Auditing Industry Status Quo Won't Cut It

Lora Bentley

Business school professors from Villanova and the University of Virginia are wondering how in the world external auditors who reviewed the policies and internal controls procedures of firms like Lehman Brothers, Wachovia and Fannie Mae agreed that they were "good enough to prepare reliable financial statements," when in fact, the companies were mere weeks away from collapse.

 

In a Philadelphia Inquirer story posted at Philly.com, Anthony H. Catanach Jr. and Paul L. Walker say "the status quo is not acceptable" and that a rethinking of auditing roles is necessary -- especially given the enormity of the global economic downturn. They argue, for instance:

The Public Company Accounting Oversight Board also needs to seriously reevaluate its role in monitoring auditing quality and setting standards. In addition to reviewing the work of the Big Four firms, perhaps the board could emulate the National Transportation Safety Board: When a financial-reporting disaster or audit failure occurs, it could send in a team of governmental experts to investigate how it happened and what could prevent a recurrence.

They also suggest compensation plans that reward auditors for reporting fraud and/or detecting material weaknesses in a company's internal controls. There's no reason to allow the Big Four auditing firms to prosper like they have been if they don't deliver "real" audits.

 

The point is well stated, but I'm not sure I would agree with rewarding auditors for finding weaknesses or fraud. Unless it it is coupled with checks and balances to prevent abuses, it could result in a plethora of weaknesses or fraud reports that may not be substantiated.



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