Auditors’ New Task Proved Difficult

Companies and their accountants faced “enormous challenges” that diminished the quality of audits as they tackled internal financial control assessments for the first time, the auditing profession’s oversight board reported Wednesday.

The Public Company Accounting Oversight Board said experience should allow accountants to overcome the difficulties of the 2002 Sarbanes-Oxley corporate-governance law provision, which required auditor approval of internal financial controls in 2004 annual reports. The challenges included a shortage of trained staff at companies and audit firms, a tight timetable and limited resources.

The board put much of the responsibility on auditors and identified steps they could take to save time and money, such as focusing on “unique risk factors within each company” and relying more on the work of a company’s internal auditors.

“While our inspections identified several opportunities for auditors to improve audit quality and efficiency, the board remains confident that auditors will be able to perform more effective and efficient audits in future years,” outgoing board Chairman William McDonough said in a statement.

The report represents the latest effort by the oversight board to prod auditors to be more selective about what procedures are necessary in reviewing a firm’s internal controls, said Peter J. Romeo, a partner in corporate and securities law at Hogan & Hartson in Washington.

“The statement ... is a recognition that there has been more caution than necessary,” said Romeo, a former chief counsel at the Securities and Exchange Commission’s corporation finance division.

Auditors “were burned so badly” by the corporate scandals at Enron Corp. and elsewhere “that they’ve overreacted,” Romeo said. “The pendulum swung all the way over to the other side. Now it needs to return to the middle where it belongs.”