Newsroom
Audit Reform Panel Tepid on Liability Caps
Compliance Week (Subscription required for full article)
Tammy Whitehouse provides an overview of the U.S. Treasury Department’s Advisory Committee on the Auditing Profession’s meeting on March 13 to discuss preliminary suggestions for how to make the auditing profession sustainable in a recent article published in the subscription-only magazine Compliance Week.
According to Whitehouse, “one of the biggest forces driving the review is fear of losing another major global audit network to the kind of meltdown that dissolved Arthur Andersen following the collapse of Enron.” Instead of outright protections, Whitehouse writes, “the group is focused on recommendations that would modify audit firm governance, promote a closer examination of the assessment and management of failure risk, and beef up auditor education and training. The committee also is preparing suggestions for how to nurture smaller audit firms for the long-term, so they could more realistically compete for public-company audit work.”
Whitehouse also says, “The committee is planning to suggest the creation of a professional center for best practices in fraud prevention and detection, which ideally would encourage market players to share information and also help close the "expectations gap" regarding the level of assurance an audit is supposed to provide. The committee also plans to recommend that the Public Company Accounting Oversight Board and the Securities and Exchange Commission work on the language of the audit report to help investors better understand that a clean audit does not provide ironclad protection against fraud.”
PRELIMINARY THOUGHTS
Below is Whitehouse’s summary of the preliminary recommendations from the Advisory Committee on the Auditing Profession.
- Promote the growth of smaller auditing firms consistent with the overall policy goal of promoting audit quality. Because smaller firms are likely to become significant competitors in the market for large company audits only in the long term, the Subcommittee recognizes that Recommendation 2 will be a higher priority in the near term.
(a) Require disclosure by public companies in their proxy reports of any provisions in material agreements with third parties limiting auditor choice.
- Create a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms.
(a) Broadly monitor, through the Public Company Accounting Oversight Board (PCAOB) authority over registered firms, potential sources of catastrophic risk, which would threaten audit quality. (b) Establish a mechanism to assist in the preservation and rehabilitation of a troubled larger auditing firm. A first step would encourage larger auditing firms to adopt voluntarily a contingent streamlined internal governance mechanism that could be triggered in the event of threatening circumstances. If the governance mechanism failed to stabilize the firm, a second step would permit the Securities and Exchange Commission (SEC) to appoint a court-approved trustee to seek to preserve and rehabilitate the firm by addressing the threatening situation, or if such a step were unsuccessful, to pursue a reorganization.
- Promote the understanding of and compliance with auditor independence requirements among auditors, investors, public companies, audit committees, and boards of directors, in order to maintain investor confidence in the quality of audit processes and audits.
(a) Compile the SEC and PCAOB independence requirements into a single document and make this document Website accessible. The American Institute of Certified Public Accountants (AICPA) and states should clarify and prominently note that differences exist between their standards and those of the SEC and the PCAOB and indicate, at each place in their standards where differences exist, that additional SEC and PCAOB independence requirements applicable to public company auditors may supersede or supplement the stated requirements. This compilation should not require rulemaking by either the SEC or the PCAOB because it assembles existing rules. (b) Develop training materials to help foster and maintain the application of healthy professional skepticism with respect to issues of independence among public company auditors, and inspect auditing firms, through the PCAOB inspection process, for independence training of partners and mid-career professionals.
- Adopt annual shareholder ratification of public company auditors by all public companies.
- Enhance continuously regulatory collaboration and coordination between the PCAOB and its foreign counterparts, consistent with the PCAOB mission of promoting quality audits of public companies in the United States.
Source Quotes:
Whitehouse writes, “committee co-chairman Arthur Levitt (head of the SEC in the Clinton Administration) acknowledged corporate resistance, but said the gains in investor confidence trump corporate concerns. ‘It would be very difficult to explain to investors in the kinds of environments we've seen and are going to see why we would resist such a change,’ he said.
To guard against another Andersen-like implosion, the committee plans to recommend a mechanism for spotting potential trouble at a Big 4 firm and working it out before disaster strikes. The committee plans to suggest some kind of broad risk monitoring by the PCAOB, along with a means for rescuing and rehabilitating a large firm under regulatory governance or a court-appointed trustee rather than allowing it to dissolve.
The committee also plans to recommend that regulators study whether audit firms should be required to appoint independent board members to improve governance and transparency at audit firms. In addition, the panel plans to suggest streamlining the audit regulatory process, better coordinating the efforts of the SEC, PCAOB, and state boards of accountancy.”
