Views from the Profession*

By Walt Conn, Global Head of Audit Methodology and Implementation, KPMG LLP

In this column presenting a view from the auditing profession, I would like to highlight some of the reasons that, even in these difficult economic times, this is such a great time to enter the auditing profession.  Some of the reasons are undoubtedly obvious and widely discussed.  Others may not be.  We live in an exciting time that puts extreme value and importance on auditors, auditing faculty, and college students preparing to, or considering entering the auditing profession.  I encourage you in academia to ensure that your students are aware of, and excited about, the opportunities for them in the auditing profession.

The past decade arguably has been a time of unprecedented change in the auditing profession, in part due to ever-increasing complexity of transactions and of accounting standards, globalization, and of course, some large-scale frauds resulting in changes in the regulatory environment in which auditors practice.  The period of change has been both challenging and exciting.  The nature of transactions and the profession’s challenges have changed with business cycles, but accounting and audit skills remain core and consistently critical to success (from the go-go IPO years of the 90s, to the private equity and M&A trends this decade, to the restructuring needs in the current environment; to the growth in public-private partnerships we expect to see in the coming years of infrastructure spending and government stimulus). 

A few words about several specific drivers of opportunity:

International Financial Reporting Standards (IFRS) and Convergence of Accounting Standards – As readers of this column surely know, in late 2008, the SEC proposed a “roadmap” for potentially phasing in mandatory IFRS filings by U.S. public companies beginning for years ending on or after December 15, 2014.  The roadmap is conditional on progress towards “milestones” that would demonstrate improvements in both the infrastructure of international standard setting and international standards, and the preparation of the U.S. financial-reporting community to function in an IFRS environment.  Some U.S. public companies that operate within an “IFRS industry” would be permitted to begin using IFRS as soon as this year, 2009, if the proposal is adopted unchanged.  While these elements of the roadmap represent proposals, there is a prevalent view that IFRS is coming to the U.S —in fact, private companies are already permitted to use IFRS. And of course, how, when, and where IFRS should fit in an academic curriculum is a common conversation with and within academia.  For the moment, accounting firms prepare and deliver much of the training on IFRS, and on-the-job training will always be an important aspect of the growth of IFRS in the U.S.  Even to the extent that some companies, for example, most U.S. private companies, are not directly impacted in the short-term by the expanding use of IFRS, I believe they ultimately will be.  In the meantime, they undoubtedly will be impacted by the FASB’s and International Accounting Standards Board’s commitment to converge accounting standards over time.  We should also keep in mind that the conversion to IFRS goes beyond new accounting.  The impact will extend into business decisions such as mergers and acquisitions, tax strategies, and supply chain policies.  Adjustments will impact software applications, management systems, and processes.  Auditors will have an ideal opportunity during conversions to clearly see just how important accounting standards are to managing a business.  There has perhaps never been an opportunity to this extent for entry-level auditors and experienced managers and partners to be on equal footing as all of us learn IFRS together.

Convergence of auditing standards – Many audit professionals will consider reference to convergence of auditing standards to be premature.  There are three sets of auditing standards that have significant influence on audit practice in the United States – those of the Public Company Accounting Oversight Board (PCAOB), the Auditing Standards Board (ASB), and the International Auditing and Assurance Standards Board (IAASB).  The PCAOB’s standards are used for audits of public companies, the ASB’s are used for audits of private and not-for-profit entities, and the IAASB’s serve as the base for several large firms’ global audit methodologies.  All of these standards are in a state of significant change.  The IAASB recently completed a rewrite of its auditing standards (which will become effective in 2010), and the ASB is in the process of such a rewrite.  The ASB’s rewrite includes an effort to converge with the IAASB’s auditing standards wherever possible.  The PCAOB follows the activities of the IAASB and ASB, and though it has not initiated an effort to converge, it recently published a comparison of its proposed risk assessment standards with the corresponding standards of the IAASB.  One PCAOB board member recently expressed a view that the Board should work with other auditing standards setters with a goal of establishing a roadmap to eliminate unneeded differences among the three sets of standards.   Whether the world will see more convergence or divergence in auditing standards remains an open question; however, either direction will bring change, which will create opportunities for motivated auditors to learn the differences and similarities, and create opportunities to re-think audit methodologies.

Growing importance of fair value – One can rarely look at a newspaper or a business periodical without seeing an article that addresses some aspect of fair value accounting.  While there are differing views on a number of aspects of fair value in financial reporting, most would agree that fair value measurements and disclosures have become, and will continue to be, increasingly important components of financial statements.  Today, many auditors rely heavily on fair value specialists to assist in auditing fair value assertions.  While that approach will certainly continue for valuations of businesses and exotic financial instruments, it likely is not a sustainable model for all fair value assertions, nor is that approach likely to result in the best audit quality.  Rather, auditors need to become better educated in finance theory and valuation concepts in order to test valuations of non-exotic instruments (for example, a simple interest rate swap) and in order to have meaningful dialogue with valuation specialists for the more complex areas.  Auditors with superior knowledge in finance theory and valuation are in high demand, and I believe that demand will accelerate rapidly, creating abundant opportunities for auditors with finance and valuation skill sets.

Economic environment – Auditing firms are not immune from the current economic downturn.  The struggles of an economy as severe as ours clearly impacts the revenue of audit firms.  We are seeing more companies, both public and private, filing bankruptcy, more liquidating, and some being acquired virtually overnight in government-assisted takeovers.  In addition, there is a dearth of initial public offerings, other types of offerings of securities, and merger and transaction work, all of which traditionally have generated significant opportunities for auditors. 

However, I am optimistic that the economic environment will generate new opportunities for auditors.  For example, a second wave of the federal economic stimulus program is expected in early 2009, which is likely to create various opportunities for auditors, such as compliance attestation services for recipients of government funds, and assurance services for state and local governments expected to administer the stimulus package.  In addition, some believe that there will be an increase in forensic auditing engagements in the current environment, either in support of internal, regulatory, or criminal investigations or as part of a post-mortem review of business failures.  While the current economic environment is discouraging in many respects, auditors should be optimistic about new opportunities ahead.  The stimulus package should position the economy for increased activities in the coming quarters and years.

Space does not permit me to speak to other opportunities ahead for auditors, but growth of assurance services related to sustainability reporting, XBRL, broader application of technology in the way auditors do their work, and other related regulatory changes as a result of the financial crisis are a few that I believe will have a meaningful impact on the profession in the years ahead.  The combination of these global, regulatory and business factors, coupled with the new skill sets needed and potential service opportunities, make this an exciting and opportune time to enter the auditing profession.

*This column represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. 

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