Can I Have Your Autograph: Signing The Audit Report

By • Oct 4th, 2010 • Category: Food for Thought

This was originally published in GoingConcern.com on September 30, 2009.

The PCAOB approved Auditing Standard No. 7, Engagement Quality Review on July 28, 2009. They also issued a Concept Release on requiring the engagement partner to sign the audit report. The comment period closed September 11th and boy oh boy were there a lot of comments. The firms came out en masse to denounce the proposal. I described their strategy to a friend:

“Representatives from each firm got together at CAQ HQ over dinner. (Well, maybe a conference call since everyone is tightening belt these days…) They listed all the possible objections, split them up, one each, and agreed to write the comment letters.”

Sounds a little like a much nerdier version of the Apalachin Meeting, doesn’t it?

Jim Hamilton’s World of Securities Regulation has a great summary of their arguments, followed by a little input from yours truly:
1. GT: “Requiring the engagement partner sign off could disrupt the intricate corporate governance structure set up by Sarbanes-Oxley…shareholders may…contact the engagement partner directly…” (fm: God forbid shareholders should upset the delicate balance and think they have the right to contact the audit partner directly.)

2. McGladrey & Pullen: “The audit committee is responsible for engaging the audit firm. If [they have] concerns about the independence or competency of the engagement partner, they would address those concerns with the firm…These types of decisions are appropriately left with the audit committee and not with the individual shareholders. (fm: So the audit firms, whose clients are the shareholders, would prefer to work with their proxy, the audit committee. Hmmmm.)

3. EY: “Requiring the engagement partner to sign the audit report would not provide appreciable benefit in audit quality…sufficient mechanisms are already in place to heighten the engagement partner’s sense of personal accountability…supported by a firm’s system of quality control and PCAOB oversight.” (fm: EY should know. In Akai, EY partner was so accountable he falsified workpapers to evade responsibility. His arrest by HK authorities does make the point. But shouldn’t shareholders have known his name sooner?)

4. PwC parrots EY: “It’s an unsupported assumption that engagement partners, as a class, need to have an increased sense of accountability to achieve improved audit quality…signing the audit report in the firm’s name reflects the reality that the quality of an audit depends on the competence of many people at the firm, as well as the firm’s quality controls…SEC can enforce the securities laws against auditors…” (fm: So will PwC take responsibility for the lack of quality in the Satyam audits, since their two partners are but part of a big “competent firm,” not lone wolves? To be sure, the SEC is already on the case!)

5. KPMG: “The identity of the engagement partner is fully transparent to company management and audit committee members… Although there is no requirement to do so, the engagement partner usually attends the annual shareholders’ meeting, and typically is available to respond to appropriate questions.” (fm: Good. So publish the names, photos, email address, contact phone numbers and CVs of all audit partners in charge of accounts where your clients, the shareholders, are suing you. Even better, publish assignments for all clients. That would certainly spice up the shareholders’ meetings.)

6. Deloitte: “…beneficial effects on accountability and transparency are speculative…. subject to…multiple sources of external oversight, such as audit committees, regulators, and the threat of civil liability.” (fm: Yes, but hiding identity of responsible partner makes it easier for you to keep paying them and reinstating them after sanctioning, suspension or other actions by those “multiple sources of oversight.”)

7. BDO: The engagement partner’s responsibilities…are set out extensively in professional standards…effectiveness …routinely monitored as part of a firm’s system of quality control, in addition to periodic inspections…” (fm: Yeah, just like BDO International monitored quality for BDO Seidman and the partner in charge of their client Banco Espiritu Santo. So, why did you fight accountability?)

The audit firms are still, as in the issue of global networks and accountability/liability for each member firm and its partners, talking out of both sides of their mouths.

Just look another recent case, the settlement of the American Home Mortgage litigation by Deloitte to see that the question of, “Who is responsible?” is not one the firms like to answer. Who was the Deloitte partner in charge of the American Home Mortgage engagement during the period litigated? Do you know?
I do.
Tim Forrester was still in their phone book and getting paid by Deloitte through the end of 2008.

