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The Future of Auditor-Corporation Relationships

Proposed audit rules in the EU aim to keep auditor-company relationships amicable but professional.

Audits can be an unpleasant experience, especially when they're being conducted by someone outside the organization. However, when a company's financial records are being reviewed by a third-party auditor, establishing a good rapport with them may make the process go smoother.

According to the ISACA, the same also goes for the auditor. "Building and maintaining strong relationships are critical," the group notes in a blog post. "The stronger your relationship is with your audit client, the more likely they will be open to your critiques and offers of improvement."

The opposite concern is that the auditor-client relationship can get too comfortable, a worry that some European Union leaders share. The Wall Street Journal reports that lawmakers on the continent are proposing to limit the number of years a firm can work with a company, in part to protect "professional skepticism."

A main issue is that audit firms could eventually "go easy" on an audited company in order to maintain a long-lasting relationship. Some allege that this sentiment led to banks and financial institutions ignoring risks and contributing to the economic meltdown in 2008, the newspaper said.

Comments

Patrick Slattery
Title: Managing Director
Company: Canopach
(Managing Director, Canopach) |

Mike --

Thanks. I appreciate it. Not to inhale too much of our own exhaust on the subject, but the real problem is best addressed outside of the audit culture. Too many people assume that the underlying activity is professionally complex and best left to the practitioners. And, the hen-house ends up as a playpen for the foxes.

I have worked in the Big-X environment since the early 1980s, including as a partner on the consulting side, though I began my career as an EDP auditor. Through all that time a meeting a manager asked me to join with the CIO of a local client has stuck with me. We were to meet to discuss three persistent technology related management comments (issues that end up being reported in a highly watered-down manner by the audit firm.) We entered the CIO's office and he had three coffee mugs on his desk. He asked us if we would like coffee, "but", he said, "before we began, I have to say three things. No. No. And, no." That was the extent of the discussion on the three technology-related management comments. The rest of the meeting was spent drinking coffee, telling technology nostalgia stories and jokes. >> Your audit dollars at work.

Decades later, the culture has only changed with respect to the degree of care exercised in covering up the problem.

Hope someone comes up with a constructive solution -- it's long overdue.

Michael Breier
Title: Partner
Company: Shepard Schwartz & Harris LLP
(Partner, Shepard Schwartz & Harris LLP) |

You are 100% correct Patrick. I have spent most of my public accounting career wondering about why we give so much lip service to independence while the companies that we audit are the same ones that pay our bill and have so much to say about how much they are willing to pay. Furthermore, I find it odd that not many professionals are even willing to admit that this is a fundamental flaw in the whole process and disservice to the public. When third parties such as lenders and investors require an audit, why are they not the ones to chose the auditor and pay the bill? I often wonder how the approach audits might change if they did.

Mike Breier

Patrick Slattery
Title: Managing Director
Company: Canopach
(Managing Director, Canopach) |

Jonathan provide a good, initial summary of the flawed audit model in TodayOnline last month:

http://www.todayonline.com/Commentary/EDC111126-0000021/Whats-the-point-in-auditors-reports

Auditing fees are basically a tax imposed by an established oligarchy, the real beneficiary of the work is the audit community. That's been clear for decades. The intended end result is ideal, an objective, third party review of claims made by management. Unfortunately the process is a human one, fraught with self-serving bias and a host of other flaws.

We need a better process, but have not seen any produced since the Great Depression. Perhaps with technological and social advances, there will eventually be greater transparency and investor (owner) participation. We'll know that day has arrived when the professional auditor is viewed with the same curiosity we have for blacksmiths, street-lamp-lighters and all the other arcane careers of long-ago.

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