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.