The Public Company Accounting Oversight Board (PCAOB) has released its findings on its compliance audit of Auditing Standard Number 7 (AS No. 7). AS No. 7 is designed to assure that audit opinions are correct and the methodology used is sound. This is accomplished through the mandate that an engagement quality review be completed on each audit of a public company. Through its inspection, the PCAOB found that the execution of AS No. 7 was often lacking at firms.
While the PCAOB noted that, in general, firms had incorporated the requirements of the new standard into their checklists, methodologies and training; the incorporation of AS No. 7 did not always equate to the execution of AS No. 7. It was noted that in many of the audits the PCAOB found to be deficient, the matters that led to the failure were included in the reviewer’s list of items to review – but this failed to lead to discovery of the error in the audit. The reason for this is that the audit review team failed to fully execute on the principles of AS No. 7. For more details and to read a copy of the report, click PCAOB AS No 7 Findings
More Than A Report
While the PCAOB’s goal is to enforce standards and regulations that keep the accounting industry at its best, this report serves as more than simply a warning to auditors of public companies to increase their audit reviews – it serves as a risk management litmus test for all firms.
Audit engagements serve as the riskiest type of work an accounting firm can perform. This statement is a result of a review of accounting malpractice claims and professional liability insurance losses our firm has performed over the years. Audit claims have the highest severity of any claim (while tax claims are typically the most frequent, they are resolved for a much lower amount that audit claims). Performing a clean and excellent audit – and having a robust review of the findings by a third party in the firm – will do more than satisfy regulators. Such an audit may also save the firm tens of thousands of dollars in future claims and lost time.
When an audit claim is in settlement negotiations or being litigated, the stronger the audit file, the better case the accounting firm has to defend against the lawsuit. If the audit was not performed to the latest standards as set by the relevant regulating board, the stronger the plaintiff’s case becomes that the audit the plaintiff relied on to make a decision was deficient and therefore the cause of the loss of money.
The PCAOB found many audit reports that lacked the clarity and support of the audit findings. They also found many accounting firms that failed to employ certain internal reviews that would have caught the errors. While fixing this at a firm is simply at heart, it is time consuming and requires a change in processes and manuals. However, as explained above, this simple fix may also help a firm avoid the headache of a lawsuit, and save both time and money dealing with it. If you are interested in discussing additional ways to protect your accounting firm from lawsuits, contact an experienced broker today.