In the wake of severe governance failures like those surrounding the emissions scandal at Volkswagen, the US Public Company Accounting Oversight Board (PCAOB) has pledged to modernize standards that define how auditors should evaluate the risk that public company clients may have broken laws in the course of vetting their earnings and balance sheets.
The audit industry wrote the current standards in the 1980s, before the PCAOB regulated them, and many of those rules remain largely unaltered. In this form, the rules are clear that it’s not up to auditors to determine whether misconduct was committed. Instead, auditors are only required to consider whether the potential cost of misdeeds would materially impact the financial statement, even though those ramifications are often indirect.
Investors have asked for stricter, clearer rules that would create more transparency around all material risks that could threaten their investments. Meanwhile, accountants and lawyers say the requirements should reflect modern governance practices, such as whistleblower hotlines, that did not exist when the rules were written.
Early next year, Starling will publish “Renal Failure: A Crisis in Audit Culture?” a Deeper Dive Supplement to our 2022 Compendium, which will discuss why strong, independent auditors are essential to a well-functioning economy and stable society.