audit firms

Sarbox and financial statement fraud

Jim Kim — Thu, 24 Jul 2008 10:57:07 -0400

Sarbanes-Oxley was intended primarily to combat financial fraud. But with Sarbox, we've all gotten used to some unintended consequences. In that vein, some recent findings from the Association of Certified Fraud Examiners has raised brows. The study found that companies with Sarbanes-Oxley mandated controls suffered greater losses from financial statement fraud than those without such controls, CFO.com reports. The report looked at various controls: management certification of financial statements, the use of external audit firms, the use of independent audit committees, management reviews of internal controls and the presence of anti-fraud hotlines. Only hotlines were correlated with a reduction in the median loss stemming from fraud. One explanation is that if an executive wants to really commit a crime, he usually can outwit the system. The good news is that Sarbox had a big impact on reducing other types of crime, like asset misappropriation and corruption.

For more:
- here's the CFO.com article

Related Article:
E*Trade offers to reimburse losses to fraud

XBRL standards body stokes worry

Jim Kim — Thu, 17 Jul 2008 08:40:17 -0400

Most people think XBRL is a pretty good idea. But not everyone thinks the tag standards should be set by XBRL US, a non-profit group comprising top accounting firms KPMG, PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and Grant Thornton. One fear, as noted by Financial Week, is that the standards organization will someday start selling more consulting services, which could create the impression of a conflict of interest. XBRL US says it will limit the services it offers and will not compete with its members. Another fear is that the powerhouse audit firms will be able to unduly affect the evolution of the data tags via XBRL US in ways that will benefit their consulting businesses. I do not think any of this is a showstopper. But XBRL US would be wise to take proactive steps to deal with any misunderstandings now. In May, the SEC proposed that large companies begin complying as early as 2009.

For more:
- here's the Financial Week article

Who will audit the auditors?

Jim Kim — Mon, 16 Jun 2008 07:42:40 -0400

The Public Company Accounting Oversight Board (PCAOB) has adopted a new rule--one mandated by Sarbanes-Oxley Section 102 (d)--that will require audit firms to file an annual report providing basic information with a description of audit reports from the past 12 months, disciplinary information and data about client fees. As noted by CFO.com, here's the rub: they, themselves, will not be audited. The rule must first be approved by the Securities and Exchange Commission. The board must strike a fine line between living up to the principles set forth in Sarbanes-Oxley and imposing an overly onerous reporting burden. Still, you have to wonder how it will ensure the integrity of 1,800 reports. I assume that random checks and PCAOB reviews (if not actual audits) will take place. We may get more information as guidance is made available.

For more:
- here's the article

Auditors can't lose if they jack fees

Tue, 06 May 2008 06:59:59 -0400

A new study from Financial Executives International has found a steep drop in the costs of Sarbanes-Oxley Section 404 compliance. The average cost was $1.7 million during fiscal 2007. It's hard to compare precisely, but the reported figure in 2006 was nearly $3 million. It's fair to say that companies are getting sharper about compliance. Of course, AS5 helped tremendously. Companies are relying on fewer controls, and generally taking a risk-based approach. Respondents (185 companies) reported needing an average of 11,100 person-hours internally to comply, an 8.6 percent drop. External hours needed dropped nearly 14 percent. Offsetting the savings? A 5 percent hike in hourly auditor fees. The bottom line is that total audit fees rose nearly 2 percent.

For more:
- here's the release

KPMG liable for mortgage lender implosion

Tue, 01 Apr 2008 07:59:59 -0400

Once again, we can ask: Wasn't Sarbanes-Oxley supposed to prevent this? Mortgage fraud has been front-page news. A 581-page report by a bankruptcy court examiner has found that New Century--a subprime leader--did a lot of shady stuff. The bombshell is that the report found that auditor KPMG enabled these practices, and thus should be held accountable. The New York Times raises the spectre of Enron and Arthur Andersen. KPMG denies the allegations. There is a big inside story here. Apparently, there were some emails from the KPMG partner suggesting the client was really playing hardball. But at some point, the auditor has to stand up. We'll likely hear more soon.

