In a recent op-ed in The Wall Street Journal, "We Audit the Auditors, and We Found Trouble" (July 24, 2023), Public Company Accounting Oversight Board Chair Erica Williams outlined a few thoughts regarding public company audit committees.
If audit committees adopt her directives, I am afraid that the professional relationships between the audit committee and the external auditor will be damaged beyond repair.
In her editorial, Ms. Williams stated, "We hope boards of directors and audit committees will use PCAOB inspection reports to hold audit firms accountable for high-quality results and ask tough questions on behalf of their investors."
"Audit committees should know the deficiency rate of the audit firm they hire and how it compares with other options," she continued. "They should ask audit firms if the audits of their company have been inspected and, if so, for the results. They should find out whether the specific auditors who are assigned to work with their company have had their audits for other clients inspected and what the results were."
Her comments as they relate to holding audit firms accountable are to be lauded. No audit firm that I know of wants to be known for performing substandard audits. And an audit committee should indeed be asking tough questions of their auditor. The auditor, on their behalf, also understands that they are serving the public interest and the company shareholders during the performance of their work.
But I am concerned when she asks the audit committee to assess an audit firm's deficiency rate and "compare with other options." A deficiency rate resulting from PCAOB audits can be quite deceiving. For one, these rates are based on very limited samples. And the PCAOB tends to identity what they believe to be those reporting companies of the highest risk. This "measurement" on its own will be very deceptive and can mask the high quality of the many other audits that a firm may perform. Further, a deficiency rate on its own would tend to mask the many variables — e.g., industry, management experience, business pressures, stockholder/board activism — that could potentially impact an audit and cause a poor score report.
Her advice for the audit committee to "compare with other options" is basically telling an audit committee that the PCAOB is encouraging a public company to quickly change auditors when the regulator deems that the firm, as a whole, had performed a substandard audit at other clients. Why doesn't the PCAOB simply state that this is their expectation rather than put this in an op-ed? I also question the use of a deficiency rate as a key determinant in making an auditor change. You can't make an apples-to-apples comparison based on such a subjective measure.
Her suggestion that the audit committee inquire as to whether their audit was subject to PCAOB review leads me to believe that the PCAOB themselves failed to communicate with the audit committee when reviewing an audit to determine the committee's assessment of their external auditor and the interaction between the auditor and the audit committee. This inquiry can provide very valuable input when evaluating an audit and the failure to do so would cause one to question the viability of the PCAOB's work in general.
But my greatest concern arises from Ms. Williams' comments regarding encouraging an audit committee to make an inquiry as to the specific auditors who are assigned to a client's audit and their history with other clients and potential PCAOB reviews. I am truly concerned that this type of inquiry will serve to dissuade talented professionals from conducting audits of public companies. Having an audit committee embed themselves in the inner workings of their audit firm, their professional practice activities, personnel evaluations, personal development programs and other performance-related measures becomes too intrusive and will only serve to build antagonistic feelings between the firm and the client's audit committee.
Also, how far down the levels of the audit team should the audit committee be concerned with? If a staff accountant was involved in an audit that was subsequently deemed deficient (through no fault of their own) will this professional be damned for the rest of their career? Is it only the partners that the audit committee should be concerned with. I can only see this intrusiveness as the beginning of a slippery slope. Additionally, if such an inquiry is made as to other PCAOB audit inspections, would that not serve to pierce any sort of confidentiality over which audits were indeed reviewed by the PCAOB? Why should one audit committee be told of other potentially failed audit inspections?
I fear that what the PCAOB is proposing is simple — if you have one deemed deficient audit inspection, your career as a public company auditor is over, since no audit committee would agree to allow you to serve on their audit team. And how does the audit committee know what exactly caused the deemed deficiency? Was it a minor oversight that had nothing to do directly with the quality of the audit?
While I enthusiastically support the overall goal of the PCAOB to increase the quality of the independent audit, I sincerely question the tactics proposed by Ms. Williams in this regard.
While she may believe that the PCAOB deficiency rate is the most valid tool to assess an auditor's performance, I am of the opinion that other methods would better serve the audit committee, the shareholders and the capital markets as a whole.
Further, any inquiry by any audit committee of the historical experience of their audit team in other PCAOB inspections goes too far and oversteps the boundaries of professionalism. If the audit committee believes that their audit firm does not take their audit responsibilities seriously in managing their people and in providing appropriate disciplinary and training activities, then by all means "compare with other options." But to conduct ongoing inquiries of their audit team capabilities and performances in other audits is a step too far.
