I recently started regular reading of the CPA Journal. It’s enlightening for many reasons and especially in light of the continuing cost/benefit debate around Sarbanes-Oxley compliance. So imagine how surprised I was to find that back in February, three professors from Weber State University, Ogden, Utah said:
Principles-based accounting is not new, it is not just a rule, it is the law. It is past time that all accountants subscribe to and adhere to the law. That means that we must make sure that all financial statements are high quality and totally transparent.
They are referring to the effects of a 35 year old criminal case on audit principles. But nothing has changed. I’ve never seen a set of US accounts where the audit report refers to ‘principles’ or ‘true and fair’ but always to ‘being in compliance with US GAAP’ or some such. In other words, US audit reports are about following the rules-based methods so many believe apply. At least that has always been my impression and one on which no-one has ever attempted to disavow me.
The Public Company Accounting Oversight Board (PCAOB) has determined that a large portion of these excessive [Sarbanes-Oxley related] costs can be attributed to compliance processes and audits that were not as effective or efficient as intended. In many cases, companies and auditors were documenting and testing too many financial reporting processes and related controls.
Am I reading too much into this or is it the case that audit crews, smelling the chance to make additional money are effectively misleading their clients? And even then is audit quality improving?
On audit quality, you can argue the rise in the number of restatements of audited accounts implies that rather than going forward, restatements are an indicator of going backwards or, at the very least, standing still. It doesn’t matter that commentators conclude that more errors are being found as a result of SOX. What matters is they went adrift in the first place.
The problem with rules based systems is they set the tone for other things. It is a small step from following rules to creating artificial tax schemes – the subject of increased scrutiny by both IRS and HMRC. They have no problem in casting aside what they see as fraudulent scams. So why does the US audit profession insist on ignoring the law?
Discussions on both sides of the Atlantic about the future of reporting, the oligopoly of the Big 4 and quality are remarkably similar. Now surely is the time for the various regulatory bodies to cast their territorial differences aside and take steps to rescue the profession from its continuing slide. Sadly it seems opportunities are being missed.
Technorati Tags: audit independence, Big Four, Sarbanes_Oxley, SOX
