By Michael Cecere, CPA, MST Gray, Gray & Gray, LLP
Most Certified Public Accounting (CPA) firms provide audits of financial statements. But that does not mean all audits are created equal. Although there are accepted standards for the audit process (Generally Accepted Auditing Standards, or GAAS), the quality and accuracy of audit examination and reporting is not without its flaws. In just one example, the Department of Labor reports that it has found “material deficiencies” in 39% of the audits they review.
Public companies and non-profits have audit obligations because of legal or regulatory obligations. Private companies may have an audit performed when seeking financing, are being sold, or seek additional investors. When the number of eligible participants in your 401k or 403b plan reaches 100 it is likely to trigger the Department of Labor’s requirement for an annual audit of your plan.
Because it is an impartial, objective process, an audit adds credibility to the financial reporting an organization provides to its shareholders, employees, suppliers, and lenders. An audit also offers a materially accurate representation of financial standing, making the results useful for strategic and operational decision making.
The inconsistency in audit quality is acknowledged by the Public Company Accounting Oversight Board (PCAOB), a non-profit entity that supervises the qualifications of the accounting firms that carry out public audits. To help ensure that standards are being met, the PCAOB administers regular inspections, while the Department of Labor (DOL) conducts its own reviews of employee benefit plan audits (such as, 401k and 403b plans).
Often the first sign of poor audit quality comes after completion, when revisions to the financial statements have to be made because regulators such as the PCAOB or DOL identify deficiencies. Or subsequent events identify mistakes that should have been caught during the audit process. This results in delays, additional costs, and (in some cases) fines and penalties. More damaging may be the mistrust that arises regarding the true financial status of the audited organization, especially from those that have relied on the incorrect financial information.
Several factors can influence the quality of the audit. Unfortunately, many companies put the price of the audit at the top of their list, prioritizing low cost over potential quality. The price is not always indicative of quality but the old adage of “you get what you pay for” does hold some truth in it. Focusing only on price is a shortsighted approach when you consider the importance an audit will have with multiple audiences. More central to the quality of an audit is the reputation and expertise of the audit firm, its knowledge of the industry, the experience and judgment of audit personnel, and a consistent and verifiable audit process. These are all areas organizations searching for the right CPA firm need to address during their selection process.
The trustworthiness of your organization can be tied to the integrity of your financial audit. This integrity, in turn, is dependent upon the quality of the audit process and the professionalism and experience of those performing the audit. Prioritizing these attributes will help you avoid a poor-quality audit that would otherwise threaten the credibility and standing of your business.
Michael Cecere, CPA, MST is a partner with the accounting and advisory firm of Gray, Gray & Gray, LLP, Canton, MA. He can be contacted by telephone at (781) 407-0300 or via email at: mcecere@gggllp.com
