Now that Congress has all but blocked regulators from setting term limits on audit firms, the Public Company Accounting Oversight Board is looking for other avenues to inspire auditors to get more skeptical and objective.
At the annual conference of the American Accounting Association, PCAOB member Jeanette Franzel appealed to the academic community help regulators figure out a way to apply auditing standards that require auditors to bring a skeptical mindset to their work. “Additional efforts are needed to better understand how the framework of professional skepticism applies across varying audit situations,” Franzel says in a statement summarizing her planned remarks as part of a panel discussion. “This may enable practitioners to find ways to monitor the application of professional skepticism and recognize and respond to its threats throughout the audit process.”
Inspection results show too often that the profession needs to make “substantial progress” toward more consistently apply skepticism to their audit work, Franzel says. However, regulators appear stumped on what exactly prevents auditors from thinking and behaving more skeptically. “Even when it is clear that a failure of professional skepticism has occurred, the underlying root causes and reasons for the failure are often multifaceted and therefore hard to pinpoint,” she says. “Academics and members of the profession have struggled to find ways to detect and assess professional skepticism throughout the conduct of an audit.”
For months, PCAOB Chairman James Doty postulated that auditors failed to exercise adequate skepticism because they are too focused on nurturing relationships with the companies they audit as their fee-paying clients. He sought support for a system of term limits as a way to break long-standing ties between audit firms and the companies whose financial statements they audit. After floating the idea in a concept release and getting heavy negative feedback, however, Congress effectively killed the discussion with an amendment to Sarbanes-Oxley that would bar the PCAOB from setting term limits on audit firms. The measure has passed the House of Representatives and is awaiting action in the Senate.
Franzel says research shows a need to study and better understand what pressures exist that prevent auditors from applying more skepticism throughout the audit process. “A better understanding of these threats and pressures can assist in identifying and implementing appropriate safeguards to mitigate against them to improve the reliability and quality of audits,” she says.