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Unit 14: Professional Ethics and Current Issues

14.3.2 Auditing Profession Notes

Auditing plays a unique role in our economy. By law, all companies whose securities are
available to the general public through U.S. exchanges are required to have their financial
statements audited by an independent registered public accounting firm. The goal has historically
been to provide confidence to investors and bring standardisation and discipline to corporate
accounting, thereby increasing the liquidity and economic potential of U.S. capital markets.
While there are legitimate debates about the meaning of financial statement audits, there are
certain facts about the auditing profession that are hard to deny:

 Not only is auditing required by law, but recent regulations and legislation greatly
increased its role in public companies. The political determination has been made that
auditing is central to public confidence in our capital markets.
 The pressure for auditors to “do more” when conducting audits means that the auditor-
client relationship is becoming more involved and continuous, with much more frequent
interactions, rather than simply holding periodic discussions geared around financial
statement reporting cycles.

 The auditing profession faces a number of significant legal challenges. It is subject to new
regulation under the auspices of the Public Company Accounting Oversight Board
(PCAOB). More important, the profession finds itself the target of a difficult litigation and
regulatory enforcement environment, where business losses by a client can result in
lawsuits, and a single indictment — even without a conviction — can result in the destruction
of thousands of jobs.

 Because of the Sarbanes-Oxley Act and other requirements, auditing expenses have increased
tremendously. At the same time, many clients believe that they are receiving less overall
advice and support from their auditors. Audit firms feel that they are caught in a no-win
situation between the demands of regulators, law enforcement, the plaintiffs’ bar, and
their clients.

 The process of developing accounting principles remains in flux, even as business
transactions become ever more complex. In addition to the respective roles of FASB, the
PCAOB, and the SEC, there are many emerging issues related to international
harmonisation and the IASB.

 There remain significant misunderstandings about the meaning and nature of accrual
accounting systems and the level of precision inherent in such systems. Changes of 1 or 2
cents per share in a company’s earnings can have a great market impact—and create
significant litigation risk—even if such changes indicate nothing about the health of a
company’s underlying business.
 The profession—through voluntary mergers as well as through the elimination of
Andersen—is severely contracted, with only four major firms serving a large majority of
the listed and actively traded public companies in the United States. While four appears to
be a sustainable number, any further contraction in this industry would present a major
challenge to the viability of the profession, with potential for a negative effect on public
confidence in our markets.

Did u know? William McDonough, former chair of the PCAOB, said, “None of us
[regulators] has a clue what to do if one of the Big Four failed.” He also said that if one of
the Big Four were to collapse, the best accountants could choose to quit the profession.

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