Public companies should pay closer attention to how their auditors are regulated and whether there are any questions about how their financial statements were audited, especially now that investors are calling for regulators to get tougher on auditors, said one of the PCAOB's newest members, Jay Hanson.

In an exclusive podcast interview with Compliance Week, Hanson says auditors don't like to talk with their public company clients about any interactions they may have with the PCAOB, especially when PCAOB inspections raise concerns about specific audit problems. “I know the major firms resist telling their clients anything about it, but CFOs should keep asking,” said Hanson. “If your auditor is being looked at by the PCAOB … if I were an audit committee member or a CFO, I'd want to know about that.”

PCAOB enforcement actions are private by law until the actions are fully investigated and settled, even through appeals. Several PCAOB members have called on Congress to amend current law to allow PCAOB proceedings to be public just as proceedings with the Securities and Exchange Commission are public. “If I were a CFO and I knew the SEC was being told about an accounting issue on my company, I'd want to be proactive and manage that as opposed to being reactive and waiting for a comment letter,” Hanson said.

The PCAOB is facing some new pressure from investors to get a better handle on what went wrong with the audit process through the financial crisis and require auditors to tell investors more about what they found in the course of an audit. The PCAOB is undertaking some new projects to look at whether auditors need new rules for how they respond when they have questions about whether a company can continue as a going concern and what additional information investors should be given through the audit report.

Hanson cautioned investors against thinking, however, that auditors are to blame if a company fails without some kind of forewarning from auditors. “Just because a business failed, that doesn't necessarily mean there was a bad audit,” he said. “Bad management or a bad business model might not mean the numbers are bad. Under today's model, auditors are opining on the fairness of the presentation of the financial statements. The financial statements may have been perfectly fine, but the business still failed.”

It's not entirely clear how to satisfy investors' demands for more information, Hanson said. “It's crystal clear that investors are wanting more information,” he said. It's not as clear whether that information should come from auditors, the audit committee, or corporate management. Auditors are more hesitant to get involved in something like an auditor's discussion and analysis because of the significant effort in a free-form writing exercise, the legal expertise that would be required to provide such insight, and the cost it might add, he said.

“We've had some frank discussions with the leaders of the major firms, and they all get it that something is going to change,” Hanson said. “I've encourage them to get on boards and be proactive in coming up with solutions, not just criticizing the things we do.”

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