November 1999

Society Responds to POB Audit Effectiveness Survey

Questionnaire Raises Tough Questions

By James L. Craig, Jr., CPA

The NYSSCPA Auditing Standards and Procedures Committee, chaired by Vincent Love, recently responded to approximately 50 questions from the Public Oversight Board's Panel on Audit Effectiveness. The POB created the panel in response to Securities and Exchange Chair Arthur Levitt's broad program to improve the quality of financial reporting and curtail abuses by public companies practicing earnings management.

"The objective of the questionnaire is to learn of troublesome and difficult audit areas and structural weaknesses that may lead to faulty audit opinions," Love said.

The Society's committee, according to Love, had the most difficulty responding to questions related to auditor responsibility for knowing and considering investment analysts' estimates of an audit client's earnings per share. The committee answered that audits under generally accepted auditing standards cannot be conducted with the expectation of finding all misstatements amounting to within one or two pennies of earnings per share.

Committee Proposes
Improved Regulatory Structure

"The main theme of the committee's response is more organizational and structural than a criticism of existing auditing standards," Love said. "We propose a system where independent auditing firms operate under an improved and strengthened self-regulatory system."

The committee also struggled with questions regarding auditor involvement in a client's business and operational matters and ongoing communications with the investment community. The committee concluded that there is no need to expand professional standards to increase audit work over internal controls, interim financial statements, forecasts, management's discussion and analysis, and nonfinancial data. The committee believes it is up to audit committees and client management to engage the auditor to perform additional services in these areas on a case-by-case basis if circumstances warrant and additional assurance is needed.

The committee expressed concern about the effects of competition and pricing on audit quality and the expansion of services in areas other than audit. It raised the possibility of regulators and the profession requiring the separation of audit practices from other unrelated businesses in order to safeguard the integrity of the audit. The committee commented that the self-regulatory system must also address the alternative firm structures where a CPA firm and a non-CPA firm work in tandem to serve the same client.

The committee's response to questions about the role of the AICPA and the self-regulatory system suggested that it might be appropriate for auditing standards to be established by an independent body, with public members, along the lines of the Financial Accounting Standards Board.

Panel Chair at Society Auditing Conference

Shaun O'Malley, retired chair of Price Waterhouse LLP, chairs the Panel on Audit Effectiveness, which includes representatives from industry, public practice, and academia, as well as two former SEC commissioners. The POB distributed more than 500 copies of the panel's questionnaire to CPAs, audit firms, state CPA societies, financial statement preparers, federal regulators, and others that are knowledgeable about audits of public companies. The panel hopes to have an exposure draft of its recommendations for the numerous players in the financial reporting process--standards setters, regulators, and CPA firms--in February or March, with a final report issued by June.

See http://www.nysscpa.org for a complete copy of the questionnaire and the Society's comments.

O'Malley is among the scheduled speakers at the Society's annual Auditing Conference on January 6. Conference Chair William Stocker expects that O'Malley will be in a position to discuss the panel's preliminary findings. *