October 1999

POB Examines Audit Effectiveness

SEC Chair, Leaders Comment at Hearings

The Public Oversight Board's Panel on Audit Effectiveness held hearings in New York City on October 7 and 8 as part of its efforts to hear from the financial community on how to improve the audit process. The panel listened to comments from and posed questions to more than 20 organizations representing securities regulators, public accounting, corporate management, preparers and users of financial statements, the plaintiffs and defense bar, and academia. Speakers included Arthur Levitt, chair of the Securities and Exchange Commission, and Barry Melancon, president of the AICPA.

The POB formed the panel in October 1998 at the SEC's request in response to Levitt's broad initiative to encourage corporations, the accounting profession, and the securities industry to address what he terms "earnings management."

"I fear that the audit process, long rooted in independence and forged through professionalism, may be diminished--perhaps even sacrificed in the name of more financial and commercial opportunities," Levitt said at the hearings. "In recent years, the amount of revenue generated by accounting firms in areas of business other than traditional auditing services has increased exponentially. Some firms--perhaps preferring to distance themselves from the roots that have given them such opportunities--prefer to think of themselves as 'multidisciplinary organizations.'"

The panel, chaired by Shaun F. O'Malley, former chair of Price Waterhouse LLP, includes representatives from industry, public practice, and academia, as well as two former SEC commissioners. It also is conducting a survey as part of its current initiative that examines the general audit environment including fraud detection, the audit risk model, auditors' involvement in client operational matters, audit committees and auditor communications, recruitment in the auditing profession, and the "business" of auditing (competition among public accounting firms, forms of practice, scope of services, and liability issues).

"I wonder if the younger people in the profession--those who have decided not to become Internet entrepreneurs--are receiving the necessary guidance and lessons in value judgments from their older, more experienced colleagues," Levitt said.

Society Committee Responds to Survey

The NYSSCPA Auditing Standards and Procedures Committee, chaired by Vincent Love, recently responded to the panel's survey that posed far-reaching questions, including:

Are auditors devoting sufficient attention to the areas where management discretion and judgment are required in financial reporting?

Do accounting standards issued in recent years help or hinder auditors in meeting the needs of users of financial statements?

Are auditors' responsibilities with respect to the detection of deliberate misstatements of earnings appropriate?

Do you believe auditors should be more involved in and familiar with their clients' business and operational matters and ongoing communications with the investment community?

Do you believe auditors currently communicate effectively with management, audit committees, board of directors, and stockholders?

Do you believe that the quality of new recruits into auditing has been declining in recent years, and if so, is this having an effect on the quality of audits?

Are the opportunities and rewards in the auditing profession sufficient to attract and retain high quality entrants?

What are your views about the effects of competition and pricing on the quality of audits?

Do you believe non-audit services offered to audit clients affect the independence or perceived independence of auditors?

What are the effects of the following on the quality of audits: non-audit organizations acquiring audit firms or parts of them, and audit firms broadening their range of non-audit services through acquisition or by internal expansion?

The hearings and the survey are part of the panel's comprehensive review and evaluation of the role of independent audits and the impact of recent trends in the accounting profession and the business community on the public interest. The panel expects to make a set of recommendations in its future report.

The POB is an autonomous body of five members established in 1977 to oversee the self-regulatory programs of the AICPA's SEC Practice Section, whose member firms audit publicly held companies.

See www.nysscpa.org and future issues of The Trusted Professional for the Society committee's response, updates on the panel's activities, and related efforts in the accounting profession and securities industry to address the SEC's criticisms of earnings management. *