Home > Risk > Are the external audit firms justified in complaining about the PCAOB inspectors?

Are the external audit firms justified in complaining about the PCAOB inspectors?

In the past, management have justified their actions, when taken against their better judgment, on the grounds that “the auditors made me do it”. (Sometimes they refer to the internal auditors, sometimes the external auditors. In neither case are they justified for doing something they believe is wrong.)

Now, the audit firms are justifying actions on the grounds that “the PCAOB inspectors made me do it”. They use this to justify additional work that they agree with management is not necessary, higher costs, and so on.

The PCAOB has released guidance for audit committees on their inspection processes and what the directors should discuss with the external auditors.

I don’t know about you, but I have little patience with this blaming of the regulators. If the audit firms believe the PCAOB inspectors are being unreasonable, they should take it up with the agency’s leaders – and explain to their clients’ audit committees exactly what they are being asked to do that is unreasonable. They should not simply do additional, unnecessary work and pass the costs on to their clients.

For example, I have heard tales of ‘I can’t adopt this practice of reliance on management testing, even though it is advised in AS/5, because the inspectors will have a problem’. If I were on the audit committee, I would not accept that from the audit partner.

Would you?

Are the PCAOB inspectors really unreasonable ogres? Or are the audit firm partners to blame because their work was deficient?

What should management and the audit committee do when the audit partner explains additional costs because of PCAOB demands?

  1. August 5, 2012 at 2:51 AM

    Ah but Norman, the real issue here is that the auditors are protecting themselves from being sued. If they did not follow PCAOB rules and ‘guidance’ to the letter, then a lawyer would later on come back to them and use this to hold them accountable.

    On this basis you can hold regulatory authorities to account. If they interpreted and wrote their guidance on a principles based, outcomes, approach, rather than method and process based route, then you could have a more contingent approach to life and audit.

    Thank goodness internal audit has not yet seen fit to wrap itself up into process and methodology based rules removing common sense and contingent approaches. Perhaps this is an area where internal has a lot to teach external audit?

    • Norman Marks
      August 5, 2012 at 3:24 AM

      Ah, but Anthony, the externals are complaining that the inspectors don’t allow them to follow PCAOB guidance where it helps them be more efficient – taking a risk-based approach!

      Norman D. Marks, CPA, CRMA OCEG Fellow, Honorary Fellow of the Institute of Risk Management Vice President, Evangelist Better Run Business SAP

      • Gregory Sosbee
        August 5, 2012 at 8:41 AM

        Ah, but Norman, that is basically the same complaint about Internal Audit. In order to resolve an IA audit point one has to either follow their orders or have the procedure re/written.

  2. August 5, 2012 at 7:09 AM

    The Audit Committee should ask for a copy of the PCAOB audit report that the partner is referring to. PCAOB Chairman Doty encouraged companies to do that.

  3. ff
    August 29, 2012 at 8:48 PM

    Audits are not 100% accurate/complete. But once they come under PCAOB’s scrutiny, the expectation goes through the roof. Most audit budgets are probably just enough for a government job. Let’s say an average audit that is about 80% right/complete costs 100k. A 90% audit can cost 160k. The ROI on that is small.

    So should the PCAOB shoot for the 90% or the 80%? Do investors care about the 80 to 90 or the sub 50% audits? If audits are sub 50%, does fixing the documentation make any sense?

  1. September 3, 2012 at 1:27 PM

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