Top CPA Firm’s Audit Procedures Questioned by PCAOB

auditsThe Sarbanes-Oxley Act of 2002 drastically changed the accounting industry and auditing procedures for publicly traded companies (issuers). This new legislation was enacted in response to some of the worst accounting scandals in United States history, which involved companies like Enron and WorldCom. A new provision of the legislation was the creation of the Public Company Accounting Oversight Board (PCAOB).

The PCAOB’s mission is to oversee the audits of publicly traded companies and protect the public interest by promoting informative, accurate and independent audit reports. The PCAOB issues audit standards for audits of issuers and is responsible for reviewing various aspects of an audit firm’s practice. The New York Times reported on March 7, 2013, that the PCAOB has expressed doubt on PricewaterhouseCooper’ (PwC) audit procedures in 2008 and 2009. In addition to the concerns raised, the PCAOB also stated PwC failed to remedy any of the noted deficiencies.

Noted Deficiencies

The PCAOB expressed concerns about professional skepticism and independence of audit firm personnel. Of particular concern to the PCAOB was PwC’s system of quality control. It was noted the system of quality control in some respects was not sufficient to assure auditors met requirements or standards. In response to the PCAOB’s concerns, PwC stated the noted deficiencies were in highly subjective, complex and evolving areas of audit practice. PwC stated it did take measures to remedy and relieve the PCAOB concerns, but to no avail. Both sides have expressed frustration with each other.

The PCAOB also noted that auditors failed to sufficiently challenge management evidence or representations. It highlights auditors’ inability to think independently and faults them for relying too heavily on management assertions. Not surprisingly, large CPA firms like PwC, Ernst & Young and Deloitte continue to struggle with new standards and PCAOB oversight.

Impact on Public Interest

The inability of the PCAOB and PwC to come to terms on audit issues impacts the public interest negatively. Many societal stakeholders, from employees to shareholders, have a vested interest in accurate and independent audit reports. Investors rely on financial statements to be free of material error or misstatement in order to make sound business decisions. Auditors serve a vital role as an independent third-party designated to express an opinion on the accuracy of financial statements.

In addition to an opinion on financial statements, auditors of public companies are also supposed to express an opinion on internal control. Internal control issues can have a serious impact on the efficiency and effectiveness of operations, accuracy of financial reporting and compliance with applicable laws or regulations. According to the Associated Press, many companies around the world are still reluctant to rely on the Management & Analysis section of financial statements. Auditors need to be professionally skeptical of management in order to perform a thorough, meaningful audit and examination. The public’s well-being depends on it.