Thursday, July 9, 2009

Considering BusinessWeek's Article: How Good Is Your Audit Firm?

BusinessWeek recently published an article titled How Good is Your Audit Firm? The Public Company Accounting Oversight Board ("PCAOB"), at the request of the SEC, has been requested "to examine the feasibility of requiring audit firms to periodically report on key indicators of audit quality", and this article explores the subject.

One of the authors is a retired partner at KPMG, and is now, along with the other two authors, a college professor. This explains the looking at the world with rose colored glasses approach suggested in this article.

I agree 100% that audit quality is important. The suggestion to report on input and processes isn't going to change a thing.

The article suggests audit firms, which mind you in the US are privately held, report things like:
  • Years of experience of professional staff by partner, manager and staff level
  • Areas of expertise
  • Relative time spent on client service, administration, training and nonchargeable time
  • Number of public clients per partner
  • Audit firm personnel-retention rates by professional level
  • Specific types of industry relevant training

Most firms already disclose information such as years of experience and areas of expertise. I submit that years of experience is overrated. Yes, generally speaking someone with 20 years of experience knows a lot more than someone with 2 years of experience. But 20 years isn't necessarily better than 10. I have unfortunately seen people with far more experience than me not get it right.

I am very bothered by the notion of disclosing "relative time" because it suggests that hours are an important input in this equation. I don't track my hours. It is not relevant to my clients. My experience and ongoing growth and training is important to them.

The market place drives competition and audit quality. An artificial set of criteria imposed on audit firms isn't going to make things better.


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