http://www.reuters.com/assets/print?aid=USTRE7AK1EM20111121
Deloitte LLP is now openly training its auditors to be more skeptical. I think the firm is right. The firm came under criticism from the U.S. Public Company Accounting Oversight Board (PCAOB) in newly released portions of a 2008 inspection report.
It is important for all publicly traded companies to begin taking audits very seriously. I am sure all companies take audits seriously but let us not forget how laws like the Sarbanes-Oxley Act of 2002 came into being. Between irresponsible auditors and white collar outlaws it is no wonder why Sarbanes-Oxley was passed.
Audits (SOX, financial, and operational) answer the following basic questions: • Who? • What? • When? • Where? • Why? • How Much?
When you hit the how much question; how much was purchased, how much did it cost; you end up back to who, what, where, and why all over again.
You may hear complaints that SOX testing is expensive. Well it is and it ought to be. The reality is that the testing is attempting to keep people honest and accountable. You want the work done right then spend the time and money to do it right. Some audit professionals believe that auditing does not have to be an expensive proposition of excellent records are maintained. I am not quite sure I agree with that sentiment. Auditors need to spend the time and resources asking questions, testing controls, tracing the money, asking why decisions were made, the list goes on.
I am not necessarily opting for a single set of rules for the entire planet. I am just seeking for an orderly way of examining companies.
I agree that auditors’ term limits need to be established. People have a tendency of getting too friendly and familiar. Imagine this scenario: • A company is flagged for material deficiencies in an audit last year. The same company that did the audit runs the same audit again but this time only runs the control tests for the material deficiencies. Is this wrong? The answer is that depends. • If you follow Deloitte’s CEO, Joe Echevarria’s logic, the need for institutional knowledge outweighs the need to avoid conflicts of interest, the appearance of a conflict of interest, and ignores the mistakes of the past. • Let us say an audit firm decides to take a short cut and decides to not run so many tests to save time and money for the client company. The audit firm feels confident that the client company does not really need to be examined closely in those tests that it passed last year. I say that is a recipe for disaster. • You now run the risk of performing a low quality audit and possibly run the risk of missing any fraud that may have been committed. • Familiarity breeds comfortableness and laziness.
The knowledge you will be out of a job has a tendency of keeping people’s skills sharp and fresh.
Has everyone forgotten Enron and WorldCom? The best thing that came out of Enron and WorldCom was the Sarbanes-Oxley Act of 2002. I love SOX 404 testing.