Determining Accountable Parties for a Thorough Audit - Who Takes Charge?
In a significant development, the International Forum of Independent Audit Regulators (IFIAR) released a report on January 14, 2016, revealing that 43 percent of inspected audits of listed public interest entities (PIEs) had at least one inspection finding. This marks the first cases against national audit firms for audit failures since 2009.
The Public Company Accounting Oversight Board (PCAOB) continues to find relatively high rates of audit deficiencies in their inspections. The report found the highest number of financial statement audit inspection deficiencies for PIEs in the areas of internal control testing, fair value measurement, revenue recognition, and risk assessment.
On the same day the report was issued, the IFIAR issued a press release stating that the pace of audit quality improvement is too slow and calling for a reduction of at least 25 percent in the number of deficient audits reported by its members in the next four years.
Audit committees play a crucial role in ensuring the quality of audits. They should ask their auditors about the points within the company's critical systems processes where material misstatements could occur, and how the audit plan addresses these risks. Audit committees should also discuss with their auditors the types of audit deficiencies identified in their PCAOB inspections, as well as how they are addressing them in their audits.
The SEC has recently brought cases against three audit committee chairs who approved public filings that were either reckless or false. Andrew Ceresney, Director of the SEC's Division of Enforcement, stated in a January 25, 2016 speech that audit committee members who fail to carry out their responsibilities and auditors who unreasonably fail to comply with auditing standards can expect increased scrutiny from the SEC.
The IFIAR plans to support improving audit quality by encouraging root cause analysis and increased monitoring and dialogue with the six largest international audit firm networks. PCAOB's auditing standard number 18 (AS-18) requires more robust audit considerations in three critical areas, including related party relationships and transactions.
Developing an audit improvement plan can help companies align their external audit process objectives to an action plan to maximize value. Companies should understand how their internal audit function will be leveraged by the external auditor. Companies should not treat the audit opinion as a commodity purchase, but carefully select and retain firms that can provide the most value through a robust opinion.
The Center for Audit Quality's 'CAQ Approach to Audit Quality Indicators,' published in April 2014, can be a good resource for identifying key elements of a quality audit. Helen A. Munter, PCAOB Director, Division of Registration and Inspections, emphasized that the goal of inspections is to help auditors improve the audit quality and the value they bring to clients and investors.
In recent months, the SEC has charged several international audit firms, including Deloitte, PwC, and EY, for audit failures involving false and misleading unqualified audit opinions. The IFIAR also aims to enhance audit quality by focusing on independence and ethical requirements, human resources, and monitoring, where the report found the highest number of firm-wide quality control deficiencies.
Maximizing value from the external audit process largely rests on the company's shoulders, not the regulators. By taking a proactive approach and engaging in open dialogue with auditors, audit committees can help ensure that their audits are of the highest quality, providing investors with the confidence they need in the financial statements of public interest entities.
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