A few links and comments that I think would be of interest to auditors. This post: what do PCAOB deficiencies mean, their new report isn’t a big deal, sausage making at FAF, one possible surprise anti-fraud test, and the fun of investigating JPMorgan.
Going Concern – PwC and KPMG Inspection Reports Make Us Wonder: Are Shody Big 4 Audits Here to Stay? – Check out the comments for some good discussion on how important or inconsequential a PCAOB deficiency is. I’ve long wondered if the horrendous, appalling, inexcusable ‘failure rates’ are a reflection of audit quality or if perhaps they are merely a comment on the PCAOB inspection process. Lots of commenters point to findings that are not particularly important to the audit process. I and others commented on the lack of context in the PCAOB’s report. Something like an A-133 formatting would make their reports more credible. Several comments point to an increase in documenting-to-the-inspection as the reason for reduced deficiency rates. Hmmm…perhaps this ‘good stuff’ comment should be a full post.
Re:Balance – The PCAOB’s “Game Change” Proposal on the Auditors’ Report is Small Change – Professor Peterson thinks the PCAOB’s idea of having the auditor’s report identify critical audit areas is
no more a “game change” than raising the stakes from a penny to a nickel.
He lists three ideas on what kind of information investors are really looking for. As I ponder the examples, the real information desired from the auditor is predictions of the future – which company’s business model will fail or who will cause the next fiasco.
More important that potential litigation risk, he describes the very real danger from leisurely second-guessing during inspections which will create hyperinflation in the length of the audit report:
One thing is for sure – the PCAOB anxiety about creating a bull market in boilerplate language is well founded. Defensive file-stuffing will prevail, as the Big Four prepare for the double-layered second-guessing in their future PCAOB inspections. Not only “Why was this issue not deemed a ‘critical audit matter’?” – but also “How did you decide that this ‘critical’ matter did not require disclosure?”
I’ve been wondering if the list of critical audit matters would merely be dozens of items for a Fortune 500 company or whether it might top a hundred. The typical audit report could be dozens of pages long.
See also the previous link for a discussion on the PCAOB inspection process.
The Accounting Onion – The Financial Accounting Foundation Has Outlived Is Usefulness (As if it Ever Was) – There is an old saying that there are two things you should not watch being made – legislation and sausage. To the list I now add selection of FASB members. Tom Selling provides some very deep inside-baseball info on how the FAF operates. Among other depressing stories, Prof. Selling says in 2008 the number of board members was reduced and power concentrated in the chair to smooth the way to IFRS adoption. Then in 2010, he suggests the size was increased and the chair replaced to stop adoption of full FMV accounting. And here you thought watching legislation being made was icky.
CPA-Scribo – Altering Check Payees – A Common Fraud – Charles Hall describes a combustible internal control environment we’ve all seen where the bookkeeper can do everything: sign checks, post to the g/l, and reconcile the bank accounts. He suggests some mitigating controls and some surprise SAS 99 tests.
BANKING:
Bloomberg – America’s New Pastime: JPMorgan Investigations– Jonathan Weil points out it takes a several-page playcard to keep track of all the official investigations of and hundred million dollar settlements from JPMorgan. Some of them aren’t really their fault, like the near-forced purchase of rapidly failing banks during the ’08 meltdown. Others though, are completely their fault.
Makes you wonder how their risk management and tone-at-the-top went so horribly wrong that they have another massively huge investigation surface every month or so.