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Audit Regulators See Positive Signs: PCAOB's Ferguson and Hanson Share Their Vision for the Profession

[ILLUSTRATION OMITTED] Jay Hanson and Lewis Ferguson bring different perspectives to their duties as board members of the PCAOB. Hanson, a CPA, has personal experience auditing public companies. Ferguson, a lawyer who specialized in securities and corporate governance matters, brings legal expertise and a global perspective enhanced by his work as chairman of the International Forum of Independent Audit Regulators (IFIAR). During a recent conversation with the Jo/A at the PCAOB offices in Washington, Hanson and Ferguson shared their perspectives on a variety of issues facing the auditing profession. They spoke for themselves and not the PCAOB. Here are some of their main points: AUDIT QUALITY IS GETTING BETTER, BUT CONTINUED VIGILANCE IS NEEDED. Hanson: It's a very different environment in the auditing profession today than it was pre-SOX [Sarbanes-Oxley Act of 2002, PL. 107-204], And even though inspection findings are still at a high level and we hope they go down, the nature of the findings has evolved over time. We see the efforts that many firms are putting in place to comply with our standards. And there is a shift in thinking we see, in many of the firms and down to the engagement teams, acknowledging that the audit is really for the investors. It isn't for the controller or the CFO sitting across the table. We're seeing that shift, but it's going to take some time because it's very much embedded in the culture in public accounting that your client is the one that sits across the table from you. Ferguson: I'm not aware of any other profession where individuals are looked at as intensely as this profession is looked at by the PCAOB and other regulators. I think it has put the profession under great pressure in some ways. But I also think the profession has responded to it very well. It took them a while, but I think they've accepted the fact that they are being regulated now by the PCAOB, and while we still have a high level of findings, there is an effort on the part of the profession as a whole to try to up their game. I'm actually pretty optimistic about the fact that we will see improvements. FIRMS ARE BEING ASKED TO LOOK DEEPLY AT THE ROOT CAUSES OF COMMON AUDIT INSPECTION FINDINGS. Ferguson: There are firms that are now looking into statistical correlations with audit quality. They are looking into the relationship between higher rates of inspection findings and, for example, partner-staff ratios, partner workloads, or a whole variety of other factors that might provide a deeper understanding of what's impacting the quality of audit performance. We are looking at the root causes of these inspection findings to see if there are correlations and, importantly, causation. Firms have hired behavioral psychologists to talk to them about the behaviors of the firm and the incentive structures of the firm, for example. Understanding quality drivers also involves looking at the economic incentive structures of these firms. There's a variety of ways of looking more deeply at the issues to try to understand what the problems are. Hanson: They've realized over time that, to use a figurative term, "sending out a memo" is not going to fix the problem. If there are some very simple things to remediate, that's fine. But the type of things that are the most difficult for preparers to do--determining estimates or fair value, for example--those are also very difficult for the auditors to audit. Firms need to think through the best ways to approach that problem. The smaller firms, we recognize, usually don't have the same level of resources, so one of the things we try to do to help them is to put on a series of forums for auditors of smaller companies. Every year we do six to nine of those, and we discuss important issues that we are dealing with in inspections, enforcement, and standard setting. FIRMS MAY NEED TO DEVOTE MORE SENIOR PERSONNEL TO AUDITING INTERNAL CONTROL OVER FINANCIAL REPORTING (ICFR). …