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Potty Mouth Carl Levin (Senator and Chair of Senate Permanent Subcommittee on Investigations), famous for his “sh*tty deal” comments to Goldman Sachs executives, has sent a letter (Jan. 3, 2012) to the PCAOB in support of a proposal to require that the lead partner’s name be disclosed (with signature) within the audit opinion attached to annual corporate annual financial statements and listed in an audit firm’s annual report to the PCAOB.

Levin prefaces his support with the following statement,

Poor quality audits of public corporations continue to plague the U.S. investment community, allowing misleading accounting, outright frauds, and substantial losses to occur … These prominent audit failures indicate that more needs to be done to encourage accurate and effective audits of public corporations and increase accountability for poor auditing practices.

Well said, Senator Levin.  It is not only bloggers that note the poor quality of large audit firm audits of large publicly traded corporations, it is also key members of governmental oversight.  The only people who don’t agree are the leaders and partners of the large audit firms that provide the poor quality audits.  They state that audit quality is fine, and nothing should be done that could negatively affect it (such as naming the lead audit partner or mandating auditor rotation).

Levin notes five reasons for supporting that the lead auditor’s name be disclosed:

  1. It would increase audit quality.  Lead auditors would now perceive that they are more accountable for their work, and would strive to avoid generating poor audit opinions.
  2. It would strengthen audit transparency by shedding light on the audit process and key communicators.  It would make it possible for the public to evaluate senior audit officials.
  3. It would strengthen partner and audit firm accountability for audit failures.  This would signal regulatory intent that both firm and partner are to be held accountable.
  4. It would increase auditor independence by making it possible to identify when changes in key personnel are made.
  5. Key corporate officers now must sign public reports and disclosures.  This proposal would increase auditor accountability so that it would be in line with other financial professionals.

Senator Levin, I think you have done an excellent job in reasoning through a controversial issue.

Thanks to Caleb Newquist of Going Concern for the tip.

Debit and credit –  – David Albrecht


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Sarah N. Lynch has a nicely written article up today at Reuters Canadian.  It’s nice to see her by-line again.  She has always written competently about accounting.

PCAOB Chair James Doty

In “SEC to Put U.S. Audit Watchdog Under Microscope,” January 12, 2012, Lynch reports that PCAOB chair James Doty will be presenting the PCAOB budget request of $227 million before the SEC in an opening meeting tomorrow.

She reports that this is the first open meeting on a PCAOB budget since 2008.  She then goes on to identify several related issues before leaving the reader to conclude that this budget review shouldn’t be a big deal.

First, she reports on the context of the budget review.  At this time the PCAOB is working on several high profile and controversial issues:  auditor rotation, audit partner name on auditor opinion, inspection of U.S. firms, and attempted inspection of foreign firms.  Questions on any of these issues might be asked of Doty.  In addition, salaries at the PCAOB are high for government work, with Doty making four times what boss Mary Schapiro receives.

Then, she reports that Doty commands “respect from both sides of the aisle,” and should represent well both himself and the PCAOB.

Then, she reports that the SEC publicly reviewed the PCAOB budget last in 2008, when Republican Commissioners  Cynthia Glassman and Paul Atkin were critical of the Board.  The current hearing has been called at the request of new Republican Commissioner Dan Gallagher.

Due to scheduling issues, I will not be able to watch the meeting.  It should be interesting to see if political interests will use any SEC commissioners to bring pressure on the PCAOB as it considers its controversial issues.

Debit and credit – – David Albrecht


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On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation.  Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”

With two weeks left in the comment period, the only audit firm to submit a comment letter is Ernst & Young.  Expect KPMG, PWC, Deloitte, McGladrey, Grant Thornton and BDO to submit their comments soon.   I’m certain that each letter will be similar in message to that of Ernst & Young.,

Ernst & Young submitted its letter on November 18, about four weeks before the December 14, 2011, deadline.  In general E&Y’s message is that auditors are sufficiently skeptical of management’s assertions that in general, financial reporting is a benefit to investors.  Because the system works at the current time, no changes are needed.  In any case, E&Y does not like the idea of mandatory rotation.

