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The issue of auditor liability is detrimental to the profession and requires serious examination by regulators and lawmakers alike. Any one of the Big 4 could easily collapse should the full amount of any one of their lawsuits be awarded. Auditor liability becomes an even more poignant issue if new auditing standards are enacted that permit ranges of balances on the financial statements. This would highlight the inherent limitations of financial reporting. As a profession, we need to ensure that greater transparency has the desired effect of increased investor confidence and does not open up the firms to additional litigation. On November 13, 2003, the American Assembly gathered in Virginia and proposed that in exchange for greater …show more content…
This standardized model, which has remained largely unchanged since the 1930s, is considered by many to be a pass/fail model. This is analogous to a pass/fail option when taking a college course. When grades are reported at the end of the semester, there is no distinguishing the effort of an A student from the lack of effort of a C- student. Much of the auditor work and judgment is not reflected in the current model. The concept of the expectations gap was introduced over 30 years ago and is the difference between what public perception of an audit and what auditors claim is expected of them. In the wake of recent accounting scandals, the expectations gap can be seen in the area of fraud detection. There is a divergence in what the investing public expects when it comes to detecting fraud and what the auditing profession reasonably believes can be detected. The public often does not realize that it is management’s primary responsibility to prevent and detect fraud. To improve the audit model, it is recommended that the auditor’s report more clearly identify the auditor’s role and responsibilities, the limitations of the auditing process, and the degree of reliance to be placed on the audit information presented. These proposed changes are based upon the same premise of avoiding the “illusion of accounting exactitude”. The auditing process requires a great deal of professional judgment and financial statement users must be cautioned against placing more than reasonable assurance on the report. In line with providing greater explanation of the financial statements, greater explanation of the audit process would be required for more uncertain parts of the auditing process, where additional judgment is needed. It is further proposed
The issue of auditor liability is detrimental to the profession and requires serious examination by regulators and lawmakers alike. Any one of the Big 4 could easily collapse should the full amount of any one of their lawsuits be awarded. Auditor liability becomes an even more poignant issue if new auditing standards are enacted that permit ranges of balances on the financial statements. This would highlight the inherent limitations of financial reporting. As a profession, we need to ensure that greater transparency has the desired effect of increased investor confidence and does not open up the firms to additional litigation. On November 13, 2003, the American Assembly gathered in Virginia and proposed that in exchange for greater …show more content…
This standardized model, which has remained largely unchanged since the 1930s, is considered by many to be a pass/fail model. This is analogous to a pass/fail option when taking a college course. When grades are reported at the end of the semester, there is no distinguishing the effort of an A student from the lack of effort of a C- student. Much of the auditor work and judgment is not reflected in the current model. The concept of the expectations gap was introduced over 30 years ago and is the difference between what public perception of an audit and what auditors claim is expected of them. In the wake of recent accounting scandals, the expectations gap can be seen in the area of fraud detection. There is a divergence in what the investing public expects when it comes to detecting fraud and what the auditing profession reasonably believes can be detected. The public often does not realize that it is management’s primary responsibility to prevent and detect fraud. To improve the audit model, it is recommended that the auditor’s report more clearly identify the auditor’s role and responsibilities, the limitations of the auditing process, and the degree of reliance to be placed on the audit information presented. These proposed changes are based upon the same premise of avoiding the “illusion of accounting exactitude”. The auditing process requires a great deal of professional judgment and financial statement users must be cautioned against placing more than reasonable assurance on the report. In line with providing greater explanation of the financial statements, greater explanation of the audit process would be required for more uncertain parts of the auditing process, where additional judgment is needed. It is further proposed