The problem with Audits today

The audit of financial statements prepared under US GAAP (“Audit”) has morphed into something that was never intended.  The Audit is a commodity. The primary reason the audit is a commodity is because US GAAP does not provide value. Simple economics. If something has no value, the goal is to get it at the lowest cost possible.

The problems with audits and audited financial information today:

Perception – Center for Audit Quality, 2018 Main Street Investor Survey:

  • 35% of investors have a great deal (9%) or quite a bit of confidence (26%) in the audited financial information of publically traded companies (1 out of 3, not sure why this is not 80%-90%)
  • 15% of investors have very little to no confidence in the audited financial information of a publically traded companies
  • 20% responded that the auditors provide honest and independent third party scrutiny (not sure why this is not 99%)
  • 11% felt auditors were highly skilled at what they do (this is not good)

This is one study but I find it to be disturbing and telling at the same time. Yet if you read the survey, it paints a very different picture.

Qualified Opinions – The refusal in the market to accept this type of opinion as a viable option. This is the fault of the accounting profession not educating the market. The stigma that a qualified opinion means the financial statements are inaccurate or “second rate”. They are not inaccurate or “second rate”. They are merely not conforming or including certain, specific accounting standards (i.e. US GAAP departures). Not all standards need to be adopted. The accounting profession needs to address this issue as a positive alternative.

80/20 Rule  – The last 20% of the engagement results in 80% of the work. Partner reviews, clearing points, drafting of financial statements, required communications, and issuance of the audit report. Need I say more. It is not wonder companies need 90-120 days after year end to complete an audit.

Personnel – Surveys in the Journal of Accountancy (published by the AICPA) has continually listed staff hiring and retention as two of the most important issues facing accounting firms. If what you produce has no value, how do you feel motivated to continue in the public accounting profession? The continual employee turnover puts enormous pressure on accounting firms. How can they meet a fixed audit fee when they are continually training new personnel?

Accounting Standards (see my other blog on this issue) – Continually increasing complexity when no one wants to pay for its implementation, its maintenance and its Audit seems self destructive and demotivating. It stands to reason that as accounting standards become more complex or add more footnote disclosures, the required auditing procedures increase. This is an issue for the audit firm and the company being audited. There is significant pressure on a company to incorporate accounting changes with the least amount of cost and impact to an organization as well as pressure on the audit firm to assess the proper implementation of those changes while staying within the audit fee agreed upon. The goal should be to simplify the accounting standard not increase its complexity.

Audit Fee – Typically fixed and unrealistically to low by not anticipating issues arising during an audit. Those issues are usually caused by their client who treats the audit fee as a cost of doing business and the product (Audit Report) as a commodity. Thus, the minimum effort is placed on the Audit.

National Practice Offices or Groups –  Personally, this is my biggest issue. Dare to take an accounting position not in line with a National Practice Office or Group of the audit firm and see how your audit goes. The outcome is the Issuer will be required to alter their financials to be inline with the audit firms interpretation or the audit firm will refuse to issue an audit opinion. Thus, if an Issuer does not address accounting standards timely and receive approval from the audit firm of its position, it can cause significant delays in issuance of the Audit Report and possibly additional audit fees.

Issuers – There are many reasons Issuers no longer see the value of a financial statements prepared under US GAAP and its related Audit. Audits are disruptions to a company’s staff and operations. They are seen as a compliance and not as an operational tool. The goal is to see “how fast can we get them (“the auditors) out of here” and receive the Audit report. Where the failure is a company or organization does not operate to follow US GAAP. If US GAAP was more flexible and adaptive to the operations of a company or organization, financial reporting could be made substantially easier and Issuers would see the value. The method in this website is easier, adaptive and flexible.

Lack of Caring – The Audit is something to “get done” and not a tool for improvement or something of value.

This has to change and this website is the start of that change.

 

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