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Treasury Department: Let's Audit The Auditors!

Oct 10

Written by: Jack Ciesielski
10/10/2007 6:00 AM

Along the lines of the Pozen Committee to examine complexity in accounting, the Treasury Department has announced the members of a committee whose aim is to "make recommendations to encourage a more sustainable auditing profession."

According to the press release, the committee "will examine auditing industry concentration, financial soundness, audit quality, employee recruitment and retention, in addition to other topics. Treasury expects the committee to produce findings and recommendations by early summer 2008."

Well, all institutions are worthy of critiquing from time to time - just to keep them fresh. It'll be interesting to see what this committee comes up with, because there's a lot that's going right with auditors nowadays. Encourage a more sustainable auditing profession? From the gripes one hears about audit fees, it seems like they're going to be able to sustain themselves financially, at least. Audit quality? That's a never-ending improvement process, for certain, but investor confidence hasn't been shaken lately by flawed audits. Employee recruitment and retention? That's a tough one: the accounting profession has had trouble with these twin goals for the last twenty years - it's hard for auditors and industry to retain real accounting talent when you compete with the sexiness of the finance world. (Especially after staffers have cut their teeth on public accounting.)

The committee will have its own website, if you care to monitor their activity. And they'll be "taking calls" from investors: you can register comments here for their October 15 meeting. They hope to have their work done and recommendations ready by the end of summer 2008.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.