Public company audits and interim reports are likely to be reviewed by two audit firm partners, rather than one, in corporate fiscal years ending after Dec. 15, 2009. That's when the proposed Public Company Accounting Oversight Board (PCAOB) rule on auditing standards and engagement quality review is set to go into effect.
"The board felt the need to strengthen the requirement for concurrent audit reviews," says Dima Andriyenko, associate chief auditor at the PCAOB, who played a key role in developing the new release. The board said last year that it wanted "to focus reviewers on the need to perform a robust review, rather than on whether particular matters had 'come to [their] attention.'"
For the Big Four accounting firms, the change will not alter procedures that much. These firms are already mandated to have all audits reviewed by a partner not involved in the actual audit process. Andriyenko notes that many smaller audit firms have also been following this practice.
But he says even the big firms haven't always done concurrent partner reviews of interim financial reports, as would be required. The practice of having a second partner go over an audit of interim reports is even less common at smaller firms, he says.
The new rule (Release 2009-001) would also apply to audits of public companies domiciled overseas. In announcing the proposed change, subject to a comment period through April 20, PCAOB Chairman Mark W. Olson said, "This proposed engagement quality review [EQR] standard focuses the engagement quality reviewer's attention on those matters that increase the likelihood of identifying and correcting significant engagement deficiencies before the audit report is issued." The new standard would "go a long way to improve the existing EQR process for public company audits," Olson said.
How big an improvement this would make in terms of spotting problems in audits remains to be seen. After all, Arthur Andersen routinely had a partner review audits of corporate clients, but that didn't speed the exposure of the enormous fraud at Enron. Nor would a mandated concurrent partner review have led the three-man firm responsible for auditing Bernard L. Madoff Investment Securities to disclose fraudster Madoff's record $50-billion Ponzi scheme. Such second-partner backstopping could help spot errors and oversights by honest and diligent auditors, however, the PCAOB hopes.
One thing is clear: Adding a review by a second partner for all audits and interim reports would add to audit costs.