The world’s largest accounting firms are fighting to block new rules in the United States that would force them to take more responsibility for rooting out fraud at the companies they audit.
With days to go before the end of a consultation period on the proposal from the Public Company Accounting Oversight Board (PCAOB) they are trying to sign up their clients to oppose the plan, saying that audit fees will soar if the changes go through.
The PCAOB’s new rules would widen auditors’ responsibility to scrutinise whether a company is complying with laws and regulations, and to communicate more of their concerns to a company’s board of directors. The proposal comes amid frustration in Washington that audit firms are not living up to their duty to protect investors from wrongdoing by their clients.
The Center for Audit Quality (CAQ), a group representing audit firms led by the Big Four of Deloitte, PwC, EY and KPMG, is asking corporate directors to sign on to a letter attacking the plan.
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“Auditors are not lawyers and as a result the proposed amendments would expand the auditor’s role to include knowledge and expertise outside their core competencies,” according to the letter. “The proposal will substantially increase the cost of the audit without a commensurate benefit.”
Existing standards require auditors to detect and report only wrongdoing that directly affects the accuracy of financial statements, while the new rules would mean they have to check for behaviour that could have an indirect effect, for example by putting a company at risk of large fines.
The proposed rules have proven controversial even within the PCAOB, where they won support from only three of the five board members. Two members who have previously worked for the Big Four both opposed the changes; one called them a “breathtaking expansion of the auditors’ responsibilities”.
Lynn Turner, a former chief accountant of the Securities and Exchange Commission who is now an adviser to the PCAOB, said existing standards provided too much “wriggle room” for auditors to avoid confrontation with management when they see potentially illegal behaviour.
“The current standard doesn’t serve the capital markets in any way, shape, fashion or form,” he said.
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“I’ve told the people at the PCAOB that this is a war and the war has begun. It’ll test those three board members and we will see if they’ve got a spine or not.”
Business lobby groups and the accounting firms themselves are widely expected to put in comment letters opposing the new rules before a deadline on August 7th. The CAQ said it was not opposed to the reform of existing requirements, but the current proposal goes too far.
Sandra Hanna, an attorney at Miller & Chevalier who has represented audit firms, said the proposal was an attempt to turn auditors into “fraud examiners” and impose on them a “forensic” standard where even the smallest concern would have to be investigated. “I worry for auditors that they are never going to be able to live up to the standard,” she said.
Tony Thompson, one of the three PCAOB board members who voted in favour of the proposal, told the Financial Times that he was open to feedback, especially regarding smaller audit firms that may not have the resources of the Big Four.
But he defended the principle behind the proposal. “We are not asking auditors to become lawyers, nor are we asking them to expend lots of resources to go out and get specialists,” he said. “There are legal issues that you may come across in an audit and be required to have an opinion on. If you see things of concern, don’t just unsee them.” – Copyright The Financial Times Limited 2023
