Thu, 23 May 2013 10:07:13 -0800WeeblyMon, 11 Oct 2010 16:32:17 GMThttp://auditeducation.info/3/post/2010/10/independence.htmlIndependence

“Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. If investors were to view the auditor as an advocate for the corporate client, the value of the audit itself might well be lost.” (Warren Burger, U.S. Supreme Court Justice)

Examples of Independence Violations:
“EY Settles SEC Case in $2.8 Million Pact,” Judith Burns, Wall Street Journal (August 7, 2008): C5. Ernst & Young was sanctioned by the SEC for paying Mark Thompson to produce promotional materials while Thompson served as a director of three EY audit clients.

“EY Gets SEC Penalty for Ties to Client,” Jonathan Weil, Wall Street Journal (April 19, 2004): A3+A8. Ernst & Young was banned from accepting new publicly-traded audit clients for six months after entering into a joint venture with audit client PeopleSoft.

“Did Ties That Bind Also Blind KPMG?” Cassell Bryan-Low, Wall Street Journal (June 18, 2003): C1+C5. KPMG paid referral fees to audit client First Union for directing wealthy customers to KPMG’s tax shelters. KPMG was disciplined previously for lending money to an audit client and for investing in a client-operated mutual fund.

“This Scandal Changes Everything,” Pamela Moore, Business Week (February 28, 2000). After investigators discovered more than 8,000 independence violations by PricewaterhouseCoopers employees, SEC Chairman Art Levitt proposed major revisions to the agency’s auditor independence requirements.

Proposals to Enhance Auditor Independence:
“PCAOB Hears Pros and Cons of Audit Firm Rotation,” Michael Cohn, AccountingToday.com (March 22, 2012). This article discusses and potential advantages and disadvantages of mandatory audit firm rotation.

“Of Fiddlers and Tunes,” Robert Sack & Mark Haskins, The CPA Journal (June 2003): 10-11. This article recommends that the stock exchanges hire and compensate the auditors who audit their listees’ financial statements.

“A Market Remedy for Our Nasty Accounting Virus,” Susan Lee, Wall Street Journal (July 10, 2002). This article describes a proposal to have corporations purchase “financial statement insurance” and have the insurance companies hire the auditors.

Cases:
“If You Need Love, Get a Puppy: A Case Study on Professional Skepticism and Auditor Independence,” Robert Braun & H. Lynn Stallworth, Issues in Accounting Education (May 2009): 237-252. A staff auditor discovers that his best friend’s wife is embezzling from an audit client.

“Auditor Independence: A Focus on the SEC Independence Rules,” Audrey Gramling & Vassilios Karapanos, Issues in Accounting Education (May 2008): 247-260. Five short cases require students to assess whether the auditor complied with SEC independence rules.

“Educational Interventions for Teaching the New Auditor Independence Rules,” Helen Roybark, Journal of Accounting Education (2008): 1-29. A series of research-writing assignments, cases, videos, and game activities to teach auditor independence rules.

“Thinking Outside of the Box (of wine, that is): An Exercise in Independence,” Robert Richardson, Issues in Accounting Education (August 2004): 363-367. Uses the example of a wine critic to illustrate the importance of auditor independence.

Research:
“Policy and Research Implications of Evolving Independence Rules for Public Company Auditors,” Audrey Gramling, J. Gregory Jenkins & Mark Taylor, Accounting Horizons (December 2010): 547-566. This article summarizes research studies related to the effects of auditor-client employment relationships, audit fees, auditor rotation, nonaudit services, and audit committees on auditor independence.



  ]]>Mon, 11 Oct 2010 16:26:16 GMThttp://auditeducation.info/3/post/2010/10/pcaob.htmlPublic Company Accounting Oversight Board

“PCAOB Sees Decline in Audit Quality,” Michael Cohn, AccountingToday.com (October 5, 2011). The number of audit deficiencies found by PCAOB inspectors did not decline in 2010. Problem areas include valuation of financial instruments, Chinese companies executing reverse mergers with U.S. shell companies, clients jumping from auditor to auditor, changes in accounting standards, and inadequate disclosures in audit reports.

