While audit regulators begin kicking around ideas for some new audit report requirements, investors are calling on audit regulators to also extract more information from audit firms about how they operate their businesses.

When the Public Company Accounting Oversight Board met with its Investor Advisory Group recently, it got an earful from an IAG working group on how the audit firms are something of a secret society. “Over the last few decades, we've found transparency and governance are key to good corporate results, good corporate performance,” said IAG member Lynn Turner, managing director at consulting firm LECG and former chief accountant for the Securities and Exchange Commission. “Yet when you look at these firms, none of them practice what they preach.”

Turner also served on the Treasury Advisory Committee on the Audit Profession, which recommended the PCAOB establish some reporting requirements for registered audit firms, and he recalled even then the firms were reluctant to share basic financial information. “None of them are providing GAAP-based financial statements even to their own partners,” he said. “If you don't get that information, how can you know if the firm is financially stable?” When firms lobby consistently for relief from crushing litigation liability, Turner further wondered, how can regulators know if litigation risk poses a meaningful risk to firms' viability, as they often claim?

The working group tasked the PCAOB to justify how it can adequately assure the financial stability of audit firms when it doesn't receive financial information on the firms. The firms provide some basic operational information under some annual or special circumstance reporting requirements, but do not submit financial statements to the PCAOB. “If one of these firms were to go down, people are going to come back and ask the PCAOB: What did you know about it?” Turner said. “If you don't even get the financial statements, it's a legitimate question as to how are you regulating and overseeing them.”

Investors are concerned that too much U.S. capital market activity remains unregulated by the PCAOB because the board is having trouble accessing and inspecting audit work done overseas, most notably China and in various countries in the European Union. The working group worries that the overseas activity of major U.S. corporations is escaping regulatory scrutiny because much of the Big 4 work tied to global corporations resides with Big 4 affiliates abroad. The PCAOB is working to cut through legal obstacles to performing inspections in other countries, most notably reaching an agreement with the United Kingdom.