• Guest Post: The PCAOB Is Our Parents Now

    By | May 8, 2013

    Ed. note: The following was written exclusively for Going Concern by a Big 4 auditor who wished to remain anonymous. 

    The PCAOB is turning into our parents. Or at least they are using the same tactics in handing out punishment. “We know you were up to no good last night, so if you just tell us what you did we’ll take that into consideration when deciding how long to ground you.”

    I can understand where they are coming from. They want to make their jobs easier and they want to form a more cordial relationship with audit firms by cutting them some slack when the firms volunteer issues or resolutions. The problem is the PCAOB is a bit like Lucy holding the football — we want to kick it but we’re afraid we’re going to end up like Charlie Brown on our backs.

    The best chance the PCAOB has of making this work is with the “voluntary and timely remedial or corrective actions.” At that point the PCAOB has already decided you’ve done something wrong so you might as well be cooperative when it comes to fixing the problems. However there are several problems with the voluntary reporting piece that I don’t see partners being able (or wanting) to overcome in the near term.
     
    The first is that engagement teams, partners and firms themselves don’t always agree with the PCAOB on what the issues are (act surprised). I had a job reviewed by the PCAOB in middle of the financial crisis. By all accounts everyone in the room was an intelligent person but none of us could agree on what issue they had with some of our fair value testing.
     
    Most of us in the profession still aren’t on the same page as the PCAOB when it comes to what does or does not constitute proper auditing of financial instruments. In addition, the PCAOB rarely tells you what’s right, only what’s wrong (like porn, they know it when they see it). This results in an interesting situation. It’s likely that if we do self-report we’re not going to bring up the issues they expect. This means we will bring to their attention something that might not have been on their radar. Doesn’t seem to be a good play. This isn’t to say we won’t admit when we’re wrong or offer to clean up the mess (see above) but it’s hard to lead the way in admitting what’s wrong when you don’t know what “wrong” is.
     
    A corollary to the above is that in a review the perception is that everything is negotiable. Every issue that the PCAOB finds turns into hours of review, meetings, document digging, expert gathering, whatever it takes to talk your way out of the issue. Most of us would rather take our chances with that process than lay it all out and beg forgiveness. Forget pleading guilty, we want the jury trial.
     
    There is also the question of “timeliness” when it comes to self-reporting. I’m not sure there would be many folks willing to report a potential violation unless they already knew they were picked for PCAOB review that year. Given that these reviews generally happen soon after the audit finishes, I’m not sure how much a team would be willing to discuss anything earlier. You're in a position of saying, “Yeah, we just did the audit but here’s what we screwed up.”
     
    Overshadowing everything is that the stakes are simply too high. This “extraordinary cooperation” “may” influence the PCAOB depending on facts and circumstances. I’m not  the first auditor to say that I don’t exactly trust the PCAOB. I wouldn’t want to be the first team to test these waters. They aren’t looking for us to report the little things that went wrong in an audit; they want the big ticket items. You won't be sent to bed without dinner if you bring up an issue that could potentially lead to an audit failure. The PCAOB seems to like making examples out of firms when they screw up and I’m not sure firms playing nice in the sandbox will change that.
     
    It may be that I’m too cynical. PCAOB reviews come after an already exhausting busy season and lump on additional hours of prep and meetings on top of our other client responsibilities. It’s hard to look at them in a favorable light after having gone through a review. I also know I’m not the only one that feels that way in the firms. I’m sure folks higher up the food chain may feel a little different since it’s their jobs to make nice with our regulators. I just know those of us in the trenches aren’t going to be too willing to stick our necks out until we know the real consequences of “voluntary reporting."
     
    We’re told to exercise professional skepticism; I think we are when it comes to leniency of the PCAOB.
    • SouthernCPA

      Is the PCAOB not unlike the NCAA enforcement team? Self-reporting works oh-so-well for the NCAA, doesn’t it? Nope, no cheating going on in college sports these days. Meanwhile, programs are raked over the coals because an NCAA investigator determined that Jimmy Recruit got a second helping of eggs at breakfast on a college visit, and the rules clearly state one helping of eggs per recruit. Meanwhile the investigator totally misses the fact that all of the starting running backs are driving BMWs to class.

      • $43517978

        Actually, universities that self-report violations to the NCAA do receive more lenient sanctions. The surest way to avoid the NCAA lowering the boom on your school is to (1) self-report violations, (2) impose sanctions on yourself and (3) separate yourself from those who committed the violations. A good recent example is Ohio State football.

        • SouthernCPA

          You are correct, my point was, that doesn’t seem to have slowed down the amount of cheating going on… mainly because schools typically only self-report when they think they are going to get caught. And too many schools don’t get caught.

          • $43517978

            So what you’re saying is that corruption is rampant in the accounting firms and one of the problems we have is the regulators aren’t effective at stopping it or slowing it down. Maybe the PCAOB needs more teeth.

            • SouthernCPA

              More teeth, and a focus on the important issues. Neither which is currently happening.

    • $43517978

      Audit firms form cozy relationships with audit committees and management. Audit firms agree to charge fees that are not high enough to cover the cost of a quality audit. Therefore, audit firms do not adequately staff audits, which results in quality issues and staff frustration. In addition, audit firms do not apply adequate professional skepticism due to all the reasons noted above. This leads to things like Enron and Worldcom and the year 2008. Then everyone who isn’t an auditor asks the reasonable questions “How the fuck did a Fortune 500 company go bankrupt three months after a giant accounting firm gave them a clean audit opinion?” and “Who is regulating these fucking audit firms?”

