August 2000

Sokolski Testifies Before POB Panel

Expresses Committee Concerns on Audit Risk Models, Forensic Procedures

Testifying at hearings held by the Public Oversight Board's Panel on Audit Effectiveness on July 11 and 12 in New York City, NYSSCPA President P. Gerard Sokolski commended the May 31 exposure draft for its thoroughness and insight and also raised concerns of some Society committees that reviewed the report.

Sokolski, who joined other leaders of the accounting profession in responding to the panel's exposure draft, indicated that many of the recommendations to various groups regarding improving audit conduct and enhancing auditor professionalism will prompt positive discussion in the coming months regarding key issues such as governance and independence.

Auditing Standards and Procedures Committee Chair William M. Stocker III, Financial Accounting Standards Committee Chair Rober E. Sohr, and SEC Practice Committee Chair Robert N. Waxman also attended the hearings, and their committees provided input on the Society's comments.

Sokolski identified several concerns of the NYSSCPA's Auditing Standards and Procedures Committee, related to improving the conduct of audits. The committee said that consensus about the identification and definition of various types of risk, as well as where and how they are considered in the audit risk model, would be very helpful in both assessing and promoting audit effectiveness. Committee members stated that current inconsistencies in the literature add to the confusion; for example, fraud risk is a separate risk component in some audit guides while SAS 82 subsumes fraud risk in engagement risk or inherent risk.

The Auditing Standards and Procedures Committee also pointed out that even though the linkage between control risk and detection risk is likely more complicated than the audit literature currently implies, there should be documented reasons for every control risk assessment and specific consideration given to those reasons when designing and performing substantive tests.

In addition, Sokoloski testified about the committee's concern that the introduction of "forensic-type" procedures anticipates a qualitatively different state of mind than that traditionally held by auditors, who have focused on professional skepticism, neutrality, objectivity, and integrity. The panel's report addresses approaches and procedures most auditors already agree on and perform; however, auditors do not think of them as "forensic," which implies the search for evidence of known wrongdoing. Moreover, even the most skeptical, or most forensic, auditor cannot guarantee detection of material financial statement fraud committed by a determined management in collusion.

Sokolski endorsed the panel's recommendation that audits and auditors receive higher priority and encouraged the panel to place greater emphasis on ways of providing resources to enhance the attractiveness of the audit profession to prospective entrants.

He echoed previous comments of the Society's Auditing Standards and Procedures Committee to the panel:

"We believe that the opportunities and rewards currently are not sufficient to attract and retain auditing professionals qualified to effectively implement a risk-based model of auditing," said the committee in comments filed on [date]. " Even though current demand for jobs in accounting is high, starting salaries remain close to the bottom of the scale for professionals. Moreover, too many CPAs, their firms, and their professional organizations espouse the concept that the audit is a "low value" or non-value added service.

"In my experience, bright young people who might otherwise be attracted to work professionally as auditors frequently opt for the larger financial rewards of business when they discover that auditing, too, is only a commodity," he said.

Sokolski concluded his remarks by commenting on the panel's proposals related to the organization and governance of the auditing profession. he underscored that perceived problems of auditor independence and scope of services are not new issues. He said that the panel's report has provided helpful commentary related to the public debate about auditor independence and nontraditional services. In particular, he said that regardless of the outcome of the current debate with respect to scope of services, it will continue to be key that those entering the audit profession develop the independence of mind and objectivity required by professional auditing standards of conduct.

Sokolski also stressed that at the current time, the concept of creating a hierarchy of GAAS has merit. Focusing GAAS at the level of standards is critical. Otherwise, there would be the danger that various regulatory authorities would proliferate specific mandatory auditing procedures without regard to an overarching set of standards conducive to professional conduct.