The Treasury Recommends Changes, Protections for Auditors

The Treasury Department has finished up its recommendations for important changes in the audit industry. The long awaited report that addresses, among other things, the risks that audit firms face in the event of fraud by a client, will be issued next week; it will be based on a draft that's available here.

The report covers three areas: audit firm structure and finances, the competitive landscape for the firms, and human capital considerations.
Risks facing audit firms in fraud events addressed in the report are broad, covering regulatory actions, loss of customers and employees, reputational risks, and civil damage claims. To prevent an audit firm from going under, the panel recommended that the audit industry itself find ways to help firms that are damaged by client fraud. The recommendations stopped short of saying that audit firms should be shielded from lawsuits in the event of client fraud -- a protection that the firms have argued for.

Recommendations continue to support the SEC's power to appoint a court-approved trustee to help troubled audit firms stay intact, in addition to a recommendation that large, privately owned audit firms provide annual reports to the public as well as nonpublic audited financial statements to the Public Company Accounting Oversight Board (PCAOB). Those reports would be signed by the firms' senior audit partner.

Some members on the Treasury panel, including co-chairs Arthur Levitt and Donald Nicolaisen, voiced strong support for the firms to provide audited financials that are GAAP-compliant as opposed to the pro forma numbers that audit firms currently use. It all might come down to peer pressure; Levitt stated at a press conference that if one audit firm files financial results to the public, other firms will likely soon follow.

The advisory panel's human capital recommendations include focusing on improving accounting education curricula and content to ensure it continuously evolves to reflect current market developments, which is particularly important as U.S. companies switch to international accounting standards. Another key human capital recommendation involves development of a demographic database on the accounting profession to ensure enough qualified auditors are in the pipeline to meet future demand.