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Is US Audit Reform Next?

Auditing regulations in the U.S. could see a change in the future.

European regulators have audit firms squarely in their targets, with many calling for a new provision that would limit the number of years that a firm could work with a client before taking a mandatory "cooling off" period.

The lawmakers' concern is that auditor-audited

European regulators have audit firms squarely in their targets, with many calling for a new provision that would limit the number of years that a firm could work with a client before taking a mandatory "cooling off" period.

The lawmakers' concern is that auditor-audited relationships can become clouded, as the firm may be tempted to go easy on the audit in an attempt to maintain the cozy partnership.

Bill Carlino writes on Accounting Today that the idea could "split up the largest auditing firms there, and mandate them to use a separate entity and name for their advisory and non-audit practice units." While the idea is still just a proposal in Europe, he acknowledges that a similar concept could eventually make its way across the Atlantic. 

Carlino says that recently, the chairman of the Public Company Accounting Oversight Board, James Doty, listed a number of measures that would reform U.S. auditing policies, such as having the engagement partner's name included on audit reports. Other suggestions included revising standards for broker-dealer engagements and establishing mandatory auditor rotations.

Comments

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Separate legal entities under common control imply a conceptual "Chinesse wall" separation akin to that of financial institutions. The prospects for success, unfornately, are no better than those which failed in the financial institutions. Economically a perfect firewall from a large loss in one entity is not feasible.

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

Bill Carlino hits the hidden nail on the head: "use a separate entity and name for their advisory and non-audit practice units" -- that practice, in the form of contrived LLCs is already in place in the U.S. Most audit partnerships are well established tax deferral scams with a heavy R&D investment in 'creative' solutions to what are perceived as 'tax and regulatory problems.' Unless new regulations are very, very carefully conceived, crafted and worded, the most creative talent you can find at an audit firm, the HQ lawyers and wonks, will build a mousetrap to circumvent them.

That is, on the assumption that the audit-oligarchy and its network of panderers and lobbyists do not do their job and obfuscate the regulatory effort every step of the way.

As one strategy firm would say, "probability 0.80+ that it does not succeed in our life time in the U.S."

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