* US lagging in probes of auditors, advisory group says
* Auditor rotation, annual reports recommended
(Adds PCAOB comment)
By Dena Aubin
NEW YORK, March 16 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
"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
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
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
AUDITOR ROTATION RECOMMENDED
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,
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
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)