Good afternoon.
I am honored to have been asked to speak here at the Midwest
Regional Meeting of Beta Alpha Psi to such a promising group of
young people preparing to enter the accounting profession. I would
like to thank the students for choosing accounting as their program
of study and the faculty members for all they do in preparing these
bright students for their future careers.
As you all know, the Public Company Accounting Oversight Board
was created by Congress through the passage of the Sarbanes-Oxley
Act of 2002 ("Sarbanes-Oxley Act") to oversee the audits of public
companies in order to protect investors and the public interest by
promoting informative, accurate, and independent audit reports The
PCAOB began operations in April 2003. I joined the Board in February
2011 after spending over thirty years in public accounting.
Before I go further, I should tell you that the views I express
today are my personal views and do not necessarily reflect the views
of the Board, any other Board member, or the staff of the PCAOB.
In our 11th year of operation, more than 2300 firms
are registered with the Board, including over 900 foreign firms from
85 jurisdictions. The Board has conducted well over 2000 inspections
of public company audits, including inspections in 40 jurisdictions
outside the United States. The Board has issued 17 auditing
standards — including, for example, standards addressing audit
documentation, internal controls, audit planning, engagement quality
review, risk assessment and audit committee communications — as well
as two attestation standards for audits of brokers and dealers. We
also have substantially amended a number of interim standards —
including, for example, standards addressing communications about
control deficiencies, audit reports, audit sampling, and substantive
analytical procedures, among others. And we hope soon to issue a
final standard on the auditors' testing of related party
transactions.
Our Division of Enforcement is vigilant in investigating and
charging firms and individuals for violations of relevant securities
laws and professional standards. To date, the Board has publicly
announced sanctions against 55 firms and 73 individuals, with
sanctions including revocations of firm registrations, orders
barring or suspending individuals from practicing before the Board,
censures and, in some cases, significant monetary penalties. Our
cases have involved Big Four firms as well as smaller firms and sole
practitioners and have been brought against firms in the U.S. and
abroad. In addition, we have matters currently under investigation
and in litigation. While many of our enforcement cases to date have
involved audit failures of varying degrees, the Board also has
imposed sanctions for failures to cooperate with the PCAOB,
including failure to produce documents and the alteration of
documents in connection with inspections or investigations. My
advice to young auditors is don't try to "clean up" an audit when
PCAOB inspectors announce their plan to conduct an inspection, and
don't assist anyone who asks you to help them do that.
Our mantra at the PCAOB, and the focus of everything we do, is
audit quality. This is because we believe that the audit serves a
unique and indispensable function in the capital markets — to
provide independent assurance to investors and the public that the
securities in which they invest are from companies whose financial
statements are fairly stated in accordance with the applicable
accounting framework and that those companies have effective
internal controls over financial reporting. While audits cannot
prevent fraud or mistakes, we hope that, in many cases, the audit
can help deter or detect them and thereby provide confidence in the
capital markets that fuel so much of our economy.
For those of you considering a career in auditing, one key
ingredient to becoming high quality auditors — or high quality
accountants of any kind — is your education. The subjects that you
have studied in your undergraduate and graduate programs are
important. While you will not necessarily use every subject area
from every class in your future careers, all the pieces are part of
a well-rounded program. But I would like to focus on some important
skills that may not be the focus of your accounting courses. These
are skills that, over the long term, will be just as important as
your technical accounting knowledge.
Let me start with communication skills. I often ask student
groups if any of the accounting majors have another major, or a
minor, in English. Not surprisingly, the answer is overwhelmingly
no. Accounting majors are fond of numbers, while many English majors
try to get as far away from mathematics as possible. I think it is
important that students in both categories stretch to gain comfort
in the other's area of strength. For auditors, numbers obviously are
at the core of the job. But a huge part of auditing is documenting
your work, and, without a complete, clear and concise description of
the auditor's work, it loses its meaning. One of the reasons why
documentation is so important is that no single individual can
perform and review all the work on any company's audit. Often,
especially on larger audits, much of the work is done by relatively
junior accountants. Thus, supervision and review of the work of
auditors is critical, but the review can only be effective when
there the work that has been done is adequately documented.
The PCAOB has issued an auditing standard that sets forth
specific documentation requirements. One key requirement of that
standard, Auditing Standard No. 3, is that audit documentation be
"prepared in sufficient detail to provide a clear understanding of
its purpose, source, and the conclusions reached."[1] Thus, the young audit staffer's
description must be sufficiently detailed to allow the firm's senior
to obtain that clear understanding the next week, the audit manager
soon thereafter, and ultimately the partner and perhaps the
engagement quality control reviewer. Months later, the firm's
internal inspectors may review the work, and, ultimately, the PCAOB
staff may inspect the audit engagement. (Hopefully, you will not
find yourself in the position of having your work reviewed by
members of the enforcement staff at the PCAOB or SEC, but if you do,
it will serve you well to have fully documented all of your hard
work.)
