POB Proposes Controversial Changes to Audit Process.

• Author: HARDEN, STUART
• Position: Public Oversight Board - Brief Article

THE PUBLIC OVERSIGHT Board's Panel on Audit Effectiveness issued in May extensive and far-reaching draft recommendations for audit process improvements. If adopted, the recommendations would impact all auditors, not just those who audit SEC-reporting companies.

The report indicates that the auditing profession, quality of audits, audit-risk model, and self-regulatory activities that oversee these processes are fundamentally sound, but made recommendations in these five areas: conduct of audits (including the auditor's responsibility for fraud detection); leadership and practices of the audit firms; effects on auditor independence of non-audit services provided to audit clients; governance of the auditing profession; and strengthening the auditing profession internationally.

AUDIT CONDUCT

Here, the panel's principal recommendation is that the auditing standards should create a forensic-type fieldwork phase on all audits. Auditors would be required to perform substantive tests directed at the possibility of fraud during this phase, sometimes on a surprise basis. Other recommendations involve assessing inherent and control risks; analytical procedures; auditing revenue; auditing estimates and judgments; considering materiality and waived adjustments; and communicating with audit committees.

In its comment letter, the AICPA noted that the recommendations tend to call for more specific and definitive guidance in the auditing standards rather than the retention of principles-based standards, which require the application of auditor judgment. The AICPA also pointed out that many of the recommendations already have been addressed in recently issued auditing standards, which are being implemented.

RECOMMENDATIONS FOR AUDIT FIRMS

The panel calls on audit firms to reaffirm, within their organizations and to the outside world (with the AICPA's help), the importance of their practices. The panel recommends that within firms audits be given the highest priority for professional development activities, and audit quality be recognized in performance evaluations, promotions, retention and compensation decisions. Firms also should place more emphasis on managing time pressures that might compromise audit quality, the panel suggests.

The panel also calls for the AICPA to provide greater audit-related support to smaller firms. In its comments, the AICPA cautioned against the inclusion of definitive procedures directed to small firms that might not apply to all...