Improving Audit Quality: The Debate

There has been a lot of discussion recently about ways to improve audit quality. Two proposals made by the PCAOB that would, in their opinion, improve audit independence and accountability. The two proposals have also received a lot of attention both bad and good. The PCAOB wants to require mandatory audit firm rotations and a signature from the lead engagement partner. While these proposals may seem like a good idea in theory, will it really work in practice?

The ideology behind each proposal is the same; both are discouraging forming social relationships that would interfere with auditor independence and create more transparency with in the audit field. Auditors should question procedures, financial statements, etc. and if they feel like they are too reliant on the client for social or economic status then it may erode their objectivity and skepticism. If the auditor’s objectivity and skepticism are decreased then their overall independence is compromised.

Many of the critics of these proposals feel that it the mandatory rotation will have increased costs and decreased quality. Many companies feel that new auditors will have to spend extra time playing catch up and the efficiencies and specific knowledge about the business will be lost in the change. The supporters of the proposal come from people who feel like the relationship has become too cozy and comfortable. This can then lead to unintended lapses in objectivity. There are always two sides to the coin.

While the mandatory audit firm rotation has garnered the most attention, another proposal of requiring a signature from the lead engagement partner has also come under scrutiny. The proposal is to increase accountability, when what is really does is increase identifiability. When a person is identified on a report, one of two things will happen. They will be very cautious to avoid disapproval, or they will become the scape goat if something goes wrong.

Neither one are perfect and will work the same way every time, but by examining the procedures and mixing in a little of both they may be a way of creating a better solution.