LACK OF PROFESSIONAL SCEPTICISM IN AUDITS: THE ROLE OF THE AUDIT COMMITTEE
Although most audits do comply with professional standards, including those set by the PCAOB, and most financial statements are not afflicted by financial reporting fraud, there are sufficient instances of audit failures and revelations of previously-unreported frauds to draw ongoing and sometimes pointed criticisms from clients, the investing public and regulators, as well as legal actions that cost accounting firms tens of millions of dollars each year. Studies conducted periodically by academics and by organisations such as AICPA and PCAOB, many of which are based on data flowing from SEC enforcement actions, continue to find significant frequencies of substandard audits. Among the more common deficiencies observed are the failure to obtain and consider sufficient appropriate audit evidence to support the assertions made in the financial statements, the failure to exercise due care in the conduct of the audit and lack of requisite levels of professional scepticism. Of these ‘top three’ most commonly detected failings, the deficit of professional scepticism is most directly pertinent to the audit committee’s role and obligations. Simply put, a properly functioning audit committee can help ensure that audits do not suffer from the dearth of scepticism that directly contributes to failures to detect financial reporting and other frauds.
The concept of scepticism has long been firmly enshrined in US private company auditing standards (GAAS), PCAOB auditing standards and International Standards on Auditing (ISA). Thus, although sometimes expressed in varying language, the need for scepticism is a universal feature of audit practice. Notwithstanding this, numerous studies have attested to a common deficiency of scepticism in the audit environment, and to the fact that this deplorable situation is, if anything, becoming more acute. Several hypotheses have been offered to explain this.
Jul-Sep 2015 Issue
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