Yours truly,
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10 Responses »

  1. I love that you signed this one! Way to be accountable :-)

  2. [...] is that the UK will now require a real person to sign the audit opinion letter, but that’s a major sticking point in the US, as we never know the names behind the work until there’s litigation. Liability fears drive [...]

  3. Hi,

    Very nicely written!!.

    I have worked for a big 4 accounting firm PwC in India for almost 10 years and have left the company 2 yr ago. it is actually right.. the concept of signing an audit report has been a can i have your autograph please?

    Where partners signs audit report in the parking, in the golf course etc.etc. there are numerable instances where an audit report has been signed without even looking at it. even the pages needs to be flagged where a partner needs to put his/her signature, they dont even bother to ateast flip the other pages.

    a single partner signs over 90-100 reports. and to field staff ..it is like given 5 days to complete an audit…. ohh partner is on leave on 5th day okay…. no problem…. now team needs to complete everything in 4 days now… this is level of pressure.

  4. THIS IS A GOOD BYE MAIL FROM ONE OF A RESIGNING ASSOCIATE FROM PWC INDIA

    Dear All,

    I fondly remember the day when I was given the opportunity to pursue my Articleship at Price Waterhouse. The excitement that I had that day cannot match the excitement that I have today as I leave this organisation.

    Until one year back, the only reason for me to not to continue with Price Waterhouse would be “Work Life Imbalance”. But now, I’ve a stronger reason to not to continue and that is
    “Job Dissatisfaction”. I would have liked to be more elaborate about the turn of events that led me to conclude as I did, but then I had read sometime ago a banner outside a restaurant that said “If you like our food tell others, if you dont, tell us”. Besides I firmly believe that criticism never helps. Infact, it only narrows the already thin line of communication. It is constructive criticism that helps. But then, I am not sure if I can be constructive through this medium of communication. Still, I would still like to put down some observations that I’ve come across over the last 3 years of articleship:
    We dont perform audit to meet our audit objectives…..we perform audit to meet deadlines.
    The focus is not on solving the problem…the focus is more on documenting the problem so that later on someone can be blamed. Refer flowchart attached below:

    Performance is measured by the number of hours you spend on the client and not the actual work performed and the quality of work performed.
    Promotions are based on your seniority and not your ability.

    The way we have managed the audits in the current year, there is no doubt about the fact that they’ve been harassed; harassed by our never ending staff crunch, harassed by our ever changing audit approach, harassed by our poor planning. Just because the global auditors are PwC and hence the client will be hesistant to change the auditors does not mean that we take our clients for granted.

    Just like the clients deserve better service from us, similarly, we deserve better treatment from our clients. It is disappointing to see the way we oblidge to the clients demands of not sharing certain important or perhaps confidential data with us or at times failing to provide us with data. A common example being Payroll registers. Infact, in one of the clients which involved multiple locations, we performed audit despite the client failing to provide us with a location wise TB. No stretch of imagination in this world can answer me the fact as to how the respective teams at the locations ensured completeness!

    We are setting a wrong precedence. For every time we oblidge to do away with a particular data, the client gets an example to deny the request for the data sought for in the subsequent years. “Pichle saal to nahi maanga tha….is saal kyun chahiye”.

    We tell our clients to provide for contingency but do we do the same while planning especially while planning for resources? Its been three years and sorry to say, but there has been no change in my Work Life Balance. And this imbalance is not helping the firm either. Because, what is happening on the field is that, the Assisstant Manager is forced to do the work of an Associate. Add to that, the politics that he has to handle in order to retain resources for his assignment. Between all this, how can one expect an A.M to review the work and see if the team members are going in the right direction. As we near the deadline, its a complete chaos!! And then comes into play the indegenous device ‘Jugaad’.

    We all have been slogging day in day out all these years and despite all that when an assignment ends this way, it is demotivating….very demotivating!

    Once, while discussing with my father about the hardships that I have faced while pursuing articleship at Pw and at the same time preparing for CA Final, he replied “Son, you have not faced the hardships that we have faced in our lives”. It was very difficult to convince my father that the problem is not with the hardship but whether there is a need to undergo this hardship. If today, I have to go through the same hardships that my father went through what will be his achievement in life?

