Staff Director of the Public Oversight Board’s
Panel on Audit Effectiveness Speaks to
Auditing Academics at Annual Meeting

David Pearson, professor of accounting at Case Western Reserve University and Staff Director of the Public Oversight Board’s (POB) Panel Audit Effectiveness (Panel) was the featured speaker at the Auditing Section Luncheon at the annual meeting in San Diego, CA. Pearson provided comments about the Panel’s overall objective of examining whether recent changes in the audit environment and audit process have served to protect the interests of investors. He enumerated a number of the Panel’s sub objectives, including (1) the performance of a comprehensive review and evaluation of the way independent audits are performed, and (2) the assessment of the effects of recent trends in auditing on the public interest. Pearson’s remarks were divided into two parts: background—matters of organization, objectives, and methods of analysis, and a discussion of the Panel’s findings. Essential points of Pearson’s comments follow.

Background
The POB’s Panel on Audit Effectiveness came into being at the request of the Securities Exchange Commission. In response, the POB established the panel with members from a number of the professions constituencies. The panel is composed of members with board experience in auditing, accounting and business and includes Shaun O’Malley (Panel Chair and retired Chair of Price Waterhouse LLP), Dennis Chookaszian (retired Chairman and CEO of CNA Insurance companies), Paul Kolton (former Chairman and CEO of the American Stock Exchange and current Chairman of the Steering Committee of the FASB’s Business Reporting Research Project), Bevis Longstreth (former SEC Commissioner and Counsel to Debovoise & Plimpton), Lou Lowenstein (Professor Emeritus of Finance and Law at Columbia University), Zoe-Vonna Palmrose (PricewaterhouseCoopers Professor of Accounting at University of Southern California), Aulana Peters (former SEC commissioner, and partner at Gibson, Dunn, & Crutcher), and Ralph Saul (former President of the American Stock Exchange and retired CEO of CIGNA Corp.). The panel has used the profession’s audit risk model as a bridge to examining issues of importance and has divided its attention in four broad areas including (1) Auditing Firm Policies/Procedures, (2) Profession Governance, (3) Firm Governance, and (4) Accounting Issues.

With such a broad scope of analysis, the Panel has taken an interactive approach that involves meetings, discussions, and focus groups with the profession’s constituencies. The list of contacts with which the Panel is interacting in its work is extensive, and includes large- and small-firm personnel; CFOs and controllers; internal auditors; SEC and POB staff members; forensic auditors; the SEC Practice Executive, Peer Review, and Quality Control Committees; the Independence Standards Board Staff; Auditing Standards Board; Audit Issues Task Force; Big 5 Chairmen; Public Oversight Board; and the International Organization of Securities Commissions. The Panel is also conducting a survey, public hearings (scheduled for October 7 and 8 in New York), research on litigation, and a quasi- peer review. Professor Pearson indicated that the objective of the survey is to obtain feedback from users, preparers, academics, auditors, and lawyers regarding the value of audits, audits, responsibilities to detect fraud, audit methodologies, effects of non-audit services on audit quality, attracting and retaining personnel, and governance.

Current Project Status
Professor Pearson indicated that the interactions among Panel members and the constituents noted above had been quite productive and that the Panel had learned a number of insights. Firms had indicated that one of the most pressing issues they face is having the right people with the right skills at the right time to deploy in the field. The audit is an important service, and auditors are moving toward a broader and deeper business understanding with greater focus on risk factors and controls. Firms are indicating that they were making significant investments in methods and tools, and reallocation of audit time and effort to be more effective. The Panel has discovered that the attitudes of most professionals seem to reflect a concern for professionalism and quality, that partner involvement has increased and is more timely, that risk assessment is performed by experienced people, and that more comprehensive work is performed in high-risk areas. The Panel's focus group meetings also raised some concerns including the fact that the audit is viewed by some as a commodity, that pressures associated with clients’ earnings can adversely affect the conduct of the audit, that uncertainty had been created by informal SEC rulemaking, and the recruiting and retention were expected to be of significant concern for the foreseeable future.

The final portion of David Pearson’s comments focused primarily on the Panel's activities under its “Quasi Peer Review,” the purposes of which are to assess (1) the quality of audit work in specific key areas, (2) whether the individuals who performed and reviewed the work have requisite knowledge, skills, and experience, (3) whether the work was performed and reviewed on a timely basis, and (4) to develop ideas for enhancing audit effectiveness. To date, over 100 engagements have been examined.

The activities of each review include an orientation session for both reviewers and reviewees, focus groups with both seniors and managers, interviews with the partner in charge of the firm’s audit function, and engagement reviews (two–seven per office on SEC registrant clients), which consist of the reviewee completing a 493-item questionnaire and preparing a description of its audit approach, and its use of analytical review procedures as substantive procedures (five additional areas), and a final debriefing session. The panel hopes to glean perspective about seven different issues through completing the quasi-peer reviews. The seven areas of focus are:

• engagement risk assessment and the linkage to the inherent risk and control environment assessment—overall financial statement level,
• inherent risk and control environment assessment—overall financial statement level,
• fraud risk assessment and fraudulent financial reporting,
• key audit areas such as inherent risk assessment at the account or transaction level, internal control risk assessment at the account or transactions level, the linkage between risk assessments and substantive tests, and design and performance of substantive tests,
• completing the audit,
• audit committees, and
• personnel assigned to the engagement and changes in the engagement in recent years.

In wrapping up his comments on the Panel’s activities, David discussed some of the implications of the Panel’s finding for auditing educators and noted that the results of the Panel’s survey would be posted on the AICPA web site this fall. More information on the Panel a downloadable version of its survey can be found at http://www.sec.gov/news/audpanel.htm; or http://www.aicpa.org/. Professor Pearson indicates that the Panel’s final report is expected by late spring 2000 with an exposure draft out by late spring. The Panel plans to meet with several of the professionís constituents (e.g., AICPA, SEC, POB, etc.) in disseminating results of the Panel’s work.

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