Every business, its strategies and its processes are unique, he noted, and reminding outside auditors of the uniqueness of each audit finding has been shown to help maintain skepticism. He maintained that most of the larger financial reporting problems could have been identified earlier if the auditor had better known the client company’s business, its strategies, operations, and the successes and challenges of its competitors. He envisions that the audit committee would evaluate the auditor’s knowledge of the business, its strategies, its risks, pressures on managers, and audit risks through discussion with the audit partner and audit manager. Audit committee members are first and foremost board members, he emphasized, and thus have a working knowledge of business issues and can decipher whether the audit is properly adjusted to fit the organization’s strategies, its risk and related accounting and auditing issues.
The audit committees should also review the overall audit plan built on the auditor’s risk assessment. The audit committee should be proactive in discussing accounting issues with both the financial management of the enterprise and with the audit team. The outside auditor should have a documented, systematic process in reviewing such transactions, including understanding the economics of the proposed transaction, identifying the relevant facts, and developing alternatives and recommending a preferred approach, along with the rationale as to why such an approach is best. In this approach, the former COSO official would like to see a best solution and the rationale for such by both management and the audit team, not just an acceptable approach.
He supports a recommendation by the Commission On Auditors’ Responsibilities, chaired by former SEC Chairman Manuel Cohen, that the auditors look at the cumulative effect of transactions to determine if they adequately portray the economic substance of what is taking place in the company and communicate that assessment to the audit committee. Requiring discussion of the cumulative effect of accounting choices on the overall presentation of the financial statements would be a positive contributor to the dialogue with the audit committee, he said, and thus benefit investors.
Finally, he believes that the audit committee should be supportive of the need for the audit partner to consult with the national office on important issues. At the same time, the chair of the audit committee, the local audit partner, and management need to be involved in the conversations.