NEW YORK (Reuters) - Deloitte LLP is training its auditors to be more skeptical when checking the books of U.S. companies after the audit firm was criticized for lack of objectivity, its chief executive told Reuters.
Recently faulted by the main U.S. auditor watchdog, Deloitte has told its professionals that skepticism should be the No. 1 focus during the upcoming auditing season for annual financial reports, CEO Joe Echevarria said.
“I know there’s a heightened awareness about professional skepticism in the firm,” he said. “It’s going to take a while for heightened awareness to manifest itself in actions and documentation because humans are involved here.”
Speaking from his midtown Manhattan office, Echevarria said moving the United States to international accounting standards would be challenging in today’s economic environment.
He said a proposal to require rotation of audit firms would create chaos because only a handful of firms have the ability to audit large global companies.
Echevarria, responsible for about 50,000 Deloitte professionals, was a self-described truant growing up in the Bronx, an experience that he said taught him humility and the art of reading people. With Deloitte since 1978, he became partner in 1988 and still serves some of the firm’s largest clients.
Deloitte, the U.S. arm of global audit firm Deloitte Touche Tohmatsu Ltd DLTE.UL, came under criticism last month from the U.S. Public Company Accounting Oversight Board (PCAOB) in newly released portions of a 2008 inspection report.
The PCAOB, the government’s audit industry watchdog, said some Deloitte auditors did not get adequate evidence to support their opinions or did not properly challenge management estimates.
Deloitte trains auditors to be skeptical and impresses on them that their ultimate clients are investors, not officials at the companies being audited, said Echevarria, who has been at the helm of the U.S. audit firm since June.
But it is natural to focus on “the person you’re talking to, the person who somehow is measuring and deciding whether you continue to be the auditor, and paying you,” he said.
Investor advocates have long charged that auditors lack skepticism because their business model has a built-in conflict of interest, where auditors are paid by companies they audit.
The PCAOB is considering term limits on audit firms as one way to make auditors more independent. But Echevarria said that would result in an enormous loss of institutional knowledge.
“I would be OK with rotation if someone could demonstrate to me that it improved audit quality,” he said.
Deloitte and the rest of the Big Four global audit firms have come under fire for not flagging risks at companies that failed in the 2008 financial crisis and for missing accounting fraud.
There is an “expectations gap” between what auditors do and what the public expects, but auditors do have an obligation to detect and report material fraud, Echevarria said.
Audit quality has improved since the 2002 Sarbanes-Oxley audit reforms took effect, but “audit quality to most of the companies that get served is invisible to them,” he said.
Deloitte itself was charged in one of the Enron-era accounting scandals that led to the Sarbanes-Oxley reforms. In 2005 it agreed to pay $50 million to settle U.S. Securities and Exchange Commission charges that it failed to detect accounting fraud at cable company Adelphia Communications.
Deloitte did not admit or deny wrongdoing but agreed to increase training of audit professionals in fraud detection.
U.S. regulators, still working on implementing the Dodd-Frank audit industry reforms, do not appear to have a conversion to international accounting standards at the top of their agenda, Echevarria said.
The SEC has said it will decide before year-end whether to move to International Financial Reporting Standards, set by the London-based International Accounting Standards Board and already used in more than 100 countries.
One set of global standards would improve the exchange of information, but U.S. corporate executives are not “clamoring” for the change, Echevarria said.
“There’s not a sense that IFRS would have had any meaningful impact on the financial crisis in terms of outcomes, because companies that were on those standards had the same challenges,” he said.
Reporting by Dena Aubin and Howard Goller; Editing by Kevin Drawbaugh and John Wallace