“New PCAOB Chairman Pushes for Audit Overhaul,” Michael Cohn, AccountingToday.com (May 5, 2011). Chairman James Doty discusses items on the PCAOB's agenda such as revising the auditor's report, making disciplinary proceedings public, closing the expectation gap, addressing industry concentration, and inspecting public accounting firms' foreign affiliates.

PCAOB Organization:
“The PCAOB 101,” Tom Olach, Internal Auditor (June 2008): 50-54. This article provides a concise overview of the PCAOB’s activities including registration of accounting firms, standard setting, inspections, and enforcement.

“Supreme Court Rules Against PCAOB,” Michael Cohn, WebCPA.com (June 28, 2010). Although the US Supreme Court ruled that limitations on the SEC’s ability to remove PCAOB members violate the constitution, the board continues to function. In the future, the SEC will be able to dismiss PCAOB members at will.

PCAOB Inspection Reports:
“PCAOB Inspections and Large Accounting Firms,” Bryan Church & Lori Shefchik, Accounting Horizons (March 2012): 43-63. This article summarizes the audit deficiencies reported by PCAOB inspectors during years 2004-2009.

“PCAOB Spotlights Auditing Problems from Economic Crisis,” WebCPA.com (September 29, 2010). A PCAOB report describes audit deficiencies related to mark-to-market accounting, goodwill impairment, off-balance sheet financing, and loan loss reserves.

“PCAOB: The 11 Things Auditors Need to Fix,” Sarah Johnson, CFO.com (October 23, 2007). The PCAOB reports the most common deficiencies discovered during 439 inspections of smaller CPA firms.

PCAOB Sanctions:
“Ernst & Young to Pay $2 Million to Settle Audit Failure Charges,” Michael Cohn, AccountingToday.com (February 8, 2012). The PCAOB fined EY $2 million and sanctioned four partners for deficient audits of Medicis Pharmaceutical Corp.

“PCAOB Sanctions Three Auditors,” Allen Rappeport, CFO.com (December 17, 2007). Two BDO Seidman auditors were sanctioned for omitting work and backdating documents. One KGO auditor was sanctioned for performing a deficient audit and because his mother owned stock in the client.

“Deloitte Receives $1 Million Fine,” Judith Burns, Wall Street Journal (December 11, 2007): C8. The PCAOB censured and fined Deloitte & Touche for a deficient audit of Ligand Pharmaceuticals.

  ]]>Mon, 11 Oct 2010 16:20:48 GMThttp://auditeducation.info/3/post/2010/10/sarbanes-oxley1.htmlMon, 11 Oct 2010 16:20:45 GMThttp://auditeducation.info/3/post/2010/10/sarbanes-oxley.htmlSarbanes-Oxley
The Sarbanes-Oxley Act of 2002 is ancient history to today’s accounting students. To help students understand the wide-spread anger at accountants that led to Sarbanes-Oxley, I show selected portions of the Frontline episode, “Bigger Than Enron.” The Chakarun article (National Public Accountant, October 2002) provides an excellent summary of the major provisions of S-Ox. The Factor article and the Healey article are fun to discuss together; one praises S-Ox while the other condemns it. The Chambers et al. article (CPA Journal, September 2010) provides an easy-to-read summary of research into the effects of S-Ox on financial reporting.

Articles:
“The Sarbanes-Oxley Act of 2002,” Michael Chakarun, National Public Accountant (October 2002): 6-9. This article provides an excellent summary of the major provisions of S-Ox 2002.

“Two Cheers for Nancy Pelosi,” Mallory Factor, Wall Street Journal (March 18, 2006). The chairman of the Free Enterprise Fund complains that S-Ox has placed an onerous burden on American public companies.

“Sarbox Was the Right Medicine,” Thomas J. Healey, Wall Street Journal (August 9, 2007). A retired Goldman Sachs partner argues that S-Ox restored market confidence as evidenced by the 67% increase in the S&P 500 from June 30, 2002 through June 30, 2007.

