Worrying news or a step forward?

The audit watchdog has identified serious deficiencies in the way auditors check the books of their clients for fraud.

A Public Company Accounting Oversight Board report released this week has revealed that auditors are sometimes adopting a mechanical, tick-the-box approach when checking out for fraud.

"The particular inspection observations described in this report gave rise to Quality control concerns that were communicated to the firms at which the deficiencies were identified. By law, those quality control criticisms are not made public with respect to any particular firm if the firm addresses the criticism to the Board's satisfaction within 12 months after the issuance of the inspection report on the firm."

According to the report, PCAOB inspection teams found that auditors "often document their consideration of fraud merley by checking off items on standard audit programs and checklists."

Under the auditing standards, big audit teams are supposed to hold what the standard calls "brainstorming sessions" to discuss such issues as how management might be perpetrating and concealing the fraud, and how the assets are being misappropriated. "Despite the importance of this planning stage to an effective audit, PCAOB inspection teams have noted instances of failures to comply with this aspect of the standard. In particular, PCAOB inspectors have (1) identified audits in which the audit team was unable to demonstrate that brainstorming sessions were held; (2) identified audits in which the audit teams' brainstorming sessions occurred after planning and after substantive fieldwork had begun; and (3) identified audits in which key members of the audit team did not attend the brainstorming sessions."

Also, the inspection teams found extraordinary instances where there was no evidence that the auditors had spoken to audit committee, management or others about fraud.

The list goes on so check it out.

The PCAOB reckons there's no need to tighten up the rules but it says some auditors should take their work more seriously. "This report is a constructive way to remind all auditors of what the Board's standards require of them in these areas. Careful attention to these requirements is important to best position auditors to detect material misstatements caused by fraud," PCAOB chairman Mark Olson said in the press statement.

On the positive side, this bit of guidance from the PCAOB is one step towards improving the chances of detecting material fraud. Many more need to be taken.