Lack of information and difficulty in discerning the difference between audits risks market stagnation, warns James Doty
THE AUDIT MARKET is “flirting with stagnation” because it is considered as an obligatory compliance function, best obtained at the lowest cost, the chairman of the US accounting watchdog has warned.
Speaking at an ICAS memorial address, Jim Doty [pictured], chairman of the PCAOB, suggested that audit is being viewed as “largely irrelevant to the investment process” because of a lack of information and difficulty in discerning the difference between one audit and another.
“Management says that KPIs and non-GAAP measures threaten to supplant the audit,” Doty said.
“Our challenge is to find ways to harness the market as an ally in the cause of audit quality. It should reward firms with demonstrably superior quality, thereby encouraging the investment and backbone essential for quality auditing.”
In response to criticism that auditors’ reports are uninformative, the PCAOB, along with a number of global and national regulators, is currently looking at ways of improving the report that accompanies annual financial statements.
The various initiatives, which include extending their scope to include a commentary of the risks of material misstatement, longer-term going concern judgments, and proving commentary that that includes reference to matters not disclosed by management, aim to force auditors to provide greater transparency about significant matters in the financial statements, as well as the conduct of the individual audit.
“We are indeed considering whether a different form of report, oriented toward the needs of the users of the report, could expand the auditor’s mindset to identify key insights about the audit that will help a user understand the quality of financial reporting,” Doty said.
“The project is not about changing the nature or scope of the auditor’s work. It’s about making the results of that work more relevant.”
The UK Competition Commission recently found that the Big Four auditors – KPMG, PwC, Ernst & Young and Deloitte – were putting the interests of management ahead of shareholders, a claim hotly denied by the firms.
According to Doty, auditors, by representing the public interest in reliable information, forgo popularity with management and take on risk, though this is not always the case,
“Auditors may not necessarily want to tell it as they see it, lest they lose the engagement.,” he said.
Referring to a conversation with one accountant about the PCAOB’s proposal to require identification of the engagement partner in the audit report, Doty said it was their opinion that it would “discourage new engagement partners from requiring restatements when they find errors in past accounts, lest the partner become known to potential future clients as a strict enforcer”.