Audit Education for the Post-Sarbanes Audit Environment

Jay Thibodeau, Greg Jenkins, and Dick Riley

The Education Committee sponsored a panel discussion at the Section's 2006 MidYear Conference in Los Angeles. This article provides an overview of the thoughts that were shared during the panel discussion as well as through conversation with the panelists in the weeks leading up to the meeting in Los Angeles. The panel members included Craig Wendt of PricewaterhouseCoopers, Jason Emmons of Deloitte & Touche, Terry Hosey of Ernst & Young and Bruce Cameron of KPMG. The panel was moderated by Jay C. Thibodeau (Bentley), Chair of the Education Committee. Additional Education Committee members include Mike Akers (Marquette), Greg Jenkins (Virginia Tech) and Dick Riley (West Virginia University).

Introduction

Recognizing the dramatic changes that have occurred to audit processes for publicly traded companies as a result of the Sarbanes-Oxley Act of 2002 (SOX), the Education Committee hosted a panel discussion at the 2006 MidYear Conference to address some of the resultant educational challenges. Each panelist was asked to share insights related to his firm's training program along one of several important dimensions. Craig Wendt highlighted changes in Partner/Manager training at PricewaterhouseCoopers. Bruce Cameron of KPMG described some of the changes that have occurred in Staff training at the firm. Terry Hosey highlighted changes that have occurred in fraud and forensic accounting training for auditing professionals at Ernst & Young. And, Jason Emmons discussed the many changes that have occurred in information technology training at Deloitte & Touche. The overall objective of the panel discussion was to provide faculty an overview of how the Big Four firms are approaching training issues associated with SOX and other changes in the audit environment and to generate ideas for incorporation into the classroom. The following paragraphs provide a brief summary of the themes and perspectives provided by the panelists in several important areas.

Internal Control

Under Generally Accepted Auditing Standards (GAAS), auditors have always been required to gain an understanding of a client's internal control system. However, prior to the Public Company Accounting Oversight Board's issuance of Auditing Standard No. 2 (AS No. 2), An Audit of Internal Control over Financial Reporting Performed in Conjunction with An Audit of Financial Statements, auditors had a choice regarding the amount of work to be completed on a client's internal control. That is, an auditor was only required to obtain a sufficient understanding of internal controls to plan the audit and determine the nature, timing and extent of substantive audit testing. After gaining a sufficient understanding, if the auditor felt that internal control could not be relied upon, GAAS allowed auditors to stop work on the internal control and instead rely to a larger degree on evidence obtained from substantive tests to reach conclusions about management's financial statement assertions. Now however, auditors of public companies must evaluate the operating effectiveness of each important control procedure regardless of planned substantive testing. As a result, the auditor's consideration and work related to a client's internal control has dramatically increased.

Panelists encouraged faculty to emphasize the critical nature of internal control design and operating effectiveness. More specifically still, students need to hone skills related to linking various internal controls to the proper internal control objective and ultimately to the proper financial statement assertion. The panelists identified such knowledge as fundamental for all auditors to possess in the current environment.

Financial Statement Assertions

As noted in the prior section, auditors are devoting more time to the linkage of internal controls to financial statement assertions. The panelists pointed out that this process is almost reversed in the sense that auditors now look at each financial statement line item, ask what are the related assertions and work back to ensure that necessary internal controls and processes are, in fact, protecting the integrity of those assertions. While information underlying the assertions must also be examined with substantive testing, the fundamental point is that financial statement assertions are now central to the audit process. Accordingly, students need to have an in depth understanding of the assertions, including tying assertions to controls and substantive testing. And, students need to have opportunities in the classroom to learn about "completing the circle." That is, auditors must be able to combine results of controls testing substantive testing to draw conclusions about the reasonableness of the financial statement assertion and fairness of the account balance. The firms training programs are emphasizing these relationships.

Auditing in a Digital Environment

The panelists pointed out that AS No. 2 has dramatically increased the need for auditors to understand links among a company's general controls related to the information technology (IT) function and the financial statements. In the broadest sense, the general controls need to be sufficiently developed and operating to ensure that the computing environment is conducive to allowing the application controls to operate effectively. Each of the panelists identified such IT knowledge as a critical competency. So, faculty should consider ways in which students can develop a more thorough understanding of general controls and application controls. Finally, the panelists pointed out the severe shortage in the number of qualified graduates in this area.

Fraud and Forensic Accounting

Auditors are performing expanded fraud and forensic-type audit procedures in the post SOX environment. The panel indicated that entry-level professionals can benefit significantly from being exposed to fraud and forensic accounting topics in the college classroom. More specifically, the panelists urged faculty to allow students opportunities to discuss the knowledge, skills and abilities that auditors need to detect all types of fraud. Most students are intrigued by fraud and forensic topics, so faculty should find it relatively easy to develop assignments (e.g., readings, cases, practice sets, and so forth) that are interesting to students and effective at broadening their knowledge in the area. Panelists also encouraged faculty to discuss the importance of professional skepticism. The faculty member's challenge here is to help students develop an appreciation for the nuances of such skepticism.

Accounting and Auditing Knowledge

Panelists unanimously agreed that entry level professionals seem to be entering the firms with a thorough knowledge of accounting. This appears to be less common as it relates to knowledge of auditing. While the panelists recognized the problem of scarce resources in the higher education environment, they stated that they observe a difference between the knowledge, skills and abilities of those students with a single undergraduate auditing course compared to those students who have been through a graduate program that includes a second course in auditing. As a result, more auditing related coursework is highly recommended for students.

Audit Environment

The panelists observed that the power of chief financial officers and chief information officers to impact change throughout the organization has increased since the enactment of SOX. While the cost of implementing SOX has been high, many companies have leveraged the requirement to document their internal control processes into an opportunity to evaluate the business value of those processes. Panelists indicated that companies have, in some cases, re-engineered various processes for the overall betterment of the company and that these efforts have resulted in such benefits as lower costs and improved customer service. If the requirements of SOX are met in the spirit of business improvement, companies have the potential to improve performance over the long-term, not just add burden to the organization. Another perceived benefit of the new requirements according to the panelists is that "auditors can be auditors again." It appears as though auditors now have far more leverage to make sure the client does things correctly.

Critical Thinking and Problem-Solving

While it appears to be an age-old problem, students need to improve their critical thinking and problem-solving skills. Accordingly, the panelists encouraged faculty to continue to developing assignments and teaching opportunities to sharpen these skills. Such skills are critically important in helping students develop their professional judgment for use in the profession.

Final Thoughts

The panelists laid out a number of challenging issues for us — increasing students' knowledge of internal controls, financial statement assertions, IT general controls, fraud and forensic accounting, and critical thinking and problem-solving skills. Some of these issues have been present in the education environment for many years, while others are of a more contemporary nature. What is clear from the panel discussion is that we must be diligent in the classroom and continue to seek out new and innovative pedagogical tools and techniques to prepare our students to enter the ever-changing world of auditing.

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