Food for Thought

By Mel Crystal

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• When a public company has its financial statements restated, perhaps an independent third party should assign both the auditors and the audit committee’s financial expert. This could be paid for through a fund managed by the Public Company Accounting Oversight Board (PCAOB). Candidates would be screened and tested on pertinent knowledge by the SEC or PCAOB; the financial expert would be required to have specific expertise in the company’s industry.
• CPAs know that a company receiving an opinion indicating substantial doubt about a company’s continuation as a “going concern” is in bad shape. But the general public must understand that the phrase “going concern” means that the company is viable. Instead of going concern, let us consider the clearer phrase “continuing entity.”
• We need a national permanent file designed to systematically reflect all disclosure items. Of primary concern is that significant accounting policies are set up in the same order in all financial statements (e.g., the nature of the business, its use of estimates, etc.). Should a specific accounting policy not be evident, not only would it not be in the notes to the financial statements, but the permanent file would indicate that it is not applicable. This would promote uniformity in presentation (hopefully in plain English), and facilitate auditor succession. This file would be maintained by each successive auditor. An equitable transfer cost could be put into place.
• The signatures of both the current and the predecessor auditors should be required on the financial statements of all public companies. Initially this could be required only for problem audits (e.g., restated financial statements or companies that continually change auditors).
• The word “materiality” is misused and abused. Its meaning should be clearly disclosed in the financial statements, the auditor’s report, and the representation letter.
• The public’s trust in the accounting profession is needed. Maybe assignment by an independent third party of all auditors of public companies would avoid independence in appearance problems. Assignment could be done by the SEC or PCAOB based on the expertise of all registered firms that have sufficient experienced staff.
• Statement of Auditing Standards (SAS) 58, Reports on Audited Financial Statements (AU 508.08), says in paragraph 3 that “the financial statements referred to above present fairly.” We need to consider what “present fairly” means to the general public.
• CPE courses could require a test before credit is given, rather than awarding credit for merely being present. In addition, CPAs in industry are not currently required to take CPE. All CPAs should have the same CPE requirements.
• New York and Wisconsin are the only states without a 120-hour, three-year CPE requirement. We should change that.
• The audits of nonprofit organizations and governmental units should be presented in a public forum, not only to the board.
• Finally, updated peer review rules will become effective January 1, 2005. These rules will enhance peer review, but not as much as a potential new requirement of peer review for registration of CPA firms in New York. An independent and adequately financed accountancy board would help remove the tarnish and polish the credibility of a time-honored profession: ours.