Date: 2024-10-13 Page is: DBtxt003.php txt00025939
CORPORATE AUDIT
DANGEROUSLY DEGRADED QUALITY OF AUDIT
ICIJ: Accounting firms accused of ‘operating with impunity’
as regulator flags growing number of flawed audits
DANGEROUSLY DEGRADED QUALITY OF AUDIT
ICIJ: Accounting firms accused of ‘operating with impunity’
as regulator flags growing number of flawed audits
Image: Miguel Pereira/Getty Images
Original article: https://www.icij.org/investigations/deforestation-inc/accounting-firms-accused-of-operating-with-impunity-as-regulator-flags-growing-number-of-flawed-audits/
Peter Burgess COMMENTARY
I went to Cambridge in the late 1950s and studied first engineering and then economics getting what might be described as a 'double major'. The was followed by some industrial management training that taught me a lot about the real world of industrial work and then professional training as a Chartered Accountant with Cooper Brothers & Co (CB&C0) in London.
CB&Co of the early 1960s was pushing forward to improve every aspect of professional accountancy to make it relevant and valuable to the business world and society. That is certainly the way most of my cohort of articled clerks saw things. I know I was given assignments during my training that stretched me to the limit ... and I was challenged in all sorts of ways during my training.
I did not stay working with accounting firms for very long but brought my training into the arena of business management as well as to North America where I was able to become a very young CFO in the corporate setting. I worked on 'proft improvement' for a number of companies as an 'employee' and in the late 70s when I was approaching 40 years old transitioned to independent consultancy and doing work that was broader in scope than profit improvement. I did many assignments for the World Bank, several UN agencies and others as well as some international corporates.
My independent work was extremely interesting as well as frustrating. By any objective measure most of the well known big organizations are not well managed and their performance well below what should be possible. This goes for most governments around the world. While technology has progressed at a very rapid pace during my lifetime, the art of management has not and the overall performance of the world's socio-enviro-economic system has stalled for perhaps as long as 40 years!
There are many examples of great progress ... but they are offset by even more examples of powerful special interests doing what is in their interest at the expense of everyone else.
This happened at scale with the collapse of the Soviert Union and the emergence of a superclass of Russian oligarchs with Vladimir Putin as the master. But it is also happening in the capitalist West where inequality has been growing for around 40 years with little done to address the enabling dysfunction.
From my perspective, there are three institutional areas that have become dangerously dysfunctional. They are academia, the media and government. But there is hardly any public dialog about this problem, and discussion of the general malaise that exists among a big part of the public is completely inconsequential.
I argue that it is time for much more meaningful management metrics ... I argue that the way corporate accountability is done does not have the capacity to get to the root causes of critical matters and bring them to the attention of everyone that should be informed. Specifically, it bothers me that conventional financial reporting hss a singular focus on informing owners of the performance of the organization's managers and essentially nothing else.
Some practioners in the accounting profession are starting to argue that there has been substantial progress in broadening the scope of corporate reporting in recent years ... and they are right that there is progress, but whether of not it can be described as 'substantial' is another matter. My go to metric on this is my observation of the financial press which never misses a news item about corporate profit performance, but only gets to say something about either the social dimension or the environmental dimension of corporate performance when it is really big news ... which is almost never!
The idea of a Triple Bottom Line emerged in the 1990s. It was a good idea, and remains a good idea. Some years later ESG started to become somewhat popular, but why? TBL was about, people, planet and profit ... essentially the same performance components I use with TrueValueMetrics, that is social performance, environmental performance and profit performance. ESG ecludes the profit component and replaces it with Governance. This is incoherent ... but it certainly suits some powerful players in the system. Governance is NOT a result as are social performance and environmental performance but a component of management ... a cause that needs to be part of delivering results. ESG is a convenient talking pint, but carefully avoids linking profit and social and environmental performance together because it would likely turn out to be 'inconvenient'!
The fact that the accountancy professional is largely silent about this nonsense bothers me ... and I intend to make as much of a wave as I possibly can with the modest platform that I have!
Peter Burgess
Accounting firms accused of ‘operating with impunity’ as regulator flags growing number of flawed audits
The U.S. regulator tasked with ensuring audit quality has found an uptick in deficiencies three years in a row. But its efforts to force auditors to change don’t seem to be working.