Video:
"Bigger Than Enron," Frontline (Public Broadcasting Service, 2002). Available for about $25 from http://teacher.shop.pbs.org. Or view through the Web at http://video.google.com/videoplay?docid=7307488749505887449#


Research:
“Did Sarbanes-Oxley Lead to Better Financial Reporting: A Survey of Recent Research,” Dennis Chambers, Dana Hermanson & Jeff Payne, CPA Journal (September, 2010): 24-27. This article summarizes five academic research studies that each found evidence suggesting financial reports have become more accurate or reliable since passage of S-Ox.

 

  ]]>Mon, 23 Aug 2010 10:15:12 GMThttp://auditeducation.info/3/post/2010/08/confidentiality.htmlConfidentiality
I tell my students that I got really angry at a staff auditor only once when I was a senior. The auditor left the client’s payroll register open on his desk while he went to the men’s room. The client controller happened to walk past the auditor’s desk, saw the payroll register unattended, and nearly tore my head off. After yelling at me for 10 minutes, the controller stormed back to his office saying he was going to call the partner and demand that the staff auditor and I both be removed from the audit. He had every right to be angry and I was just lucky that he didn’t actually report the incident to the partner.

I’ve been able to generate some very good class discussions using the August 31, 1990 Wall Street Journal article about James Checksfield who was stripped of his CPA license for reporting a client’s tax evasion to the IRS. Some students argue that Checksfield acted ethically by blowing the whistle on a known tax cheat. Other students argue that accountants, like priests and lawyers, shouldn’t reveal information obtained from clients in confidence.

Articles:
“Accountant Confidentiality: The Duty to Remain Silent vs. the Duty to Speak,” Charles Werner, CPA Journal (June 2009): 62-67. This article summarizes accountants’ legal and ethical responsibilities and provides a decision table for 13 situations CPAs might face in their audit and tax practices.

Examples of Violations of Client Confidentiality:
“Deloitte Partner and Wife Charged in Insider Trading Scheme,” AccountingToday.com (November 30, 2010). The SEC charged former Deloitte Tax partner Arnold McClellan with notifying his brother-in-law about seven confidential acquisitions planned by Deloitte clients.

“Former E&Y Partner Settles Insider Trading Charges for $250,000,” WebCPA.com (August 18, 2010). James Gansman, former partner in E&Y’s Transaction Advisory Services group, was fined $250,000 and sentenced to one year in prison for tipping off his stockbroker girlfriend about seven of his clients who were acquisition targets.

“Former Deloitte Vice Chair Settles Insider Trading Charges,” WebCPA.com (August 4, 2010). Deloitte partner Thomas Flanagan earned more than $400,000 of illicit profits trading securities of several of the firm’s audit clients.

“Relative Goes Public With Private Info,” Abigail Van Buren, Chicago Tribune (February 9, 1995). A reader asks “Dear Abby” for advice after an employee in her accountant’s office reveals personal financial information.

“Missouri Is Revoking License of Accountant Who Doubled for IRS” Wall Street Journal (August 31, 1990): A2. The Missouri State Board of Accountancy revoked the certification of an accountant who reported his client’s tax evasion to the IRS.

  ]]>Thu, 05 Aug 2010 12:04:40 GMThttp://auditeducation.info/3/post/2010/08/liabilities1.htmlThu, 05 Aug 2010 12:04:36 GMThttp://auditeducation.info/3/post/2010/08/liabilities.htmlLiabilities
Auditing liabilities is more difficult than auditing assets. When testing assets, the auditor can generally start with the items recorded in the accounting records and verify their existence through physical examination or other means. But with liabilities, the auditor must look for debts that should have been recorded but weren’t. Many of my students have trouble understanding tests of completeness. I spend a lot of time explaining and re-explaining why auditors select samples of January cash payments and trace them to December 31 accounts payable.

I have tried without success to find a good case in one of the accounting education journals that teaches students how to test accounts payable. If I’ve overlooked such a case, please post a comment below.

Articles:
“Accounts Payable Fraud: Ten Ways to Identify It,” Christine Warner, New Perspectives (Summer 2007): 14-17. This article explains audit procedures to identify accounts payable fraud such as searching for duplicate payments, round-amount invoices, abnormal invoice volume, and invoices just below approval amounts.

