Top 10 Worst Responses From Your Outside Auditor

Want to shake things up at the next board meeting? Ask the audit committee when was the last time their public auditor handed over a Public Company Accounting Oversight Board (PCAOB) report card. If the answer is “never,” it may be time to put together some questions for the outside audit firm—or maybe look for a new auditor.

The five-member PCAOB is an outgrowth of 2002 Sarbanes-Oxley Act and the significant corporate governance reforms that followed the Enron and WorldCom accounting scandals. In both cases, outside auditors missed the company’s accounting issues. SOX, as it is widely called today, came with a number of accounting-related reforms meant to address issues seen in the Enron and WorldCom cases, including restrictions on accounting firms selling consulting services to audit clients, listing standard revisions for audit committees, CFO and CEO certification provisions, and the creation of the PCAOB. SOX requires auditors of U.S. public companies to be subject to PCAOB oversight. Jim Doty—a no-nonsense securities law guru and the former general counsel of the Securities and Exchange Commission—heads the PCAOB.

Each year the PCAOB reviews public company accounting firms by looking at a sampling of their audit reports. These are called PCAOB inspections, and they assess whether the audit firm complied with professional standards. The audits are typically selected on a risk-weighted basis and focus on difficult audit work or uncertain areas of financial statements.

In 2012, the PCAOB put out a report to help audit committees understand the results of the PCAOB’s inspection process. The report noted that “[s]ome audit committees have told the [PCAOB] that their audit firms provide helpful information . . . about their inspection, but others have said that their auditors decline to discuss their PCAOB inspection results . . . or downplay the results of any adverse findings that may be included in the report.”

The results of the PCAOB’s reviews should be balanced against their mission—i.e., there are two sides to every audit story. The PCAOB report notes that the inspection results can help the audit committee carry out its oversight role and assess how the outside auditor performed on specific audits. The PCAOB cannot make audit firms disclose confidential information about prior audits to their clients—but they do provide questions for the audit committees to pose to the firms to help audit committees see how the auditors fared.

In-house counsel should make sure their audit committee is diligent in asking outside auditors about the PCAOB process, because it’s part of the controls that Congress put in place to make sure that auditors were exercising their proper role as gatekeepers (as former U.S. District Judge and SEC Enforcement Chief Stanley Sporkin would say).

Unfortunately, the PCAOB does not identify any bad answers. But Corporate Counsel has you covered. We’ve come up with a top 10 list of responses that should make your company change auditors:

Top 10 Worst Responses From Your Audit Firm When Asking About Their Annual PCAOB Review

10. The engagement partner for those audits has left our company.

9. We believe the PCAOB is unconstitutional.

8. Our company is non-political, so we cannot discuss the PCAOB.

7. Our results are on appeal, and we’ll take this to the U.S. Supreme Court.

6. We use international auditing standards, so we do not follow the PCAOB.

5. We do not support public broadcasting.

4. You’ll have to talk to our lawyer about that.

3. Those results were lost during the government shutdown.

2. Those were in 2013; this year we have new procedures we’ll tell you about.

1. What? We have a bad connection. (Click)

This list is non-exhaustive, but if your outside auditor cannot shoot straight with you about the PCAOB, it’s time to make some changes. Have a happy and compliant New Year!