Written by David Kenner
August 1, 2023
A new report found “the most significant increase” in audit flaws came from the group of accounting firms that includes the “Big Four.”
A U.S. regulator has found that audits conducted by global accounting firms have grown increasingly flawed and warns that these deficiencies undermine investors’ ability to make informed decisions.
In a report released last week, the Public Company Accounting Oversight Board said that roughly 40% of audits it inspected in 2022 had such significant deficiencies that the audit firm did not have sufficient evidence to support the opinion it rendered on clients’ financial statements or financial reporting.
Audit quality has been deteriorating in recent years, and the report states that “the most significant increase” in flaws occurred within the global network firms, a category that includes the “Big Four” accounting firms: Deloitte, Ernst & Young, KPMG and PwC. The PCAOB found that 34% of audits in 2021 and 29% in 2020 had such deficiencies.
When also considering other deficiencies in PCAOB standards, the regulator found that roughly 6 in 10 audits were flawed — an increase from 55% in 2021 and 44% in 2020.
The PCAOB has attempted to draw public attention to flawed audits by increasing the transparency of its own inspections regime. Earlier this year, it announced that it would publish more information on audit firms’ independence violations and make it possible to compare different firms’ deficiency rates. The PCAOB also fines audit firms that violate its standards or related U.S. laws. But critics say that the PCAOB remains too weak to act as an effective regulator of the audit industry. Two decades after the regulator was created, audit quality is trending in the wrong direction, and the PCAOB is currently mired in a struggle to strengthen auditor obligations to identify fraud.
“The penalties imposed by PCAOB have not changed behavior; one can conclude that the fines are too small to change the thinking of audit partners,” said J. Edward Ketz, an associate professor at the Smeal College of Business at Pennsylvania State University. “We see [the PCAOB’s ineffectiveness as a regulator] as well in the continued resistance to ferreting out fraud. Auditors do not want that responsibility, and so they resist the PCAOB’s efforts.”
The penalties imposed by PCAOB have not changed behavior; one can conclude that the fines are too small to change the thinking of audit partners.KPMG and PwC have faced recent public scrutiny due to their auditing practices. Deforestation Inc., an ICIJ-led investigation, showed how KPMG’s environmental auditing practices overlooked forest destruction in Canada and Indonesia. The firm did not respond to ICIJ’s questions at the time of the investigation, but a KPMG Canada spokesperson said the company is “committed to delivering high quality services in accordance with applicable regulated and international standards.”
— J. Edward Ketz, an associate professor at Pennsylvania State University’s Smeal College of Business
In Australia, PwC has become embroiled in a political scandal after one of its partners shared confidential government information about upcoming tax reforms with his colleagues, who used it to drum up new business from companies eager to avoid a higher tax burden. The scandal, which was first revealed in January, recently resulted in the sale of PwC Australia’s consulting arm for less than $1 and the firing of eight of the firm’s partners. A PwC spokesperson said the company’s clients were not involved in any wrongdoing and no confidential information was used to enable clients to pay less tax.
According to the PCAOB report, audit firms attributed the growing number of flaws in their work to reliance on remote work due to COVID-19, higher-than-normal staff turnover and the subsequent use of less experienced staff. PCAOB chair Erica Williams rejected attempts to use the pandemic as an excuse, writing in a Wall Street Journal op-ed that three years on, “these challenges are no longer new and firms should have a strategy to meet them.” In a separate statement, Williams described the report’s findings as “absolutely unacceptable” and called on firms to “make changes to turn things around.”
The larger question, though, is whether the PCAOB is capable of putting enough pressure on audit firms to change how they do business. Francine McKenna, the author of the newsletter The Dig, which focuses on the auditing industry, argues that industry influence and political pressure continue to shackle its ability to act as an effective regulator.
“The PCAOB is a regulator that was never really given the authority and the heft to tell the audit firms, ‘You need to improve, you need to get it done, or there will be repercussions,’” McKenna told ICIJ. “The largest firms have the upper hand and are operating with impunity.”
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Topics: Auditors, Deforestation Inc, KPMG, Lux Leaks
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