Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

A skeptical reason mandatory auditor rotation won’t improve audits

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Dr. Tom Selling offers hypothetical resolutions to how mandatory auditor rotation might play out when a bank is sitting on a lot of bonds that are only worth half of face value.

Let’s say that management states only a 20% haircut is needed so the auditor has to decide what to do.  (Look up the bond values in the WSJ and you will see they trade at 1/2 of face, but management says they are worth 80%.)  Say this happens during the last year of the engagement before mandatory rotation.  The auditor knows another firm will be looking back at the valuation next year.  The auditor also knows he or she will likely take over a bank audit currently run by the other auditor who is also dealing with the same issue.  Next year this auditor will be looking back at that auditor’s valuation conclusions on the other bank.

How does that turn out?  The good professor offers four possible outcomes.  Only one of them is good from a public policy or ethical perspective.  It pains me to admit that the other three options are realistic alternatives.  I’ve been a CPA long enough to know from personal observation of my colleagues that there actually are firms that would give serious consideration to something other than taking the high road.  (Should any of the accounting profs whose blogs I read take a look at this post, they will be chuckling at this point!)

For the full scenario, see his post: Mandatory Audit Firm Rotation and Greek Bond Accounting: What Might Have Happened?  He is more skeptical and pessimistic than me, but then that’s been obvious for a while.  That doesn’t affect the recommendation.

Dr. Selling’s recommendation is to make the PCAOB inspection reports public. He thinks that would have a better impact on creating reform than any other scenarios.   I agree it would be far better than mandatory auditor rotation.  Certainly easier to accomplish, with less disruption, at far less cost, and would avoid the very severe implementation issues.  Not a bad idea after all. Certainly worth more discussion.

Written by Jim Ulvog

September 7, 2011, 8:45 am at 8:45 am

Posted in Audits, Pondering

Tagged with ,

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