CPA Audit Quality:

Status of Actions Taken to Improve Auditing and Financial Reporting of Public Companies

AFMD-89-38: Published: Mar 6, 1989. Publicly Released: Mar 6, 1989.

Additional Materials:

Contact:

David L. Clark, Jr
(202) 512-9489
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Pursuant to a congressional request, GAO reviewed the implementation of changes to improve auditing and financial reporting of public companies.

GAO found that the public accounting profession and others have taken positive actions to address concerns about audit quality and the accuracy and reliability of financial disclosures, but have not acted on several proposals. GAO also found that: (1) the Securities and Exchange Commission (SEC) does not require companies to provide information concerning significant risks and uncertainties in the corporate management discussion and analysis (MD&A) section of annual reports; (2) in July 1988, SEC proposed a rule requiring public companies' management to report on their responsibilities for the financial statements and on their assessment of the company's internal controls, but SEC never finalized the rule; (3) while endorsing audit committees as an effective force for ensuring auditor independence, SEC decided not to require all public companies to establish audit committees; (4) direct notification by terminated auditors to SEC would serve to alert SEC to possible problems which caused the company to change auditors; (5) SEC has delayed action on mandatory peer review for all public company auditors while it addresses several issues, including the structure of an SEC-sponsored peer review program, the costs and benefits of mandatory peer review, and questions about SEC authority to require peer reviews; (6) the American Institute of Certified Public Accountants' (AICPA) Special Investigations Committee (SIC), which examines allegations of audit failures, has performed its activities in strict confidence, limiting SEC ability to monitor the investigative process; and (7) although AICPA has made significant progress in improving both professional and auditing standards, it has not updated guidelines for some specialized areas.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: An interpretive release regarding management discussion and analysis disclosure was issued May 18, 1989.

    Recommendation: SEC should expedite its review of MD&A disclosures and issue guidance, such as the planned interpretative release, to improve information on risks and disclosures in annual reports.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Not Implemented

    Comments: SEC does not plan to implement this recommendation.

    Recommendation: SEC should adopt its proposal to require management of public companies to publicly report on its responsibility for the financial statements and internal controls.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: SEC does not plan to implement this recommendation.

    Recommendation: SEC should require the auditor to review and publicly report on the management report.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Not Implemented

    Comments: SEC does not plan to implement this recommendation.

    Recommendation: SEC should reverse its decision on audit committees and adopt a requirement for public companies to establish audit committees.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: AICPA requires this reporting of its SEC Practice Section members under a new rule adopted, effective May 1, 1989.

    Recommendation: AICPA, or SEC, if it concludes it has the authority, should require accountants to report directly to SEC when they resign or are terminated. However, if AICPA or SEC does not adopt such a requirement, legislation would be necessary to require direct notification to SEC.

    Agency Affected: American Institute of Certified Public Accountants

  6. Status: Closed - Implemented

    Comments: Since 1990, AICPA has required that all member firms that audit SEC clients join its SEC Practice Section (SECPS). As a result of this requirement, about 15,800 SEC clients are currently audited by members of AICPA's SECPS. One of the membership requirements that all SECPS firms must comply with is that they "report directly to the SEC the termination of any client-auditor relationship with an SEC registrant within five business days." About 325 SEC clients continue to be audited by non-AICPA member firms. These firms are not required to report audit terminations to SEC. In light of the small percentage these SEC clients represent of the total SEC client population and the lack of planned SEC actions in this area, GAO is closing this recommendation.

    Recommendation: AICPA, or SEC, if it concludes it has the authority, should require accountants to report directly to SEC when they resign or are terminated. However, if AICPA or SEC does not adopt such a requirement, legislation would be necessary to require direct notification to SEC.

    Agency Affected: United States Securities and Exchange Commission

  7. Status: Closed - Not Implemented

    Comments: SEC has dropped action on this issue, and it does not plan to adopt such a requirement.

    Recommendation: SEC should resolve the remaining issues and adopt a requirement that all firms practicing before SEC be subject to periodic peer reviews. However, if SEC determines that it does not have sufficient authority to do this, legislation would be necessary.

    Agency Affected: United States Securities and Exchange Commission

  8. Status: Closed - Not Implemented

    Comments: SEC reviews activities of the Quality Control Inquiry Committee (QCIC), the organization that replaced SIC. SEC examines closed case summaries, QCIC staff summaries of allegations, and a limited amount of other information that, in total, does not permit SEC to conclude on QCIC's effectiveness. However, QCIC is one part of the accounting profession's quality control program--with the peer review program being the major quality control review and evaluation mechanism. SEC has access to a significant amount of peer review program documentation (i.e., review workpapers and other records). SEC believes that it can appropriately accomplish its SEC client audit oversight responsibilities through its current peer review program and QCIC oversight activities. The additional costs that SEC would incur by reviewing more QCIC case records and documents would not adequately increase SEC's ability to effectively monitor auditor performance. SEC is not planning any action on this recommendation.

    Recommendation: For SEC to monitor the effectiveness of SIC activities, the Committee should provide SEC with access to all required information about the cases it investigates.

    Agency Affected: American Institute of Certified Public Accountants: Special Investigations Committee

  9. Status: Closed - Implemented

    Comments: New industry audit guides have been available since January 1991. The looseleaf format will allow easier updates.

    Recommendation: AICPA should issue the industry audit guides currently under revision as quickly as possible and undertake an effective program to keep all guides current.

    Agency Affected: American Institute of Certified Public Accountants

 

Explore the full database of GAO's Open Recommendations »

Sep 20, 2016

Sep 6, 2016

Aug 19, 2016

Aug 12, 2016

Jul 29, 2016

Jul 28, 2016

Jul 13, 2016

Jul 11, 2016

Jun 13, 2016

Looking for more? Browse all our products here