How Audits Must Change

Auditors face more pressure to find fraud.

At the end of the day, management is still writing the check for the audit. Although the new reporting lines mandated by Sarbanes-Oxley may ease this inherent conflict, it’s not likely to go away. Even though they are required to report to audit committees, auditors still spend their days with management.

“It’s not as if auditors are being managed directly day-to-day by the audit committee,” says Jay Morse, CFO of The Washington Post Co., who says he has seen an increase in auditor scrutiny at his company. “Boards don’t have time for that. Most directors don’t have the expertise. The audit committees will get more involved, but taking a strong managerial role just won’t happen.”

Robert Halliday, CFO of Varian Semiconductor Equipment Associates Inc., in Gloucester, Massachusetts, thinks auditors can’t be skeptical if they don’t understand what they’re looking at. “They have so much mechanical work — no one stands back, thinks about it, and asks, ‘Does all this make sense?’” he says. “But auditors can only do that if they have experience or if they know the industry. Gray hair is helpful.”

Under cost pressure, firms put less-senior auditors in charge of tasks more suitable for experienced auditors. “When people say that audit quality has decreased, that’s what they’re talking about — less-experienced people,” says Frank Borelli. “We have to have specialist auditors who know the industry from a high level of experience, and these are the people who should be supervising the audits instead of selling new business.”

Deloitte says it is reviewing its staffing plans for audits, and it now requires two audit-partner reviews for particularly risky engagements. “Every audit is different, and we have to make sure we have the right level of people on the audit,” says Weaver at Deloitte. “There’s no substitute for experienced people.”

Carmichael faults auditors for failing to aggressively implement recommendations in the 2000 POB report that call for more “tests of details” instead of relying so heavily on tests of controls. “Audit firms seem to find ways not to go out to locations, and to do less of the type of work that involves actually counting things, observing physical inventory, doing test counts,” he says. “It’s required, but when a company has multiple locations, it gets complicated.” But this has been a concern for some time. When auditors do test transactions, they frequently only sample above a certain dollar amount, he says, and are too predictable in their approach, “which is a problem more often than I’d like to see.”

Audit firms contend they have always conducted the “shoe-leather work” that is a foundation of the audit process, but some CFOs disagree. “I suspect that in an effort to hold down fees and make the auditing profession more attractive to young people,” says Morse, “they’ve cut out a lot of that type of grunt work. It’s not very appealing, but at some point you have to ask: Did anyone on the audit engagement do anything substantive?”

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