I’m writing to disagree in the strongest terms with what Blake Oliver has stated in his article “
I think these types of articles draw unnecessary and unsupported conclusions with statements such as:
- “It’s ironic, considering that the function of auditors is to determine materiality.”
The function of the auditors is to determine that the financial statements are not materially misstated. Materiality is determined in many ways, usually with the audience in mind.
- “But more importantly, this decision raises a serious question for auditors: Does this mean all audit opinions don’t matter?”
Wow. As a qualified peer reviewer, I spend many hours each year working with firms to help them comply with the auditing standards. The courts make interpretations based on fallacious arguments made by prosecuting attorneys on behalf of plaintiffs. Auditors, in my experience, from large firms to sole practitioners, do their very best to comply with professional standards and issue quality reports.
To even consider that opinions do not matter is to ignore the evolution of the auditor’s opinion from a two-paragraph report when I graduated in 1986 from USC, to today’s multipage audit report explaining auditors’ and management’s responsibilities, what constitutes an audit etc. In reality, management has the responsibility to ensure their financial statements are free from material misstatement due to error or fraud. To suggest otherwise is disingenuous and lacks an understanding of why public accountants exist in the first place.
- “As long as a company gets a ‘clean’ opinion from auditors, everything is assumed to be OK — even if serious issues exist below the surface.”
What kind of jibber jabber is this? Have you not even read an audit opinion? “Auditor’s Responsibilities for the Audit of the Financial Statements” states, “Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.” (Emphasis added.)
In other words, caveat emptor. With everything there is risk. An audit is not a guarantee that everything is hunky-dory, but it’s better to have an audit versus not having one at all.
- “Such a standardized audit regime saps the profession of any meaningful impact. Auditors check boxes to say that a company narrowly complies with accounting rules. There is little room for professional judgment or making a difference by uncovering and addressing critical risks.”
Have you even studied the evolution of the auditing profession and the clarified auditing standards? The entire focus is about assessing the risk of material misstatement and designing audits to mitigate that risk, a.k.a. risk-based auditing. This has been around for over 10 years and has been of greater focus with SAS 145, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.”
Yes, there are practice aids to help auditors comply with the standards and trust me, they are not merely “check the box” and are a far cry from “a standardized audit regime [sapping] the profession of any meaningful impact.”
Without professional standards to improve audit quality, firms self-monitoring, and triennial peer reviews, the quality of an audit would suffer exceedingly. Trust me: I have seen firms that have fallen woefully short of complying with professional standards as a peer reviewer and member of the Texas Society of CPAs’ Peer Review Committee and former member of the National Peer Review Task Force of the AICPA National Peer Review Committee.
- “Worse, auditors have to deal with unending ethical conflicts.”
Firms go to great lengths to ensure independence from their audit clients. Being independent helps to make our work more credible. There has even been greater emphasis on nonattest services performed for audit clients and to consider if such services would impair an auditor’s independence. We have to ensure proper safeguards are in place, if needed. If not independent, we should not perform the work.
- “Auditors are under constant pressure to issue unqualified opinions despite any reservations because they are hired and paid by the companies they audit. And when audits are pass/fail, there’s no incentive to do high-quality work. You make more money when you do the bare minimum.”
Overall, the profession places pressure on auditors to do the right thing to protect the profession, the firm they work for and those reading the financial statements. True, we are paid by the clients we serve, but who would be paying us if not them? Clearly audits are not pass/fail; if you have ever performed an audit that ran into dicey situations, you would learn quite quickly the remedies auditors have to help motivate clients to comply. That is why modified disclaimers and adverse opinions exist. They are a “hammer,” so to speak, to show the client what opinion an auditor would issue if material matters were not adjusted. The auditor always has the ability to withdraw, if the auditor believes that the financial statements would be misleading or false.
- Comments on “low-quality audits” receive a “low value … because they are identical to the customer.”
For public companies, the critical audit matters vary from company to company and audit to audit. The comment, “It doesn’t matter who does the audit — just that you have one,” is ridiculous. Public Company Accounting Oversight Board-rated firms have even higher standards to follow for public companies, and trust me, banks, regulators and investors care about who the auditors are, and that they have a good reputation in the industry.
- Comments on wages leading to fewer young people entering the field.
What does this have to do with anything that you decried above? Wages are market-driven and have steadily increased over the past few years. Supply and demand market forces have already had that impact and will continue to do so in the future, increasing the cost of audits. Fewer auditors in the marketplace will also drive up the price of an audit.
If I had more time, I might write a complete rebuttal to the entire article. I question what purpose it serves to “attract the best and the brightest to safeguard” the profession if we are not committed to doing our best to teach and train the rising generation. Auditors strive to do their best; there are a few “bad eggs,” yet overall, audits are valuable and serve a grander purpose in helping to communicate the financial information to banks, regulators and the general public.
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