May 25, 2004

Accountancy Faculty's Commentary in Wall Street Journal
Does Your Auditor Understand Your Business?

Ira Solomon and Mark Peecher make a case for business-informed auditing in an commentary published in the Wall Street Journal on May 25, 2004.

Solomon, professor and head of the Department of Accountancy and the R.C. Evans Endowed Chair in Commerce, and Peecher, associate professor and Deloitte & Touche Teaching Fellow, draw on their collective 40 years of experience as audit scholars when they urge the members of the Public Company Accounting Oversight Board "to adopt a framework requiring auditors to obtain a deep understanding of the businesses that underlie public companies' financial statements."

Say the faculty members:

"A deep understanding of business is central in what we call "strategic-systems auditing." Two premises of SSA are that accounting systems reflect business risks and performance in fallible, incomplete, and untimely ways, but that financial statements should reasonably reflect these business realities. As such, auditors must conduct business-informed tests and amass business-informed evidence before they can draw reasonable conclusions about the veracity of financial statements."

Unless the PCAOB grounds its rulemaking in a SSA framework, subsequent rulemaking by PCAOB that requires seemingly far-reaching substantive tests will yield insubstantial evidence and amount to fool's gold, say the authors. In order to judiciously interpret audit evidence, auditors must possess a deep understanding of the business reality -- the business model and processes -- that underlie the financial statements.

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