keeping the audit by memos to the minimum.

    1. Thanks for your comment. Your experiences provide more context as I try to understand the “audit failure” definitions in use.

      In my teeny tiny audits there are hundreds of pieces of information that feed into my conclusion on the financial statements. There will always be another dozen inquiries or observations or tests or analyses I could do.

      In a public company there are probably tens of thousands of pieces of information. There is always another few thousand pieces of information that could have been gathered.

      The huge struggle is when to stop. Perhaps that one particular assumption over there on that workpaper is so critical it should have gotten more testing. Or perhaps the auditor looks at it, discusses with the client, ponders for a while, and concludes it actually makes sense.

      I intentionally stay about two light years removed from the PCAOB world. I am astute enough to know there are a lot of auditors that drop the ball. Thank you for sharing your perspective. It is the first on-the-other-hand comment I have seen trying to explain the regulatory perspective.

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