Hold auditors accountable for deficiencies


For The Wall Street Journal for Saturday / Sunday August 14-15, 2021, a pair of reporters wrote: “The oversight is weak of the audit of private companies. The article contrasts the degree of supervision of auditors in private companies with that of auditors in public companies. Since the passage of the Sarbanes-Oxley Act in 2002, auditors of public companies have been subject to the scrutiny and discipline of the Public Company Accounting Oversight Board (“PCAOB”), a government agency itself overseen by the Securities. and Exchange Commission of the United States (“SEC”). The distinction is not entirely accurate, as audit firms can be held liable if misleading financial information is involved in the sale of securities, even by a private entity.

See my blog from March 2, 2021 “Being Held Accountable: The“ Education ”of KPMG at the College of New Rochelle,” where the SEC issued sanctions against two auditors from the college, a private entity, as part of the show municipal titles. These auditors have lost their ability to practice before the SEC.

Audit performance

However, The Wall Street Journal raises very worrying issues. Specifically, the only regular assessments of the audit performance of private entity audit firms (except in the case of issuance of securities) are unofficial and voluntary peer reviews carried out by other audit firms. . The Journal reports that 91% of companies surveyed in a United States Department of Labor (“DOL”) study received the “highest” pass “score, while only 4% received the” worst “score. ‘” failure ” “. It is suspected that this deviation from normal human experience strongly suggests that this peer review is a ‘paper tiger’. And there is strong corroboration for this suspicion of the actual review of pension plan audits, where around 40% of the audits reviewed were found to be significantly deficient. The Journal article suggests that the creation of the PCAOB, which focuses on public company auditors, may have inadvertently led the rest of the profession to allow laxity to grow. This essentially echoes an article from February 2021 in The CPA review who asks, “Does the peer review have a mid-life crisis?” This article reports that peer review is starting to be taken for granted, especially in small businesses, since the inception of the PCAOB, which focuses on audits of public companies.

“Audit” comes from the Latin “audire”, to hear. Its ancient origins can be traced back to the time when it particularly evoked the desire of rulers to understand how their resources had been used and how their governments functioned. There are signs of hearing in the ancient cultures of Mesopotamia, Greece, Egypt, Rome, and India. In medieval times, particularly at the end of the 15th century, it was used to verify the newly developed ability of double-entry bookkeeping to document income and cash outflows and to confirm that the personnel involved were neither negligent or fraudulent. It was in the 18th century, when the industrial revolution brought about large-scale production, that auditing took on its full meaning. The significant expansion in the volume of business transactions and the increased reliance on money as a settlement mechanism have made accurate record keeping essential. In addition, shareholders of UK companies have found that independent audits can protect their interests. The Institute of Chartered Accountants in England and Wales was founded by the Royal Charter on May 11, 1880. In the United States, the American Institute of Certified Public Accountants (“AICPA”) was established in 1887.

In the 20th century in the United States, the same evolution of capital markets in the face of systemic stress, which led to the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, also greatly increased the importance of the accounting profession. , and in particular the audit function. This importance was underscored, following the bankruptcy of Enron and Arthur Andersen & Co., with the passage of Sarbanes Oxley and the resulting creation of the PCAOB. But the audit function for non-public entities has remained, and remains, unaddressed beyond the laws and regulations in the various states that authorize accountants and the AICPA.

A 2002 article in the Harvard business review asks “Why do good accountants do bad audits?” (Written by Max H. Bazerman, George Loewenstein and Don A. Moore) and suggests that he is biased in favor of a client. As noted above, these deficiencies in the audits resulted in the situation highlighted in both Wall Street DayEarth The CPA review articles. Basically, the “Guardians” are NOT watching, at least not closely enough.

DOL audit study

In 2015, the US Department of Labor (“DOL”) undertook a relatively in-depth review of audits filed as part of annual benefit plan reporting. This study was carried out by the Office of the Chief Accountant of the Employee Benefits Security Administration at DOL. The chief accountant’s office examined 400 deposits out of a total of 81,162 for the year 2011. These 81,162 deposits were made by 7,330 different audit firms ranging in size from very small to quite large. Some companies only had a few deposits; others had a multitude of plan audit clients.

Following the discovery that 39% of the files had audits with serious deficiencies, putting some $ 653 billion in plans at risk, the DOL made findings and recommendations. Among the most important of these was the finding that the peer review process of AICPA and several Crown corporations of accountants “does not appear to be an effective tool for identifying audit work of deficient plans and ensure compliance with professional standards ”.

The DOL study found that large audit firms with a number of plan audit clients were significantly less likely to perform poor audit work. Another positive factor was when audit firms were active members of the Audit Quality Center of the AICPA Employee Benefit Plan.

Push for change

Time and time again, the report has stressed the importance of training and experience, which strongly suggests that small audit firms should not undertake the work of auditing benefit plans alone, but should either entrust the work to more experienced firms, or partner with them. The report also urged passage of legislation that would empower the DOL to set professional standards for the work of auditing benefit plans, and just as the SEC does under its Rule 2 (e) , authorize the DOL to impose sanctions on companies that do not respect these standards. Additionally, the report calls for greater cooperation with the National Association of State Boards of Accountancy “to improve investigations and penalties” of failed accounting firms.

Calls like these, for better training and regulation, come from information like this from The Wall Street Journal article and confirmation of issues raised by the DOL report and The CPA Journal. When the audit function is not necessarily reliable, then anyone who relies on the work of auditors to report on the financial condition of private entities: businesses, charities, benefit plans should be concerned that these reports may be suspect. Legislative and regulatory initiatives can be expected to correct these shortcomings.

© 2021 Norris McLaughlin PA, All rights reservedRevue nationale de droit, volume XI, number 236


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