* US lagging in probes of auditors, advisory group says
* Auditor rotation, annual reports recommended (Adds PCAOB comment)
By Dena Aubin
NEW YORK, March 16 (Reuters) - Audit firms that failed to flag risks ahead of the financial crisis have not been held to account and an in-depth investigation is needed, an advisory group to the U.S. auditor watchdog agency said on Wednesday.
Regulators in Europe and the United Kingdom are probing the role of auditors in the 2008 crisis, but the United States has lagged and needs to do more, said Barbara Roper, head of a working group for the Public Company Accounting Oversight Board.
“Auditors failed to perform their basic watchdog function in the financial crisis,” Roper said at a PCAOB advisory group meeting in Washington. “There’s a need to figure out why they failed to perform that function and what can be done to fix that problem.”
The PCAOB was created after the Enron and WorldCom accounting scandals to police audit firms. It oversees the work of the Big Four auditors -- Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers -- and other auditors of public companies.
While auditors did not cause the financial crisis, they gave stamps of approval to many companies’ financial statements just months before they failed, said Roper, director of investor protection for the Consumer Federation of America.
She said the PCAOB should look at examples of companies that failed or had to be bailed out and find out what went wrong with the audits and why.
Lehman Brothers LEHMQ.PK, American International Group (AIG.N), Citigroup (C.N), Fannie Mae FNMA.OB, and Freddie Mac FMCC.OB, among others, received unqualified audit opinions on their financial statements months before their collapse or bailouts, Roper said.
“If the auditors were performing as they should and this is the result we get, then there’s a problem with the system,” she said.
Audit firms also lack the basic independent governance that most public companies around the globe have, Lynn Turner, head of a PCAOB working group on audit firm governance, said at the meeting in Washington.
He said these firms need more transparency. They should have to file annual financial statements with the PCAOB, including information about how they control quality globally, Turner said.
PCAOB members said they will consider all the recommendations and report back on what they decide.
Asked for his response to the recommendations, PCAOB chair James Doty told Reuters that the PCAOB had identified areas where audits performed during the credit crisis needed to be stronger in a report released in September. Some of the problem audits are being investigated and disciplinary actions may result, he said.
“All of these activities, including what we heard from the investor advisory group today, will give us insights into the root causes of problems we identify and will inform our initiatives to strengthen investor protection,” he said.
Because the Big Four audit firms are private, they are not required to file public financial statements, though they do report their revenues annually.
Without seeing their financial statements, however, it will be difficult for the PCAOB to properly regulate them, said Turner, a former chief accountant for the Securities and Exchange Commission.
The PCAOB also should require companies to rotate auditors periodically to break up cozy relationships between some companies and their auditors, he said.
Audit partners, but not audit firms, have to be rotated every five years currently.
Nearly 60 percent of all Fortune 1000 public companies have had the same auditor for more than 10 years, and 10 percent have had the same auditor for 50 years of more, according to materials Turner presented at the meeting.
Rotation could help keep auditors independent and focused on doing their jobs properly rather than keeping a client and its fees coming in, he said. (Reporting by Dena Aubin; Editing by Gary Hill, Phil Berlowitz)