Doty’s remarks came during his opening statement at the kickoff of the PCAOB’s two-day Standing Advisory Group (SAG) meeting.
The proposal for a PCAOB Fraud Task Force was most recently discussed at the PCAOB SAG’s November 2013 meeting, at which the concept of a SAG subcommittee forming the core of a Fraud Task Force was discussed.
“We are going to pursue this with a series of outreach efforts, not unlike the one we are sitting in today,” Doty said while updating the group on Tuesday.
He added that the outreach meetings aimed at drawing out information on why fraud occurs, and why auditors miss fraud, would “probably be more focused, to induce candor,” or said another way, “not public.”
As to how such outreach meetings have been conducted by the PCAOB – and based on the tone of his remarks, and the remarks of Chief Auditor Marty Baumann – it appears with some success – the meetings have been conducted a variety of ways, including, as described by Doty, “some focus groups, less public meetings, smaller meetings,” and that the information appeared to be more forthcoming in such meetings, “than what we can find out in a large group.”
Search for Fraud Root Causes Moves to Background, But Not Back Burner
Doty emphasized that while the board is not working along the lines of a formal task force structure, but more informal, nonpublic outreach to obtain the type of sensitive feedback on fraud and the failure to find fraud as described above, as far as the PCAOB is concerned, “There is not a lapsed or diminished interest in why auditors cannot find fraud.”
The PCAOB Chairman also added a sobering observation, “The data tends to show that auditors that do find fraud get fired.”
“There is not a good statistic that supports the auditor that does find fraud,” he continued, “that’s an audit committee issue.”
Baumann detailed the level of outreach conducted by the PCAOB since the last time the Fraud Task Force was discussed with the SAG. “We have spoken to over 100 experts, including your firms, forensic accountants, financial executives, federal prosecutors, investigators, law enforcement experts, about the subject of financial reporting fraud, incentives, behaviors, and ways in which procedures performed by the auditor can be improved as well.”
On the subject of the Fraud Task Force, he added, “We have decided to continue to have meetings with the SAG as well, but not limit it to the SAG [meetings] in November… we may have other public meetings [with] panelists like the SAG meeting, we concluded we have the entire SAG to work with, we don’t need only a subgroup of the SAG.” Reiterating the PCAOB Chairman’s message, Baumann noted the Fraud project is “a very active project.”
SAG members raised some questions in response to the announcement of the Fraud Task Force going ‘camo,’ so to speak.
Rick Murray asked, “Why has it been determined [to use] a nonpublic and institutionalized process?” He added, “Speaking as a SAG member, I suspect all 42 of us would like to have the opportunity to make a contribution.”
Doty replied, “There is a view, .. it also requires if we get people that are close to fraudulent situations, you would like to be able to debrief people as to what they saw in crisis situations, advise the client in which they found fraud; it would be good if we could debrief some of those people, quietly.
He continued, “We meet with audit committee members from time to time; professional groups from time to time; audit firms.” He indicated that in contrast, it can become a more formalized process with a formal task force.
As to process, “With a task force,” said the PCAOB Chairman, ”you have to ask them, what the question is you want them to answer, and tell them what you want them to do, expect them to do.”
On the issue of scope: “It’s a question why auditors don’t find fraud; that’s a very broad question; in the course of the process that’s envisioned, we may come to a sufficiently focused need for advice, it’s not unlike what regulators around the world do, to determine what [the dimensions] of a problem are.”
“I agree,” said Baumann, and in addressing Murray’s second question, added, “we will include the SAG, and potentially have special meetings of the SAG.
Baumann emphasized, “Our plan is to have a very transparent process,” adding that the PCAOB has been able to obtain certain information that they may not have been able to obtain in a more public venue.
In related news, Doty noted that 76 out of 208 inspections found a deficiency in the audit, and that at the end of the year a summary report, referred to as a “4010 report” would categorize and summarize trends in those deficiencies.
Other matters discussed during the ‘opening remarks section of Day One of the two-day SAG meeting included communications between audit committees and their audit firms, and communications between audit committees and the PCAOB. PCAOB board and staff members strongly encouraged audit committees to read the PCAOB’s August 2012, Information for Audit Committees About the PCAOB Inspection Process, and there was discussion around improved communications between audit committees and audit firms as a result of suggested questions for audit committees to raise with their firms in that document.
Chairman Doty also noted in his remarks to the SAG that if audit committees were being told by their audit firms that fee increases were due to the PCAOB, he invited those audit committees to come talk to the PCAOB, and that he viewed his role as being an ‘evangelist’ for good governance, and to explain that a high quality audit was a bulwark that would stand behind the audit committee.