Audit firms fight against expansion of fraud detection role

The largest accounting firms in the world are fighting against new rules that force them to be more responsible for rooting fraud out of the companies they audit.

They are trying to convince their clients that the Public Company Accounting Oversight Board’s proposal will increase audit fees if it is implemented.

New rules from the PCAOB would expand auditors’ responsibilities to ensure that a company complies with laws and regulations and communicate their concerns more to a board of directors. The proposal is a response to frustrations in Washington over audit firms’ failure to protect investors against wrongdoing on the part of their clients.

The Center for Audit Quality (CAQ), a group of audit firms led the Big Four Deloitte PwC EY KPMG and PwC, asks corporate directors to sign a letter opposing the plan.

According to the letter, “Auditors do not have the same legal training as lawyers. As a result, the proposed changes would extend the auditor’s role in order to include knowledge and experience outside of their core competencies.” The proposal would increase the audit’s cost without providing any benefit.

The existing standards only require auditors detect and report wrongdoings that directly affect the accuracy of financial reports, but the new rules will force them to look for behaviours that may have a direct or indirect impact, such as putting an organization at risk of heavy fines.

Even within the PCAOB they have been controversial, with only three board members supporting them. Two former Big Four employees opposed the changes. One called the changes a “breathtaking extension of auditors’ duties”.

Lynn Turner, former chief accountant at the Securities and Exchange Commission and now a PCAOB adviser, says that existing standards give auditors too much latitude to avoid confronting management when they observe potentially illegal behavior.

He said that the current standard “does not serve capital markets in any shape, form, or fashion.”

I’ve told people at PCAOB this is a battle and that the war has started. We’ll see if those three members have a spine.

Before the deadline of August 7, it is expected that business lobby groups and accounting firms will submit comment letters opposing these new rules. The CAQ stated that it is not against reforming existing requirements but the current proposal went too far.

Sandra Hanna, a Miller & Chevalier attorney who has represented auditing firms, said that the proposal was an effort to turn auditors “fraud examiners”, and impose a “forensic standard” where even the smallest concerns would have to investigated. She said, “I am worried for auditors because they will never be able live up to this standard.”

Tony Thompson, who was one of three PCAOB members to vote in favor of the proposal, stated that he would be open to any feedback, particularly regarding smaller auditing firms, which may not have as many resources as the Big Four.

He defended the idea behind the proposal. He said that we are not asking auditors become lawyers or to spend a lot of money to hire specialists. You may encounter legal issues in an audit, and you will be asked to provide an opinion. Don’t ignore things that are concerning.