Deloitte Rewards Auditors for Job Well Done with Professional Skepticism Homework

On December 21st, long after most people had given up on the world coming to an end and just about the time everyone on the east coast was about to check out for the rest of 2012, the PCAOB conveniently released the 2011 inspection reports for Deloitte, Grant Thornton, and Ernst & Young. The timing of the release gave us all a good laugh and not surprisingly, resulted in very little attention in the press. Nevertheless, learning how poorly auditors are auditing (or alternatively, how aggressively inspectors are inspecting) is of great interest to many.*

Basically the reports stated that the firms are still sucking it up in the public company auditing department. Ernst & Young and Grant Thornton both had "problem rate"** increases in their 2011 inspections; E&Y's jumped from 21% to 36% and GT's rose from 37% to 41%43%, per Compliance Week's math.
 
Deloitte, on the other hand, actually experienced an improved error rate, as it dropped to 42% in 2011 from 45% in 2010. Sure, that's only a 3-percentage-point drop, but considering the year Deloitte had, they'll take it!
 
They were so excited, in fact, that audit leadership sent out a communiqué the same day the PCAOB inspection report was released. A tipster dropped us the text of the message shortly thereafter:
To: All Audit professionals
 
Through your unrelenting focus on the Audit Imperatives, we have seen significant improvement in the quality of our public company audits. Thank you for your efforts – they are yielding great results.
In other words: this is huge, you guys! Sure, Deloitte still might have the worst "failure rate"*** or whatever you want to call it, but this improvement combined with E&Y and PwC's deterioration has resulted in these three firms more or less sucking at the same rate! 
 
But Deloitte isn't finished; it is determined to not suck the most and leadership wants everyone to stay focused:
While we should take pride in what we have accomplished, we must continue to build on the progress we’ve made.
And where, pray tell, do you think this continued building of audit quality will start? Smarter interns? New auditing software? More artisticly pleasing tickmarks? All great ideas, but no. Audit quality starts inside the hearts of every soulless opiner on the job. 
Professional skepticism is an area of significant focus for our regulators and the investing public.  It is at the heart of our work and is fundamental to the performance of all aspects of every audit. It is the responsibility of each individual auditor to appropriately apply professional skepticism, and to document the related thought processes, throughout the audit.
 
As auditors, we must act as evaluators with an attitude of professional skepticism in order to fulfill our responsibilities to investors, lenders, and other users of the financial statements; this means we need to keep our focus on driving both the PCAOB FY13 Audit Imperatives and the AICPA FY13 Audit Imperatives, including appropriately applying professional skepticism on all of our audits – for both public and non-public (private) entities.
Armed with the knowledge that auditors aren't necessarily born as inherent skeptics, the firm has put forth an action plan:
In order to build on our progress in delivering quality audits and our commitment to professional excellence, it is important that we devote time to the important topic of professional skepticism – as professionals and as a practice. Accordingly, we are asking that all audit professionals (staff through P/P/D) take the following steps:
 
1.      Read PCAOB Staff Audit Practice Alert No. 10
 
Published on December 4, Staff Audit Practice Alert No. 10:  Maintaining and Applying Professional Skepticism in Audits reminds us of the importance of exercising professional skepticism.
 
2.      Read Martin Baumann’s December 4th speech (delivered at the 2012 AICPA Conference on Current SEC and PCAOB Developments)
 
Baumann, PCAOB Chief Auditor and Director of Professional Standards, discusses Staff Audit Practice Alert No. 10 and emphasizes the importance of professional skepticism in his speech at the 2012 AICPA Conference on Current SEC and PCAOB Developments.
 
3.      Reread our Professional Skepticism Practice Aid
 
4.      Complete a short required assessment focused on the key concepts emphasized in the above materials
 
Note: you may also access all these materials on DeloitteAudit Plus.
 
You are requested to complete the required reading and assessment as soon as possible, but no later than January 15. If you have any questions, please contact National Office (Audit Consultations).
 
While we recognize that fulfilling the requirements noted above will take time in what are already busy schedules, given the importance of this subject and its pervasive impact to our audit engagements, we are asking you to devote the approximately 60 minutes that it will take to complete this important exercise.
 
As you complete these requirements, please take the time to reflect on your own engagements and how improvements in the exercise of professional skepticism can lead to improved quality on our audits.
 
Thank you for all you do each day to support our efforts in leading the profession. You should be proud of what you have accomplished and of your role in delivering quality to the capital markets, investing public, other users of our client’s financial statements and our clients.
God willing, this momentum should carry through to the 2012 inspections and if you commit to jumping through these hoops so that the firm may check boxes better than ever before, 2013 will be unsuckiest yet. Onward.
 
* Relatively speaking, of course
** This is what Compliance Week calls it. They also used "failure rate" which seems unecessarily harsh.
*** Oops.

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