Mandatory audit firm rotation, in our view, is not a necessary or constructive means to promote
auditor skepticism. There is no evidence that we are aware of suggesting that mandatory firm rotation will improve audit quality. Moreover, there are many identifiable and known downsides to such a policy with little to no certain benefit. A mandatory audit firm rotation model would not only give rise to substantial costs and disruptions, but also would, we believe, impair audit quality, undermine sound corporate governance, and detract from the ability to maintain a robust accounting profession —all to the ultimate disadvantage of the interests of investors. We believe the mandatory retendering approach suffers from the same or even greater disadvantages.

There are five reasons why E&Y “… believe[s] mandatory firm rotation would harm corporate governance and investor interests and the ability to maintain a robust, highly skilled independent accounting profession performing high-quality audits.”

  1. Negative effect on shareholders, corporate governance and audit committees.”  E&Y says this would result from meddling with the duties of the audit committee.
  2. Negative effect on auditor’s knowledge of the company being audited and the effectiveness of audits.”  E&Y argues that long auditor tenures are beneficial, not detrimental.
  3. Negative effect on public companies and the interests of their shareholders.”  E&Y argues that a new auditor’s efforts would be inefficient (and therefore more costly) and less effective (thereby increasing audit failure risk).
  4. Negative effect on the audit profession.” E&Y says that there would be increased costs to auditor and audit team relocation once a five-year engagement ends.  In addition, the firm’s focus would shift away from delivering quality audits to a focus on marketing.
  5. Effect on audit fees.” E&Y thinks audit fees are bound to increase.  Since it foresees no advantages to auditor rotation, it is a negative NPV proposition.

There you have it. E&Y didn’t say anything controversial.

I can’t wait to read what the other firms have to say.

Debit and credit – – David Albrecht

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On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation.  This comment period ends on Wednesday, August 14, 2011, at 5 p.m. ET.

Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”  There are links to a copy of the concept release, comments by each of the five board members, and comment letters received so far.

At the current time, 72 comments have been received.  Two were withdrawn, and one deals with a different concept release.  Consequently, there are 69 comments on the issue at hand.

After reading all 69 comment letters, not only do I have an intense desire to relieve the pain by hitting myself with a hammer several times in the head, but I can comment on general trends.

By my count, 47 comments (68%) oppose mandatory audit firm rotation and argue for maintaining the status quo, 12 favor mandatory auditor rotation (17%), eight (12%) suggest alternative changes, and two (3%) only raise questions instead of taking a position.  Alternatives include letting shareholders vote annually on which audit firm to hire, and having an independent agency assign new auditors.

Because the board assumes that each comment letter is a vote, retaining the status quo currently is winning the election with 68% of the vote.  I disagree with the PCAOB’s interpretation of the comment letters.  Taken as a whole, the entire collection of comment letters provide ideas and reasons for one alternative versus an idea.  Many might identify and agree with views expressed already, and therefore might not be inclined to submit a comment that is redundant to the larger argument.

Based on my analysis of the submitted comments, it appears that investors favor mandatory rotation.  On the other hand, corporations and auditors oppose rotation.

Although only one audit firm (Ernst & Young) has tendered an opinion, several retired audit partners were represented (individually or as part of a corporate audit committee) in opposing rotation.

Time to comment is growing short.  To have your voice heard, send your comment letter to:

Written comments should be sent to the Office of the Secretary, PCAOB, 1666 K Street, N.W., Washington, D.C.  20006-2803.

Comments also may be submitted by e-mail to comments@pcaobus.org or through the Board’s Web site at www.pcaobus.org.

All comments should refer to PCAOB Rulemaking Docket Matter No. 37 in the subject or reference line.

Debit and credit – – David Albrecht

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Miscellany — interesting items that caught my eye during the week.


Jonathan Weil shows why he is one of the premier journalists writing about accounting in, “Goldman Sachs Envy Gains New Meaning at Big Four.”  Weil shows several examples of the revolving door between the large accounting firms and their regulators on the PCAOB.  There are stinky conflicts of interest.


Adam Jones, accountancy correspondent for the Financial Times, writes about new KPMG International chairman Michael Andrew in “KPMG vows to remain a multi-disciplinary firm.”  In this interview, Andrew ridicules all non-Big 4 accounting firms,

He also lashed out at a Commission proposal to force the Big Four to share some audits with smaller rivals. “Can you imagine a second-tier firm auditing a global bank at a time when there is already a lack of confidence in the marketplace?”

