Auditors may get some new guidance around how to acquire and rely on third-party confirmations.

The Public Company Accounting Oversight Board will meet this week to discuss whether to issue a concept release that would form the basis for a new standard on audit confirmations. The board discussed its concerns about audit confirmations with its Standing Advisory Group in an early April session.

Audit confirmation is a process where auditors seek verification about transactions in an audit client’s books from the client’s bankers, customers, suppliers, or other third-party contacts. It’s an important part of the evidence trail for auditors in reaching their assertions about an entity’s financial statements. It’s also a weak spot in auditing standards that has allowed massive frauds at Parmalat, Sunrise Medical, Health South, and others to proliferate.

PCAOB staff told their advisers that confirmations are a frequent trouble spot when inspectors pore over audit documentation. Auditors often do not receive responses to confirmation requests or do not follow up on confirmations. The staff also noted auditors sometimes rely too heavily on confirmations to reach their assertions.

In a briefing paper to the SAG, the board also notes technology has advanced since the existing standard, AU sec. 330, The Confirmation Process, was written 15 years ago, so it doesn’t adequately reflect modern means of gathering information, including electronic access, e-mail, or even fax.

SAG members generally support the board’s plans to overhaul the confirmation standard. “To me, the big issue as it relates to all confirmations, whether paper or anything else, is knowing who’s responding to the confirmation,” said SAG member Joe Carcello, director of research at the University of Tennessee’s Corporate Governance Center.

Carcello said confirmations can be skewed when coming from an entity’s customer, who may be willing to provide false information to keep a customer happy. “You also need to think about incentives to respond truthfully,” he said. “That affects the quality of audit evidence.”

The American Institute of Certified Public Accountants published a practice alert in 2007 that addresses more modern communication means for facilitating confirmations, and the International Auditing and Assurance Standards Board finalized a new standard on external confirmations in late 2008.

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