Auditors issued clean opinions even though the audit work wasn’t complete.
There has been a ‘disturbing’ increase in audit firm mistakes over the 2010-2011 audit cycle, Public Company Accounting Oversight Board (PCAOB) member Jeanette Franzel told a large audience at a financial reporting conference held at the Robert Zicklin Center for Corporate Integrity at Baruch College in New York on Thursday.
The PCAOB, which is charged with protecting investor interests by ensuring the independence and accuracy of audit reports, is still working to determine the cause of the rise in errors on audit reports it reviews annually.
‘We did see a marked increase in certain audit deficiencies in 2011 inspections of mostly 2010 audits,’ Franzel said, and she ventured a guess at the possible causes. ‘It could be because of the economic pressures the firms were facing – maybe they cut back, maybe they held fees low.’
Among the problems found by the PCAOB:
• Auditors issued clean opinions even though the audit work wasn’t complete. In some cases, there wasn’t sufficient evidence to show that specific audit work had even been conducted.
• Financial statement information was contradicted by other evidence in the audit files with no explanation why the financial statement numbers would be better than the other contradictory evidence.
• Audit conclusions on material issues were found to be based only on management’s views without independent verification.
Franzel said the PCAOB was working with the firms that were flagged with problems to fix the issues by developing remediation plans for them. She emphasized the agency is committed to driving change under the current audit model in order to improve and update audit standards.
One of the agency’s latest moves to update audit standards – its consideration of mandatory audit rotation – is making good progress, according to Franzel. She said there could very well be ‘a package of actions around mandatory audit rotation’ put forth by the PCAOB, after it completes its review of comment letters and testimony from public forums.
Instead of a single measure to deal with auditor independence she suggested a flexible approach based on individual circumstance could be used. For example, firm rotation may only be mandated for egregious cases of a firm showing a lack of independence; or questionable firms might have to undergo a PCAOB investigation to determine whether they must use firm rotation.
