One in Three Audits Fail, PCAOB Chief Auditor Says

January 24, 2014, 3:12 PM ET

One in Three Audits Fail, PCAOB Chief Auditor Says

EMILY CHASAN

Senior Editor

More than one in three audits inspected by the U.S. government’s audit watchdog were so deficient the auditors shouldn’t have signed off, an official said this week.

While the Public Company Accounting Oversight Board inspects audits where is suspects problems, the high failure rate is raising questions about whether auditors are getting adequate training and oversight to provide high quality audits for investors.

“When we look at an audit, the rate of failure has been in a range of around 35 to 40%,” Martin Baumann, chief auditor of the Public Company Accounting Oversight Board said on Thursday in comments to a New York State Society of CPAs conference.  In those cases, the watchdog said it found that auditors did not have sufficient evidence to support their opinions.

That doesn’t necessarily mean the underlying corporate financial statements are incorrect, but the audit failures could start to undermine investor confidence, Mr. Baumann said. “Investors are relying on the audit,” he said.

The board is working on creating audit quality indicators so that firms could potentially measure their performance against a common standard in the future, Mr. Baumann said. It expects to issue a concept release on the indicators in the first quarter.

The PCAOB has found five common trouble spots for auditors: complex “fair value” measurements for hard-to-price financial instruments, management’s estimates, revenue recognition policies, internal controls, and relying too heavily on the use of data prepared by the company being audited.

“In many cases [auditors were] just taking the report that management prepared and using that as evidence without getting behind what that’s all about,” Mr. Baumann said.

The board’s inspections are the finding problems — at both large and small audit firms — stemmed from ineffective supervision, ineffective quality reviews and monitoring, a lack of professional skepticism, and inappropriate tone at the top of the audit firm.

“Most industries have some way in which they monitor the quality of their products,” Mr. Baumann said.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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