Audits fail not so often because the firm’s process was flawed, but because individual auditors or engagement teams fail to adhere to firm methodologies, according to Jay Hanson, a member of the Public Company Accounting Oversight Board.

At a national accounting conference on regulatory issues, Hanson said he sees much more context around audit failures than the board is able to relate in its inspection reports, and he’s pushing for more PCAOB analysis to identify the root causes of audit failures. Board members have greater visibility into what goes wrong in audits, he said, and he observes it’s more often a problem with auditors executing on firm methodologies. “I can ask: did the firm miss it overall, so any diligent auditor following their programs would have missed it? Or was it an on-the-ground execution problem?” Hanson said. “The vast, vast majority of findings are an execution problem. The firm’s guidance is usually just fine.”

Hanson said he wishes the PCAOB’s inspection reporting process enabled the board to share which audits “by every measure were a train wreck” versus those that represented “a near miss” and those marred by one-off deficiencies in audit procedures. “We’re pretty good at putting out data,” he said. “I wish we could do a better job of putting out the analysis of what the data means.”

With another round of inspection results expected next year that will show no meaningful improvement in audit inspection findings, Hanson says he commonly hears questions about the board’s regulatory approach. “I am often asked whether we have struck the right balance to drive positive changes while avoiding the imposition of unreasonable burdens,” he said. “That is a question that all of us at the board should regularly ask ourselves.” Chairman James Doty and Hanson said the board is preparing to issue some kind of summary report to give some broad visibility into 2014 inspection results without the year or more wait for individual reports to be finalized.

To effectively drive improvement in audits, the PCAOB needs to not only call out poor work, but identify indicators of good quality audit work as well, Hanson said. The board sees cases where inspectors dig into complex audits with numerous audit risks but find no deficiencies to criticize. “I wish we could find a way to bottle our observations of those and share it,” he said. The PCAOB has been working on a project to identify audit quality indicators and is expecting in early 2015 to publish a concept release that would summarize its findings.

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