Audit Effectiveness - Worrisome Trends.

• Author: Livingston, Phil

No doubt you've read about SEC concerns over "earnings management" and recent high-profile cases of accounting misstatements. Part of the SEC's reform is to scrutinize the audit process; the commission has charged the Public Oversight Board to study the issues and prepare a formal report. The POB held public hearings in October; FEI gave the corporate perspective.

Our testimony, posted as text and as a PowerPoint presentation at www.fei.org, stressed four points:

* FEI members want and need a critical, independent audit. It provides a valuable, third-party cross check in producing accurate financial statements.

* Many members sense that the auditing and assurance business has diminished in prestige and emphasis. The auditing profession needs to turn this trend around.

* CPA firms must reestablish their leadership roles in the development, analysis and interpretation of accounting standards. We sense a shift in the balance of authority in accounting and auditing, with auditors relying too much on the SEC and the FASB to solve difficult accounting issues.

* Regardless of the market pressures on management to deliver results, those pressures shouldn't affect the outside auditor's ability to complete an objective, independent, well-executed audit.

Generally speaking, the audit process isn't broken; there's no objective evidence that audit or financial reporting failures are up. But we can do more to maintain high quality and enhance the stature of this important function.

One problem is the perception that audit work is less desirable than consulting. Traditional auditing is essentially a line of business with finite potential, not one of dynamic growth. So understandably, audit firms have leveraged their core skills into other, more lucrative, areas. But does that translate...