Targeting the auditors, or: too short on confidence!

Here’s the main text of a recent news release issued by the Ontario Securities Commission:

  • The Ontario Securities Commission (OSC) announced today it will be making targeted inquiries to certain public accounting firms that conduct audits of Ontario reporting issuers.
  • As a result of ethical violations identified by regulators in Canada and other jurisdictions, the OSC will request specific information about audit firms’ internal policies and procedures. The scope of this review does not presently include individual audits of reporting issuer financial statements previously filed with the OSC.
  • Among other things, the OSC will seek information about firm policies related to compliance with relevant ethical requirements and the operation of internal whistleblower programs. The OSC will also request details about firm procedures with respect to the dating of audit work performed and the implementation of internal training courses.
  • As gatekeepers of Ontario’s capital markets, auditors play a critical role in investor protection by ensuring that audited financial statements can be reasonably relied upon when making investment decisions. Any actual or perceived issues related to the integrity of financial reporting can undermine investor confidence.

The news release received what was presumably the intended press coverage, with the Globe and Mail noting that while the release didn’t name any names, “Canadian or U.S. affiliates of three of the Big Four global firms – Deloitte LLP, PricewaterhouseCoopers LLP and Ernst & Young LLP – have entered agreements in the past 12 months with regulators to settle charges related to ethical lapses. The U.S. arm of the fourth, KPMG LLP, struck a settlement with the U.S. Securities and Exchange Commission in 2019.” The underlying lapses include cheating on professional exams and internal training courses and, in Deloitte’s case, employees who falsified “the date and time stamps on work papers for 29 different audits from 2016 to 2018 by changing the settings on their computers to a different date.”

This blog doesn’t spend much time worrying about the audit profession, but it’s worthwhile to touch down on it once in a while. The piece of the news release I’d probably take primary issue with would be its most innocuous element, the framing comment that “auditors play a critical role in investor protection by ensuring that audited financial statements can be reasonably relied upon when making investment decisions.” That is, given the vast infrastructure that underlies the preparation of financial statements (systems, controls, experienced staff, the standards and everything that goes with them, the governance structure, the looming presence of regulators…), users shouldn’t inherently need the input of yet another resource-draining party to reach that “reasonable reliance” standard. And when one reflects on the well-established general awfulness of auditing as a human discipline, especially at its lower echelons – the ego-crushing, time-pressured, psychically under-rewarding grind of it all – it’s hardly plausible to think the machine won’t regularly at least sputter (not to downplay shady behaviour, but given the almost limitless possibilities for audit-related lapses, maybe one should view the ones identified as above as cause for relative relief rather than horror?)

We looked a few years ago at the eternal issue of the “expectation gap” between “what the profession thinks an audit is—and does—and what everyone else thinks.” At that time, the thinking was that changes to the auditor’s report might somewhat help with that, but my own sense was that people don’t read an audit report in its previous form, they wouldn’t be much more likely to read a longer one (at least not very carefully). This is how I concluded that previous article:

  • (An article in Pivot magazine) refers to the expectation gap as the profession’s “existential problem,” as if implying that its very continuation may depend on solving it. But the problem has been with us for decades (the term was used at least as far back as 1974) and while the audit profession has plenty of challenges, it remains an enormously lucrative one for those who rise within it. One imagines the profession would have little enthusiasm for taking one obvious step to address the gap – that is, by voluntarily assuming greater liability for errors in issued financial information (one participant (in the article) does slightly open that door, saying “we need to go there, because auditors need to extend the usefulness of an audit,” but the point isn’t pursued). So the hand-wringing isn’t altogether convincing (of course, it’s not unusual for the powerful to feel misunderstood and besieged …)
  • Naturally, I’m not advocating complacency or surrender. But like all other participants in capital markets, the audit profession would be best advised to stop chasing after unattainable vanishing points. The truest words spoken in the article may be these: “The thinking part of being an auditor is important to our future. Our young people entering the profession want challenging things to do.” That is: better to have an audit profession that keeps getting better and more relevant, even with an expectation gap that keeps widening, than one in which actuality and expectation eventually converge into tired stagnancy.

Maybe for some of the firms’ beaten-down employees, there’s more of a rush to be had from figuring out ways to cut corners on training sessions and to backdate tardily completed working papers and suchlike than from doing everything by the very long and dull rule book. If that’s even remotely so, and if the effect of current regulatory actions is to make the rule book even longer and duller, then the real problems with audit will likely just continue to grow…

The opinions expressed are solely those of the author

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s