    So I request the Articles to not forget the day when they apply for leaves and are not granted to there satisfaction. Because, that day will return, and this time they will be the approver and the Article under them will be applying for examination leave. That day, dont say that “We never got leaves and so will you wont…”; BECAUSE IF YOU DO…you’ll get the answer as to why YOU weren’t granted adequate leaves”.

    I would like to thank the entire Group for their co-operation, support and coaching.

    I would specifically like to thank Amar for being such a beautiful human being. There is only one reason to the fact that I’ve survived three years in Pw and at the same time cleared CA Final in first attempt and that is because of the co-operation shown by Amar. Amar, I’ve learnt a lot, I’ve learnt a lot by just observing you. I would specifically like to state down some of your virtues that I rate highly;
    Punctuality – (I hope the managers are reading this) Sadly, the problem with punctuality is that there is no one there to appreciate.
    Communication – The way you make it a point to revert back to every mail, every missed call is commendable.
    Approachable – This is one quality that I believe distinguishes you from every other senior. You ‘listen’ and that is one of your biggest attributes.

    As I step from the shoes of an employee to the shoes of an employer, I will get answers to most of the questions I’ve raised above. And am sure, that I’ll come across some answers that I would have not accepted as an employee today. But still, this fear of learning my lesson the hard way does not stop me from trying to bring a change that I want to see. Yes, perfection can never be attained, it can only be pursued. No matter what level one reaches, there is and always be scope for improvement. But what disappoints me is the rate at which we are trying to bring improvement.

    I would sincerely like to thank all the partners for giving me this opportunity to pursue my Articleship at Price Waterhouse. I realise the fact that this was one of the best place to pursue my articleship of the options given. Without a doubt, the last three years have been the most enriching one. It is just that, I am disappointed, because deep within I know that the experience could’ve been better. I hope that my mail will not be interpreted as one from a disgruntled employee who is trying to get even. Before writing this mail, I was advised by more or less everyone to avoid and go on good terms. But then, I felt, that if there’s one thing that I can return to this firm in return of the opportunity given to me, it is an honest feedback.

    I remember, when Mr. Punjabi was interviewing me, he asked me a question “What will you do if you come across a senior who is doing an activity that is not in the interest of the firm?”. Sir, I think I’ve answered the question today. I don’t know if the answer is right or wrong but I shall soon know.

    As I bid final good bye, I leave you with some of the famous words of the eminent personalities within our group. Whose words are these? I leave the guessing work to you…

    – “arreee….tum problem leke mat aao…solution leke aao…because I just want to CLOSSSSSSEEEEEEE”
    – “you know…acha ok…but you know….what I was suggesting is ki….what I would like to suggest is ki”
    – “hmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm???………arrewait baba….ruko…I’ll come back to you”
    – “means…I tohalways do that….in the sense ki…”
    – “Trust this clarifies”
    and lastly,
    -“Tum sab hum ko goli deta hai”

  5. [...] no way for investors to find out who is running the audit at companies they invest in because audit partners do not sign the audit report in their own names. That information is not made public until sues [...]

  6. [...] Audit reports in the United States are signed in the firm name, not individual partners as a sign of solidarity, unity, and global brand strength. It’s professionally embarrassing that Ernst & Young would use this defense to, in effect, “have their cake and eat it, too.” StarRemovePickunPick [...]

  7. [...] comment period closed September 11, 2009 and boy oh boy were there a lot of comments. The audit firms arrived en masse to denounce the proposal. Jim Hamilton’s World of Securities Regulation had a great summary of their [...]

  8. [...] comment period closed September 11, 2009 and boy oh boy were there a lot of comments. The audit firms arrived en masse to denounce the proposal. Jim Hamilton’s World of Securities Regulation had a great summary of their arguments: Ernst & [...]

  9. [...] inflammatory piece supported only by two anonymous sources,  that the Chinese government called an Apalachin Meeting of the accounting leaders in China, stirring up fears of firing squads for disclosing state [...]

  10. [...] an inflammatory square upheld usually by dual unknown sources, that a Chinese supervision called an Apalachin Meeting of a accounting leaders in China, stirring adult fears of banishment squads for disclosing state [...]

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