Cases:
“Garbage In, Garbage Out Waste Disposal Incorporated: An Audit Case,” Srinivasan Ragothaman, William Wilcox & Thomas Davies, Issues in Accounting Education (August 2003): 307-316. A fictitious waste disposal company manages its earnings by manipulating its depreciation expense and environmental liabilities.


















]]>Thu, 05 Aug 2010 11:16:55 GMThttp://auditeducation.info/3/post/2010/08/other-assets.htmlOther Assets
After teaching my students how to audit sales, accounts receivable, and inventory, I rarely have enough time to talk about other assets. That’s too bad because Issues in Accounting Education has published some interesting cases recently dealing with assets such as mining properties, foreign bank accounts, line cost accruals, depreciable fixed assets, and investment securities.

Cases:
“Sky Scientific, Inc.: An Auditing Minefield,” Stephen BeMiller, Randy Wirtz & Deborah Lindberg, Issues in Accounting Education (May 2009): 219-236. Describes an actual company that overstated the value of its mining properties and foreign bank deposits. The case addresses audit planning, the evaluation of management representations, the responsibilities of the concurring auditor, and the auditor’s going-concern judgments.

“Behind Closed Doors at WorldCom: 2001,” Kay Zekany, Lucas Braun & Zachary Warder, Issues in Accounting Education (February 2004): 101-117. Describes the fraud at WorldCom. Students must evaluate WorldCom’s revenue recognition practices and line cost accruals.

“Garbage In, Garbage Out Waste Disposal Incorporated: An Audit Case,” Srinivasan Ragothaman, William Wilcox & Thomas Davies, Issues in Accounting Education (August 2003): 307-316. A fictitious waste disposal company manages its earnings by manipulating its depreciation expense and environmental liabilities.

“Laborers Local 829 Health and Welfare Plan: Testing Investments and Receivables,” Thomas Hogan, James Bierstaker & William Seltz, Issues in Accounting Education (November 2001): 637-649. Students must plan and perform audit tests of investments and receivables at a multi-employer health care provider.

 ]]>Tue, 03 Aug 2010 17:50:18 GMThttp://auditeducation.info/3/post/2010/08/accounts-receivable.htmlAccounts Receivable
I tell my students that testing the existence of accounts receivable is relatively easy. By sending confirmation requests and examining documentation we should be able to obtain reliable evidence about whether somebody owes our client money. The hard part is testing valuation. Can our client collect the amount due? The first two articles listed below provide advice for testing the client’s allowance for doubtful accounts. The third article suggests that auditors don’t always test that account very well. 

Articles:
“Assessing the Allowance for Doubtful Accounts,” Mark Riley & William Pasewark, Journal of Accountancy (September 2009): 40-44. This article describes 3 techniques for evaluating past estimates of the allowance for doubtful accounts.

“A Reserve Against Loan Defaults,” Thomas Stanley, John Lajaunie & David Meeting, Internal Auditor (June 2009): 43-47. This article explains accounting rules and audit procedures for loan loss reserves.

“Dear CFO: Watch Your Loan Loss Reserves,” Marie Leone, CFO.com (August 21, 2009).  In its annual inspection reports, the PCAOB criticized, among other firms, Deloitte, KPMG, and McGladrey & Pullen for not doing adequate testing on their clients' reserves.

Cases:
“The SEC’s Case Against California Micro Devices: A Lesson in Using Professional Skepticism and Obtaining Sufficient Appropriate Evidence,” Jill D’Aquila & Kim Capriotti, Issues in Accounting Education (February 2011): 145-154. Students must evaluate the audit procedures performed by Coopers & Lybrand to test California Micro Devices’ accounts receivable.

“Laborers Local 829 Health and Welfare Plan: Testing Investments and Receivables,” Thomas Hogan, James Bierstaker & William Seltz, Issues in Accounting Education (November 2001): 637-649. Students must plan and perform audit tests of investments and receivables at a multi-employer health care provider.

