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Regulators Give Auditors a Fail Report

The AICPA’s peer review program, which in the past was of interest only to regulators and CPA firms, may soon impact CPA firm clients ability to find an auditor, and more importantly, an auditor from a small firm that understands and can relate to small business.

Several regulators, most notably the Department of Labor (DOL), have long contended that work performed on audits of employee benefit plans was not being conducted with the thoroughness that the DOL would prefer. Anecdotal evidence of shoddy auditing has been discussed for many years, but recently the DOL did a study of audits and determined that approximately 40% were not being performed as the DOL would prefer. Indeed, the study turned up the fact that literally thousands of audits were being performed by CPAs that weren’t licensed by any state and by firms that lied about whether or not they had performed such audits.

Presented with overwhelming evidence of a problem, the American Institute of CPAs (AICPA) and state boards of accountancy have taken several actions. First, almost every state now requires that a CPA firm be peer reviewed, so firms can no longer opt out and remain licensed (whether they will remain licensed or just “disappear” remains to be seen).

Second, the AICPA has ratcheted up the pressure on reviewers and firms. Reviews that used to cost a few thousand dollars and take a day or two can now last for months and cost tens of thousands of dollars. The results are subjected to multiple levels of oversight stretching out over four to six months and costing firms additional thousands of dollars.

Third, the AICPA has come to the conclusion that small firms should be out of the audit business altogether and is actively working to eliminate this part of the practice of small firms.

Faced with this, many small firms, who formerly provided a good option for nonprofits, small employee benefit plans and other small businesses, are leaving the audit business. Regulatory risk, risk to their reputations, and the overwhelming cost of this regulatory process are often reason enough for a firm to jettison their audit clients leaving them to search among the large firms for someone that can understand their concerns.

Over the next few years, as the pressure increases on firms, expect the availability of audit firms to decrease rapidly and dramatically. Supply and demand would dictate that costs for these small entities will increase, and perhaps dramatically.