For more:
- here's the New York Times article
- more on auditors caving in

Related Articles:
Analysis slams Bear Stearns' subprime activity. Article
Some hedge funds hit by subprime meltdown. Article

Audit committees wrestle with new powers

Tue, 05 Feb 2008 06:59:59 -0500

Just how activist should an audit committee be? That's a big question at many companies, even five years after Sarbanes Oxley was passed. At some firms, according to cfo.com, management still seems a bit wary of ceding too much to the committee, especially when it comes to hiring and firing audit firms. Some executives are used to managing the audit firm, and don't want any interference. But these attitudes seem to have given way to a new audit committee mentality that takes the bull by the horns and really owns the audit process. Of course, a committee could go too far. There will need to be some balance among the board, the CFO and the audit firm. It would be worth spending some time looking at this three-way relationship and make sure all parties have similar expectations and goals.

For more:
- here's the article

Bar rises for internal auditors

Tue, 06 Nov 2007 06:59:59 -0500

In many ways, internal auditors fared well in the early years of Sarbanes Oxley. According to cfo.com, their stature has risen as they come into more contact with audit committee members and senior executives. But now, all that will change. The fact that they check controls will be less valued and taken much more for granted. Two Big Four audit firms say that top managers will expect more from internal auditors in the areas of strategy and operations. So internal auditors may want to start thinking more broadly at various kinds of risk, anticipating the needs of executives and audit committee members. Thinking about risk in the context of major software deployments would be a good idea. But don't even think about letting up on core controls.

For more:
- here's the cfo.com article

More on the evolving audit committee

Tue, 30 Oct 2007 07:59:59 -0400

A new study by professors at Boston College and Northeastern University sheds light on the evolving audit committee. At many companies, the audit committee has indeed become a more forceful player. But while Section 301 gives audit committees responsibility for hiring audit firms, many still defer to management. In fact, more CEOs seem to be taking a more active role in retaining audit firms. Also, audit committees still tend to be passive about resolving disputes between management and its audit firm. Often, settlements and agreements are post-factor brought to the committee for sign-off. So audit committees still have a ways to go before they fulfill the vision laid out by Sarbanes Oxley. But you have to think that management prefers committees this way--empowered but not too empowered.

For more:
- here's a summary of the study by cfo.com

Related articles:
- To whom should your audit company report?
- Audit committees evolve, more focus on IT
- Your audit committee might need a new focus, a risk committee

The litmus test for AS5's value

Tue, 30 Oct 2007 07:59:59 -0400

Most of the talk about AS5 has noted the many hoped-for benefits, a streamlined, less confused approach. But there is an obvious litmus test: audit fees. One would expect a fairly dramatic decline. In a speech in Japan, SEC commissioner Paul Atkins put it bluntly: "If auditing fees do not come down as a result of these changes, then something is terribly wrong with the interpretation of Audit Standard 5 and perhaps with the competitive landscape in the auditing profession itself." So you have to ask, is there a way that costs will not come down? At individual companies, there could be a spike in complexity due to growth or diversification or something else. And you would have to think that audit firms are not keen to be giving up revenue. It may be that they find ways to mute any cost cuts. Still, we should see lower audit fees generally. Stay tuned.

For more on Atkins:
- here's a brief on WebCPA.com

Related articles:
- Will AS5 really make compliance easier?
- Can AS5 really trim audit bills?
- As expected AS5 becomes law, what to expect

ALSO NOTED: BPM one of Gartner's top 10 strategic technologies; Advice: Sarbox costs here to stay;

Tue, 23 Oct 2007 06:59:58 -0400

> PCAOB lists 11 things small audit firms need to look out for. Article
> Advice: Sarbox costs here to stay. Article
> Huron Consulting faring well? Article
> Wolters Kluwer to acquire TeamMate from PwC. Article
> Grant Thorton revenue up 17 percent. Article
> Corporate crime still rampant? Article
> Strong correlation: Governance and reputation. Article
> Wal-Mart whistle blower lands--at Wal-Mart. Article
> SEC approves options auction mart; aid to valuations. Article

IT Watch:
> XBRL inches closer to reality. Article
> BPM one of Gartner's top 10 strategic technologies. Article

And finally ... The origins of "bean counting." Article