      The Big 4 firms created this mess by not managing their businesses well, charging insufficient fees and performing audits that lack quality. I believe the solution to the problem is for audit firms to stop sucking at doing audits.

      • SouthernCPA

        Or maybe regulated audit fees? Tie the audit fee to some metrics, then the firms can compete on specialization or something?

        What I don’t see happening is the audit partners giving up some of their distributions in order to have more money for the actual audit. The firms are not charging enough because for some reason they feel they want to compete on price.

        Usually monopolies result in higher price and crappy output. The Big Four got the crappy output right, but can’t get the higher price right. It boggles the mind.

        • $43517978

          Mostly agree. I don’t know of any other successful business or industry where firms routinely undercharge for their goods or services to the point where the only way they can sustain their business is to deliver low quality output. And what makes it even worse for the accounting firms is that their customers are REQUIRED BY LAW to purchase their services. If you can’t make money in an industry where customers are REQUIRED BY LAW to buy your services, and customers have a very limited number of firms to buy those services from, then I don’t know what else to say other than you suck at managing your firm.

          • cool story brah

            I agree with you an extent, but to me it seems the firms are enjoying the growing consulting fees that result from audit relationships since the growth of audit clients has remained relatively stagnant and it’s mostly a jostling of which firm can cut your fees the most.

            Company’s may be required by law to have an audit performed, but just like other business expenses, you want it done as cheaply as possible while preserving some semblance of quality (whether its actual quality or just perceived quality from having a Big 4 name).

            Audit quality continues to be complete shit, for the most part, because of new standards resulting from review comments from the PCAOB, while staffing remains stagnant, and in most cases even worse due to turnover from all levels due to being treated like complete shit.

            • $43517978

              There used to be a time when commercial banks weren’t allowed to do investment banking, and vice versa. Banking is a highly regulated industry that’s vital to America’s economic stability, so it was determined that it was not in the best interest of society for the two types of banks to overlap. Then we got rid of that law, and less than 10 years later a global economic crisis ensued.

              Maybe audit firms should just stick to auditing.

            • Robert Palmer

              I think the financial crisis was more correlated with the big banks going public in the late 90’s. People (bank partners) were much less risky when it was their own money on the line.

            • $43517978

              C’mon Palmer. Let’s see the forest through the trees.

            • This is not my real name sorry

              Big4 was pretty spot on with his assessment of the crisis. After the Great Depression, deposit banks were required to separate the investment part by law. The 90s saw the push of the American dream (owning a home), which led to relaxed regulations regarding loan applications. Then deposit banks were once again allowed to have investment arms. They were making cash from the home loans hand over foot and turning them into CDOs for sale. Fannie Mae/Freddie Mac were struggling to keep up because they were still governed by the old laws. Around 01/02 they were allowed to do the same things. Life was good for a few years until people could not pay these outrageous mortgages they had gotten themselves into. Then, like a Disney princess, we had our happily ever after. Haha, just kidding. Gunny Hartman’s diatribe about not being very courteous comes to mind. And that concludes my story. Stay Classy Going Concern.

            • Robert Palmer

              You’re both over-simplifying it and are just going to confuse those poor saps on this site who can’t pass BEC.

    • Guest

      The problem is that everyone wants auditors to perform quality audits but everyone’s opinion of what constitutes a quality audit is different. When the PCAOB has a comment, they call it an audit failure. Well if there are so many audit failures out there, why are restatements at an all time low? Why do such a small percentage of comments from the PCAOB result in restatements?

      • $43517978

        You do understand that an audit failure doesn’t necessarily mean the financial statements were materially misstated, right? Please say yes.

        • Playa

          So if my brake pads are getting worn out and squeak a little bit, it would be accurate for me to tell people I had a brake failure on my way to work?

          • Guest

            Your analogy would be more accurate if you say the mechanic inspected your brake pad and said they are great and you should expect no squeaks at all. Then the mechanic inspecting is failing. The brake squeaking itself is actually not a problem at all (no material misstatement), it was the inspection of the brake that didn’t catch a squeaking brake that was the failure.

        • Guest

          If an “audit failure” does not constitute an actual auditing error that resulted in an undetected material misstatement – why the hell does anyone care?

          • $43517978

            Oh my. Many firms call their audit practice “assurance”. Do you know what the word assurance means?

            • differentGuest

              Yes i do – but since when does assurance mean 100% accurate? Whatever happened to “reasonable assurance” that FS are free of “material misstatement.” All this BS about audit failures that don’t result in any material changes are just ways for these jackwads at the PCAOB to act like they are worth a damn (newsflash – they are not).

    • Guest

      This anonymous poster probably works for PwC and is tired of all their crappy PCAOB inspection reports.

      • csb

        you mean Deloitte?

        • Guest

          You mean KPMG or E&Y. And maybe even GT / BDO etc etc. The useless Big 4 (or 5) rejects working for the PCAOB who could not deliver a quality audit if their lives depended on it while actually working in client service fail to realize its only a matter of time before all the Big 4 firms will be in the same place – with Part IIs being made public (in 2013 for 2008 inspections) in an incredibly “timely” manner. Govt. efficiency at its best.