Is audit quality essentially a people problem?

Where there are problems with audit quality, it appears to be more of a problem with people than with institutional approaches to audit work.

That’s the view of at least one member of the Public Company Accounting Oversight Board, Jeanette Franzel, who says firms are making progress in addressing audit quality issues. In an article appearing in an accounting professional journal, Franzel says the board has noted a reduction in the number and severity of audit deficiencies that are serious enough to flag and describe in inspections reports.

“We’ve also seen improvements in tone at the top, coaching and support to audit teams, and training and monitoring of audit quality,” says Franzel. “These are real improvements to those quality control systems that can then—if they’re operating effectively—help keep the deficiency rates down and prevent deficiencies going forward.”

The challenge major firms have now is with consistency of execution across engagement teams, says Franzel. It’s “coming down to a people problem in a lot of cases.” Firms have deployed training tools and technical guidance, yet “some teams do a very good job and others don’t.” 

All the Big 4 and major national audit firms have struggled with inspection findings since about 2011, when James Doty became chair of the PCAOB and the board’s inspectors began turning out increasing numbers of deficiency findings. The firms consistently say they are taking measures to address those concerns raised in inspections, yet the level of findings have remained a persistent concern until more recently when numbers for most firms began to taper a bit.

Laura Phillips, who led a task force at Financial Executives International to explore tensions between companies and auditors over quality and execution issues, said last year she also suspected problems can be tied to engagement teams. The FEI effort, through its Committee on Corporate Reporting, looked for trends in audit tensions, particularly around the audit of management review controls, but found none in terms of which firms were involved, nor what types or sizes of companies were involved.

“We did find that if companies were having problems or seeing this misalignment tension around the evaluation of management review controls, they tended to report having issues in other areas as well,” Phillips said. “Those without tension around management review controls tended to not have other issues either. That leads me to believe that this may be something that is specific to audit engagement teams.”

Franzel says firms are learning they need to manage not only consistency across engagement teams, but also audit clients. A good project management approach seems to be a key to good audit quality, she says, and that includes managing the client.

“For instance, if the client is struggling with a difficult estimate or question, or a difficult accounting area, and therefore getting the whole package to the auditor later than the auditor wanted, the auditor takes on all kinds of risk by not having enough time to do a proper audit,” Franzel wrote.

That raises interesting questions about how auditors will cope with the first year of audit work under the massive new revenue recognition standard that takes effect with the start of the 2018 reporting year. Experts and regulators have said companies generally have not devoted enough time and resources to adopting the new standard, raising concerns about how robust compliance will be when the standard goes into effect.