Accounting Observer > Public Blog - The Watchdog That Didn't Bark

The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

The Watchdog That Didn't Bark

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	3/24/2006 6:34 AM
In this case, you can relax and enjoy the peace and quiet. In August 2004, the PCAOB released its first reports on its inspections of the Big Four auditing firms. The quality control issues it noted in those inspections remained private - unless the firms did not remedy them within twelve months. And apparently, they addressed them well; none of the gory details have ever been made public. The threat of public embarrassment is a pretty big carrot/stick. On Tuesday, the Public Company Accounting Oversight Board (a subscriber to The Analyst's Accounting Observer) released two reports. One described its process for evaluating how well the previously-inspected public accounting firms have improved their quality control. (No link to this report; I'm afraid you'll have to look for it. One of those internet mysteries where the mere act of creating a link causes the browser to sizzle and fry.) The second report is a bit more interesting; it details some of the steps taken by firms to improve their quality controls. Among them: - changing the organizational structure so that there's separation of the audit performance function from responsibility for ethics, independence, client acceptance, and audit quality monitoring. (Seems so basic, you wonder why it had to be brought up.) - adding internal guidance requiring more experience audit personnel review the contractst carry the most risk for material misstatement. (Another common-sense step.) - increasing the number and depth of the firms' own inspections and evaluations of audits. (This refers to the fact that audit firms have their own internal auditing functions; they inspect how effectively the firm has carried out their engagements.)- changing the way partners are compensated and promoted by increasing the emphasis on technical auditing skills and decreasing the emphasis on "rain-making." - tightening up on the criteria for client continuation There's plenty more, but you get the drift: what were once habits are now recognized as vices. The dog didn't bark this time; there's nothing to bark about. The firms kept their end of the bargain and straightened their respective houses. But let's hope the watchdog stays awake.

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