Speaking at the Baruch College 13th Annual Financial Reporting Conference in New York, PCAOB Chairman James R. Doty said although accounting and auditing are critically important to increasingly complex global economies, confidence in the relevance of audits has declined since the 2008 economic crisis and the auditing profession needs to improve investors' trust in its efforts.
"To be sure, audit firms are innovating, but not in the area of the audit," Doty said. "Audit fees have become a decreasing portion of audit firms' revenues. Audit practices have shrunk in comparison to audit firms' other client service lines — not all of which depend on the fundamental exercise of skepticism."
Saying price has becoming an important factor in market share competition, Doty cited statistics about auditor changes among companies in the Russell 3000 index between 2006 and 2011. Among that cohort, 418 companies changed audit firms, and 62 percent of the companies making a change reported lower fees during the first year of the new engagement. Among companies in the broader index, audit fee increases and decreases represented an effectively even split.
Doty stressed that regulating audit fees is outside the PCAOB's purview and that a variety of factors can lead to lower audit fees. These often include increased efficiency, a reduction in audit scope, and a willingness of the new auditor to charge a fee that doesn't cover the full cost of a first-year audit.
"Whatever the answers are in particular cases, the emerging reality for all of us is the need to understand the effect of these trends and pressures on audit quality," Doty said.
Doty's remarks may sound familiar to people involved with the profession in the late 1990s, when concerns that accounting firms were pricing audit services below their true value led in part to stricter guidelines and the Sarbanes-Oxley Act of 2002.
Doty said the fight for market share has also become a battle to retain audit clients. He cited statistics saying 1.88 percent of Russell 3000 companies in 2010 changed auditors the following year, compared with 3.72 percent of companies in the 2006 index who made an audit firm switch.
Enhancing Audit Performance
Doty also recapped several PCAOB initiative he said are designed to improve the relevance and reliability of audits, and to refocus capital market participants on audit quality.
Along with the 2014 inspection cycle, Doty cited PCAOB's standard on engagement quality review and its new standard to improve auditors' communications with audit committee members.
PCAOB has also launched several projects, including an effort to improve its standard on auditing related party transactions, as well as potential changes to auditing standards on fair value and estimates, the involvement of other auditors and specialists, and quality control.
PCOAB has also proposed expanding the scope of an auditing firm's work beyond financial statements to include the company's annual report and management's discussion and analysis.
"[The proposal] builds on the pass-fail report but would provide more insight about the audit, to help the public understand where the audit was most challenging and thus provided the most value...[and] provides a framework to report critical audit matters, which keeps the auditors in their area of expertise — the audit."