Audit Failure – Yet Another Solution Looking For a Problem to Solve!


When was the last time you heard of a real live audit failure? I mean an Enron or WorldCom? Remember, Enron occurred in 2001 and Sarbanes Oxley was passed in 2002. You’re right if you say, you can’t remember the last one. Maybe it’s time to declare victory and move on.

Not so fast says Floyd Norris of the New York Times.

In his October 25th article entitled Accounting World, Still Resisting Sunlight, Mr. Norris reverts to the old tactic of the critic – if you don’t agree with me, I’ll question your integrity. So it is here. Mr. Norris is accusing the profession of “contempt” for those “who should yield to their superior judgment.” Never mind it is well within their rights to do so. After all, they may be correct!

This is all about the more recent idea that audit failures – assuming we ever have another one – would be avoided if only the individual partners sign off on the report rather the firm of which they are members. He cites as evidence partners who, having been found negligent and suspended from serving registrants, are still with their firms. This, he trivializes as the firm “standing by their man.” Rather than what, shooting them in the parking lot? Having not publicly shot them causes Mr. Norris to question the “culture” of the firms. What does this have to do with who signs the report?

He further cites Deloitte being sanctioned by the PCAOB for not responding to their audit deficiencies as further support. I’m not defending Deloitte from its duty of response to the oversight of the PCAOB. Being criticized for lack of response is appropriate, but, again, what does this have to do with who signs the report? Mr. Norris has apparently concluded that none of this would have happened if the partner had signed the report individually instead of on behalf of the firm.

And what is the evidence? Deloitte makes the obvious point:

“… we are not aware of evidence showing that disclosing an engagement partner’s name in the audit would increase the partner’s sense of accountability or that it would cause the engagement partner to exercise greater care in performing the audit.”

“Aha!” declares Mr. Norris. “Now there is such evidence!” Once more the academics have come to the rescue. He cites as evidence a study done in the UK that showed that more audit reports were qualified on companies after the partner was obligated to sign personally than were qualified before. Not only that, but the partners were “less likely to sign off on audits with managed earnings.” They were? How, it is left unsaid, could they possibly have determined that? And even if they did, how could they attribute that to the personal signature?

Wait, there is more. Another academic study has found that audits in Sweden, where partners must sign personally have become subject to “more aggressive accounting and conservatism” over the years. Again, how did they determine that and even if they did, how did they determine that personal signature was responsible? The implication is that somehow the auditor is going to be more professional and risk averse if he or she is signing personally? That defies logic. Where is the evidence to support that? As it is now, a significant deficiency in an audit is a career impacting event for the engagement partner. How much more incentive do they need?

Not surprisingly, the profession is trying to place this in perspective. First, they say, it is the firm that counts and not the partner. And, second, it is the quality control process that is critical, irrespective of who signs.

It is this last point that counts. As a leader of an accounting firm, am I going to somehow assume that since the partner is now signing personally, he or she is going to be immune from the risk of error in judgment inherent in the audit process? Or, that somehow, they are going to “try harder?” If I am naïve enough to do so, it would be my judgment called into question – not that of an individual audit partners.

Having spent most of my professional life involved in protecting our firm, our clients and our individual partners from the risk of audit error, I am of the opinion that virtually all audit failures are a function of fundamentally good people making mistakes that were not detected or corrected timely by the internal control process.

So, let’s forget the knee jerk, silver bullet answers and focus on what counts – the selection, training, supervision and monitoring of the audit partner and attention to the comprehensive system of internal control that protect all concerned from the risks inherent in the audit process.

That may not sell newspapers, but that is the reality of risk management in the audit profession.

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