For new accountants, the focus on documentation can be a
difficult transition — the world of texting, Facebook postings, and
tweeting may not fully prepare you. And, of course, communication
skills are important even beyond the accountant's documentation of
audit procedures. Being able to express yourself effectively is key
to your relationships with your co-workers and supervisors, clients,
potential clients and many others. Verbal communication is a large
part of this. Whether presenting before a large group like this, or
sitting down with a member of the accounting staff of an audit
client, making your point effectively is critical. I remember being
a young staff accountant, going through a questionnaire with a
client, and keeping my fingers crossed that I would not be asked to
clarify or rephrase a standard question! The ability to do just
that, though, is a sign that the person understands the subject
matter, can provide context, and, most importantly, can tell when an
answer just doesn't make sense.
So if you believe that your written or verbal communication
skills need improvement, I encourage you to begin now to work on
writing and speaking clearly, comprehensively and succinctly. Take
advantage of any classes or clinics that your schools may offer in
this area. Practice! Honing your communications skills is a long
journey, and you may find yourself — as I do — continuing to work on
these skills throughout your career.
Good organizational skills also are a key ingredient to success
as an accountant. Whether in government, industry or public
accounting, the accountant's ability to create an organized plan to
tackle the many steps in the financial reporting or auditing cycle
is critical. Good organization allows you to be proactive by taking
steps in advance to prepare for or avoid a problem, initiating
actions rather than waiting for things to happen, and generally
increasing your efficiency and effectiveness. So I urge you to think
about how best to accomplish the tasks at hand, take control, and
make things happen.
This is particularly important given that one of the many
challenges in almost any accounting career, but especially auditing,
is the intense demand on your time. An auditing career is rewarding
but involves many long hours. As much as auditors try to do before
the company's year-end, there are a lot of procedures that cannot be
completed until the final numbers are available. When I hear stories
of the workload of some auditors, I question whether the firms are
doing enough to monitor excessive workloads and take appropriate
real-time measures to ensure both the quality of work being done as
well as the toll it takes on the lives of those involved. I have
discussed this with several firm leaders, pointing out that audit
quality cannot possibly benefit from overworked and exhausted
staff.
Another challenge for the new staff auditor is not getting an "A"
on every work paper. I have observed many times how humbling it can
be for a recent graduate of a top accounting program to receive
extensive review comments from the senior. But if this happens to
you, it should not dissuade you. Auditing is learned, in large part,
through experience. Your first years will be akin to an
apprenticeship. Perhaps keep in mind this Japanese proverb: "Fall
Down Seven Times; Stand Up Eight." You have to learn from your
mistakes and keep going — there is a light at the end of the tunnel,
when you will have become a respected and sought-after expert in
your field.
But the most important skill or characteristic that every auditor
needs to develop is professional skepticism. No matter how much
technical knowledge you have or how well you document, and
regardless of your organization and hard work, your audit will not
be effective if you are not also skeptical. The relevant auditing
standard, AU 230, defines professional skepticism as "an attitude
that includes a questioning mind and a critical assessment of audit
evidence. . . . The auditor neither assumes that management is
dishonest nor assumes unquestioned honesty. In exercising
professional skepticism, the auditor should not be satisfied with
less than persuasive evidence because of a belief that management is
honest."[2]
Thus, professional skepticism requires that the auditor question
management's conclusions, decisions and judgments. Auditors must
consider whether there is sufficient, appropriate and persuasive
audit evidence to support the audit opinion and not accept
management representations without corroboration. The auditor must
be watchful for and wrestle with any contrary evidence that
undermines management's conclusions.
Unfortunately, professional skepticism is also an area where we
see a lot of problems in our inspections. In 2012, we issued a staff
audit practice alert on professional skepticism, after seeing
several years of inspection reports with high rates of deficiencies
in this area and after spending a year studying and discussing ways
to enhance auditor independence, objectivity and professional
skepticism.[3] Our work, however, is not done,
and we continue look for ways to further improve audit quality in
this important area.
I believe there are several factors that are relevant to whether
a particular public accountant can be appropriately skeptical. One
key factor is competence. If you are going to challenge management's
assessment, you need to come armed with knowledge about what you are
challenging. This requires not just a solid technical background in
applicable accounting and auditing requirements, but also a good
understanding of the company and its industry.
Another key factor is confidence. Even some highly competent
individuals do not have the confidence to challenge management of an
audit client. This can be due to the personalities involved, the
respective age or experience of the individuals involved, or the
incentive structures in the given situation.
One of the biggest impediments to auditor skepticism, however, in
my view, is the calendar. Public companies have filing deadlines to
meet, and they are rarely missed. When they are missed, the
consequences can be serious, including declining share prices and
harm to investors. If potential issues are discovered late in the
audit process, or an issue is not resolved in a timely manner,
auditors may feel pressure to cut corners. We have seen it in
inspections and enforcement matters: Auditors recognize that there
may be a problem with management's estimates or conclusions but
allow themselves to be talked out of doing anything about it.
Staying organized and proactively dealing with problems far ahead of
filing deadlines will help the auditor avoid running out of time as
well as the pressure to accept insufficient audit evidence.
