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, et.al., 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.