Audit Quality Indicators, the Usual Suspects

If you are interested in audit quality (and who isn’t?) there is a very interesting slide deck available at the PCAOB web site on Audit Quality Indicators. Looking though the recommendations and survey results, it seems that there is strong support for reporting more data, not more documents, to the PCAOB. And what data standard might we use for that?

Yes, the usual suspects have been rounded up. Audit hours by the partner. Partner hours in ratio to total hours, staff hours, etc. Staff experience levels.

The most relevant metric, IMHO, is partner hours spent on key risks. This is something the partner must do – revenue recognition, management estimates, risk of fraud. The more key risks, the larger the partner involvement must be. A poor ratio of partner involvement to key risks is a sign of a poor audit.

Other proposed metrics should be scrutinized closely. Many of them sound obvious or attractive, that is why I call them ‘the usual suspects’. But are they actually well correlated with any metric of audit failure? The PCAOB would do well to investigate that issue before requiring any particular metric be reported.

In particular, IT spending, per audit hour or otherwise, is a very suspect metric. Did you ever see movie advertising that touted how much the movie cost to make? It means they had nothing else good to say about it. Costing a lot is no measure of quality. Audit firms (I’ve worked for three) are terrible software developers. They all have exactly the same business model, but the ego of the partnership mentality nudges them in the direction of build instead of buy.

When they do buy, they all buy the same damaged goods – prime case in point, Microsoft Sync technology. This collaboration nightmare followed Ray Ozzie from Lotus. Remember when ‘collaboration’ was a buzzword? Right, it was a time when Microsoft ruled the desktop, and the desktop ruled the world. We wrote thick client apps that were tightly integrated with Microsoft Office, because Office on the desktop was ubiquitous. Ah, the 90’s.

Your auditor has a workpaper management and engagement team collaboration solution that uses Microsoft Sync to coordinate a thick Windows client to a SQL Server backend? This single design is supposed to span multinational corporations to very small entities, and every member firm around the globe? The very best design the 90’s could provide and I bet it cost a pretty penny.

So, no, by all you think is holy, don’t imagine that IT spend correlates to audit quality.

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