The best way to deal with such pressures is to remember that the
auditor's fundamental obligations are to the investors of the
company. The audit is intended to provide assurance that the audited
company's financial statements and related disclosures fairly
present the institution's financial results in conformity with
applicable accounting and disclosure standards. Auditors are the
eyes and ears of investors, who do not have the access or resources
to take a close look at the information underlying the financial
statements. Auditing is more than just a business and different from
the other types of services a firm may be providing to its clients.
Your "client" in this case, is not the entity that is paying the
bill. And if auditors fail to live up to their obligations of
conducting an independent and skeptical audit, investors will stop
trusting in their investments, and ultimately in the capital
markets.
Of course, audit committees also have a role to play in ensuring
that auditors maintain their focus on investor protection. Audit
committees chose the firm and engagement partners that will audit
their companies. They set the terms of the engagement. And, during
the audit, they can request information and ask difficult questions
of both management and the auditors to make sure that each is living
up to expectations. We at the PCAOB share many of the same goals as
audit committees — to supervise and continue to enhance the
performance of public company audits. Over the last two years, we
have engaged extensively with audit committees to make sure that we
understand their needs and that they benefit from our work and
communications. I believe we, and those audit committee members with
whom we have met, have learned a great deal. My hope is that young
auditors will be exposed to audit committees of their clients early
in their careers, allowing them to gain an appreciation for their
role as investor representatives.
Let me turn to the last subject I wanted to discuss today, which
brings us back to my original focus on the importance of
communication. In the wake of the 2008 financial crisis, involving
the failures or near-failures of systemically important entities
that had received unqualified audit reports just months earlier,
investors raised questions about whether more communication by
auditors could provide investors with important insight into the
risks associated with audit clients. In response to this concern,
the PCAOB undertook a standard setting project to consider whether
and how auditors should provide public communications beyond those
currently found in the standard auditor's report, which, as you
likely know, provides little more than a pass/fail opinion on
whether the company's financial statements are fairly stated (or
whether internal controls are effective).
The Board began by conducting extensive informal outreach to
investors, auditors, audit committee members, financial reporting
professionals, academics and others, to gain a better understanding
of the relevant concerns and issues involved. Subsequently, in 2011,
the Board issued a concept release to discuss several possible
alternatives for changing the auditor's reporting model. These
alternatives ranged from relatively modest tweaks to clarify certain
words used in the audit report to fundamental changes that would
require the auditor to discuss both the audit and the company in
some detail.
After reviewing written comments and conducting an open meeting
to seek additional feedback, the Board decided that the best
approach would be one where the auditor provides additional insight
into the audit, but leaves disclosures about the company's
activities, financial results, and risks to the company itself. As a
result, we issued in August of last year a proposal to expand the
content of the auditor's report.[4] The proposal, if adopted, would
require auditors to discuss in their reports so-called "critical
audit matters," which are defined as those matters addressed during
the audit that (1) involved the most difficult, subjective or
complex auditor judgments; (2) posed the most difficulty to the
auditor in obtaining sufficient appropriate evidence; or (3) posed
the most difficulty to the auditor in forming the opinion on the
financial statements.
It is important to understand that the proposed standard does not
require reporting of all information known by the auditor in which
investors may have an interest. There are risks and uncertainties
inherent in the financial reporting process and in business that may
not be discussed as critical audit matters because the application
of the accounting standards in those areas are clear and the audit
process straightforward. Likewise, there may be critical audit
matters reported that bear little on investment decisions.
In commenting on the proposal, some have suggested the
requirements do not go far enough and are not sufficiently specific
to require the auditor to report information that investors want.
Others have suggested that most of the matters to be discussed in
the audit report would largely duplicate disclosures already
included in the financial statements; while yet others have
expressed concern that the auditor might disclose information that
applicable SEC rules and regulations explicitly allow the preparer
not to disclose. Finally, some skeptics wonder if the end
result of the changes to the auditor's report will be limited to the
addition of new "boilerplate" language to the report that ultimately
will not be helpful to investors at all.
We have already received over 240 comment letters in response to
the proposal (in addition to the 155 we received in response to the
2011 concept release). Next week, on Wednesday and Thursday, we plan
to explore these issues in more depth when we host a public meeting
in Washington to discuss the proposed auditor reporting standard. We
have invited a series of speakers — including investors, auditors,
audit committee members, financial statement preparers and others
from the U.S. and abroad — to present to us their views of the
proposed standards in a forum that allows us to ask questions and
have a two-way dialog to further explore the potential advantages
and disadvantages of the proposed changes. Subsequently, the Board
will consider what we have heard and decide what action to take.
Possibilities include adopting the standard as it is or dropping the
project entirely. More likely, however, is that we would make
changes to the proposal and re-propose it for additional comment, to
try to achieve the best possible balance between disclosing
information that will be helpful to investors but not harmful to
companies or the capital markets.
Because this standard would represent a significant change for
audit practice as we know it, I urge you to pay attention to this
important project. Indeed, perhaps your professors would like you to
try your hand at writing up some critical audit matters, which would
allow you to practice your writing skills while also providing
insight into the potential effects of the proposed changes!
With that, I would like to wish you all the best of luck with
your studies and accounting careers, and I would be happy to answer
questions.