  ]]>Mon, 02 Aug 2010 17:11:01 GMThttp://auditeducation.info/3/post/2010/08/evaluating-going-concern.htmlEvaluating Going Concern

“In 54 percent of the 673 largest bankruptcies of public corporations since 1996, auditors provided no warnings in the months prior to bankruptcy.” (David Dietz, Pittsburgh Post-Gazette, 4/26/02)

After showing the above quotation on the screen, I ask my students why auditors might be “timid” about expressing doubt about a client’s ability to continue as going concern. Students hypothesize that auditors might be afraid the client will retaliate by firing them or that the modified report might become a “self-fulfilling prophecy.” That is, the modified report might worsen the client’s situation by scaring away customers and creditors. The Geiger et al. Advances in Accounting study presents evidence suggesting that both fears are warranted.

The Heilig-Meyers case has always generated good class discussion for me because the choice is not obvious. There are enough facts to build a case for modifying the report or for issuing a standard opinion.

Articles:
“Living with a Scarlet Audit Letter,” Sarah Johnson, CFO.com (October 21, 2009). A going concern modified audit report may make the client’s situation worse and become a self-fulfilling prophecy.

“Regulators Eye ‘Going Concern’ Concerns,” Sarah Johnson, CFO.com (April 6, 2009). PCAOB reconsidering standard for auditors evaluating going concern. Judgment is difficult and “extremely subjective” in an unstable economy. 23 percent of audit reports in early 2009 contained a going concern modification.

“Auditors are Timid: They Failed to Warn in Most Big Firm Bankruptcies Since 1996,” David Dietz, Pittsburgh Post-Gazette (April 26, 2002): C8. Of 673 bankruptcies since 1996, only 46 percent received modified audit opinions. Small firms are more likely than large firms to receive a modified opinion.

“Auditors Often Victims of ‘Kill the Messenger’ Mentality,” Bill Deener, Dallas Morning News (March 7, 2002): A1. Auditors who issue going concern modified audit reports are three times more likely to be fired than auditors of financially-distressed clients who do not issue a modified opinion.

“SAS 59: How to Evaluate Going Concern,” John Ellingson, Kurt Pany & Peg Fagan, Journal of Accountancy (January 1989): 51-57. This article provides a concise summary of SAS No. 59 and includes a checklist of conditions and events that may indicate a going concern problem.

Cases:
“The Rise and Fall of Heilig-Meyers,” Paul Clikeman, Journal of Accounting Education (December 2005): 215-231. Students must decide whether to issue a modified auditor’s report on Heilig-Meyers’ fiscal 2000 financial statements. 

Research:
“Investor Reaction to Going Concern Audit Reports,” K. Menon & David D. Williams, Accounting Review (November 2010): 2075-2105. Companies suffer negative excess stock returns when they receive a going-concern modified audit report. The stock price reaction is more negative when the auditor discloses that the client is having trouble obtaining financing. Institutional investors tend to divest their shares after a company receives a going-concern modified audit report.

“Costs Associated With Going-Concern Modified Audit Opinions,” Marshal Geiger, K. Raghunandan & D.V. Rama, Advances in Accounting (1998): 117-139. Financially-stressed companies who receive a going-concern modified audit report are more likely than financially-stressed companies who do not receive a modified audit report to: (1) switch auditors, and (2) declare bankruptcy.

“What Is Substantial Doubt?” Lawrence Ponemon & K. Raghunandan, Accounting Horizons (June 1994): 44-54. Judges and financial statement users have different perceptions of “substantial doubt.” Bankers and financial analysts believe a modified auditor’s report indicates a high probability of bankruptcy while judges think auditors should issue a modified report even when the probability of bankruptcy is relatively low.

“Going-Concern Evaluations: Factors Affecting Decisions,” Vicky Arnold & Donald Edwards, CPA Journal (October 1993): 58-60. In deciding whether to express substantial doubt about a client’s ability to continue as a going concern, auditors are most influenced by the client’s: operating income or loss, availability of trade credit, potential liability from litigation, possibility of losing a major customer, and current ratio in relation to loan covenants.

  ]]>