July 13, 2024

Companies May Face Rule to Shift Audit Firms

James R. Doty, who became chairman of the Public Company Accounting Oversight Board this year, said in a speech that he had been disturbed by evidence turned up by board inspectors that many auditors failed to show sufficient independence from their clients.

“Considering the disturbing lack of skepticism we continue to see,” he told a conference at the University of Southern California, “the board is prepared to consider all possible methods of addressing the problem of audit quality — including whether mandatory audit firm rotation would help address the inherent conflict created because the auditor is paid by the client.”

The idea of forcing companies to change auditors, perhaps every seven or 10 years, has been raised periodically in response to accounting scandals since at least 1977, when Senator Lee Metcalf suggested such a step in the wake of the scandal at Equity Funding, an insurance and mutual fund company that falsified its sales figures.

It has been bitterly opposed by accounting firms, which argue that such rotations would do little for audit quality but would drive up costs and create great problems for complex companies trying to explain their operations to a new set of auditors.

Such a requirement was considered by Congress in 2002 when it passed the Sarbanes-Oxley bill that established the accounting oversight board, but was not included in the final version. But the law did require that audit partners be rotated off engagements every seven years.

Mr. Doty said he had not decided yet whether it was necessary to require changing auditors. But he made clear that he thought changes had to be made to “more systematically insulate auditors from the forces that pull them away from the necessary mind-set.”

Mr. Doty took the post in February, after being appointed by the Securities and Exchange Commission. A securities lawyer who served as general counsel of the S.E.C. from 1990 to 1992, Mr. Doty has said he was outraged by some audits the board had inspected, and would consider changes in a number of areas.

On Thursday, he cited one auditor who allowed a company to count a sale in the third quarter, even though the contract was signed in the fourth quarter — a move that allowed the company to meet its earnings target. He mentioned another auditor who helped a company conceal an error by suggesting changes in the company’s accounting policies. In each case, the firm had held the account for decades.

Another step the board will consider, he said, is to require that the engagement partner sign the audit. Currently audits are signed by the firm without any indication which partner took the lead. Advocates of such a change say partners might be more hesitant to sign off on dubious accounting if they knew their name would be publicly attached to the audit if problems were later discovered.

In addition, Mr. Doty said the board would consider forcing audit firms to disclose the amount of work done on audits by other firms, including foreign affiliates that are not inspected by the board.

The board has also announced that it will propose possible changes in the information auditors provide to investors. Currently, auditors either approve statements or they don’t, but do not offer any opinions on the relative quality of accounting choices.

Financial statements often include many estimates, and auditors now simply conclude whether an estimate is or is not reasonable. That has been a problem in valuing some securities that rarely trade, with the same audit firm approving widely varying estimates by different clients. One possibility may be for disclosures to be made on the range that the auditor deemed reasonable, and where the estimate fell within that range.

Article source: http://feeds.nytimes.com/click.phdo?i=81c4090681b549448b127d60ee0f21fa

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