He added: “They simply don’t have the skills or the market expertise.”

He also accused some smaller rivals of being “quite lazy” about investing in their businesses.

Mr. Andrew is a jerk.  But Steve Martin was funnier at it.

Jones has another story on the issue, “Auditing has moved into the realms of sitcom.”  It’s worth a read.


Stephanie Sammons, of Social Media Examiner, writes about, “5 Simple Steps for Improving Your LinkedIn Visibility.”  Read it.  Do it.


Tom Selling is terrific when he writes about IFRS adoption issues, as he does in, “Will the SEC Sneak IFRS in Through the Back Door?”  Selling is sounding more pessimistic about how the nefarious SEC might sneak in IFRS, despite all reason and common sense (as well as almost every accountant and investor) being against it.

I have little faith.  The commissioners of the SEC are political appointees, and Mary Schapiro has been a willing accomplice to Obama administration policy.  She has her marching orders to install IFRS, and she is loyal to the hand that feeds her.


Mark Schaefer of {Grow} has another post out on Klout, “Kould Kare Less.”

His Klout score is high, but he doesn’t care.  Mine isn’t, and I don’t care either.  Yet, many do.


Debit and credit – – David Albrecht

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On October 11, 2011, the PCAOB unanimously approved a proposal for changes to certain disclosures in the audit report.  The proposal is identified as PCAOB Release No. 2011-007, “Improving the Transparency of Audits:  Proposed Amendments to PCAOB Auditing Standards and Form 2.”

The proposed amendments are summarized in Release 2011-007 as:

The Public Company Accounting Oversight Board (“PCAOB” or “Board”) is soliciting public comment on amendments to its standards that would improve the transparency of public company audits. The proposed amendments would:

  1. require registered public accounting firms to disclose the name of the engagement partner in the audit report, 
  2. amend the Board’s Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and 
  3. require disclosure in the audit report of other independent public accounting firms and other persons that took part in the audit.

This proposal would not require the engagement partner to separately sign the audit opinion.  It merely would require that the partner’s name be disclosed on the opinion.

Is this proposal a big deal?  No.  I tend to agree with Jim Peterson, “The PCAOB Wants to Name Audit Engagement Partners: Would Its “Red A” Really Matter? when he says that this is not a substantive matter.  This additional piece of information will not cause the scales to fall away from the eyes of investors.

However, it does signal the possibility a small defeat for the entrenched large audit firms.  Large audit firms are not accustomed to losing any battles, however inconsequential.  And how long has this battle lasted?  The underlying concept release (“Concept Release on Requiring the Engagement Partner to Sign the Audit Report,” PCAOB Release No. 2009-005) was approved on July 28, 2009.  Approval of this proposal won’t take place until early 2012, if at all.

The PCAOB has had three years on this and this is all it came up with?

Debit and credit — David Albrecht

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Today the PCAOB is hosting a roundtable discussion on the form of the auditor opinion.  32 experts and a full eight hour day.  I will not be live blogging it.


The use of social media is crucial to any professional.  It is important as a source of news.  It is an important form and style of communication.  It is also a means of branding for those with something to say.  If you don’t have something to say, shame on you.  See yesterday’s post for examples some whose use social media turned them into thought leaders.


Update to the SEC document destruction story.  Last week, Broc Romanek (theCorporateCousel.net) reported that the SEC is suspending its policy of shredding MUIs (matters under investigation).  Yesterday, Jessica Holzer of the Wall Street Journal reports, “SEC’s Khuzami: Current Probes Not Hurt by Records Destruction.” I’ve written before that this is a non-issue.


Mark Schaefer is a marketing professor who has a terrific blog on social media marketing.  I subscribe to {grow}, and highly recommend you do so also.  I know of no blogger who writes as much daily and valuable content as does he.  Today’s guest post, “The Death of Internet Marketing and the Rise of Social SEO,” touches on my recurring theme–social media use is more than a marketing ploy or a mindset, it is a transformative and transcendent experience.


If you hope someday to become a blogger, you should read taxgirl by Kelly Phillips Erb, a Philadelphia lawyer.  I would emulate her if I could, but I don’t think accountingboy would have the same ring.  Her post today on the tax treatment of employer provided cell phones is an enjoyable read.  Are there any employers out there who want to provide me with a smart phone?


Debit and credit – – David Albrecht

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