A Treasury committee has updated its draft report on how to prop up the auditing profession but with no further consensus on what could or should be done to minimize the threat of liability wiping out an audit firm.
Given the inability of the committee to reach an agreement on the extent to which audit firms should be protected from liability, Donald Nicolaisen and Arthur Levitt, co-chairs for the Advisory Committee on the Auditing Profession, added their own thoughts on the matter. They suggest Congress consider creating a federally chartered audit structure for firms that would choose to operate as such—including incorporation, requirements for capitalization, federal licensing, further clarity of regulatory oversight, new governance structures with independent directors, mandatory public reporting with audited financial statements, and improvements to auditors’ reports to investors—all to provide limits on liability for audits of public companies.
Congress might also consider establishing a federal insurance agency to provide coverage for investors in some instances, funded by a portion of the audit fee, the co-chairs suggested. “A federally chartered structure for auditing firms would have the advantage of maintaining independence and the focus on the audit as the principal product,” Nicolaisen and Levitt wrote.
The full committee report addressing the liability threat to audit firms contains less radical ideas, such as requiring audit firms to issue annual reports to the Public Company Accounting Oversight Board with financial statements kept confidential, requiring the PCAOB to monitor the potential for catastrophic risk, and establishing a framework to rehabilitate and preserve any threatened firm.Audit firms generally have pushed for a recommendation that audit firms be given protections against liability while investor advocates generally have lobbied against any such protections.
The report also further distills some earlier ideas about how to improve audit quality and make the audit profession more sustainable, such as establishing indicators for how to define audit quality, improving the information contained in audit reports to investors, improving audit firm inspection reports, compelling more disclosure about changes in audit firms, requiring shareholder ratification of audit firm selection, and establishing a fraud prevention and detection program. The report also makes a number of recommendations regarding firm governance, professional development and education, and helping smaller firms become more competitive with larger firms.
The Center for Audit Quality acknowledged that litigation threat remains a sticking point. “Because catastrophic liability remains the greatest threat to the profession’s long-term sustainability, our hope is that others in the policymaking community will use the report as a starting point for further study of the issue,” said Cindy Fornelli, executive director of the CAQ.
The PCAOB said it will consider the committee’s recommendations that may have an impact on its oversight of the auditors of U.S. public companies.
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