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Why Limiting Auditor Liability is Wrong

Speaking of gatekeeper liability, Sam Antar argues, at his white collar fraud blog, that

"Audit firms put too many relatively inexperienced staffers on audits to do much of the leg work.

Most auditors never take a single semester in-depth college level course devoted exclusively to combating fraud or understanding weaknesses in internal controls before graduating college.

Worst yet, too many topics covered on the CPA exam have to be learned in a cram CPA review course, only after potential CPA candidates' graduate college.

Now some clowns at certain audit firms want to limit their liability for failed audits?

As a former CPA and the criminal CFO of Crazy Eddie, I advise public accounting firms to increase the professional competence of your staffs and improve your audit procedures if you truly want to reduce your liability exposure for your screw ups."

One of the problems that the really large accounting firms got into was a competition on auditing fees, which lead to a race to the bottom.

Both on the fee side and the quality of the audits.

To make up for the loss of fees, the accounting firms started to perform consulting functions.

These consulting functions immediately lead to at the very least cognitive dissonance and at the worst fraud.

With a proper budget, the audit firm can control the quality of the audit.

But the big accounting firms found themselves undercutting their audit fees so much that it was impossible to ensure internal controls were in place.

What was needed was a floor on audit fees: something like a minimum resale price for the audit team which could have set up as a franchise of the big accounting firm.

One the floor was set, it would be been less likely for there to be a race to the bottom.

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Full post as published by Misleading Advertising Law on July 17, 2008 (boomark / email).