Business leaders often turn to experts to perform complex, specialized tasks thinking that these specialists will improve quality and efficiency. Unfortunately, this is not always the case.
In the field of accounting, auditors turn to valuation specialists to improve the quality of fair value estimates on financial statements, but audits involving these specialists often yield less-than-optimal results, according to the Public Company Accounting Oversight Board (PCAOB). To find out why, I interviewed 28 auditors and managers with extensive experience employing these experts, and they identified several common areas of conflict.
Many conflicts arise out of questions of authority. Auditors are ultimately responsible for revising specialists’ work and making final conclusions, but they may not fully understand the data, which can make them feel threatened. As a result, auditors sometimes—consciously or subconsciously—downplay the specialists’ role and perhaps revise their work to conform with the audit teams’ expectations, which puts the quality of the audit at risk.
The different perspectives of auditors and specialists can cause problems as well. Auditors have an accounting background, and valuation specialists have a finance background. Ideally, these different skills complement one another and provide a higher-quality audit, but when the auditors and specialists work separately, it can create uncertainty about who is responsible for certain tasks, and work might slip through the cracks.
The auditors in this study also expressed a lack of clarity about how to work with valuation specialists. Currently, PCAOB standards treat these specialists the same as anyone on the auditing team, and yet the team doesn’t have the same level of expertise. This creates an unbalanced relationship that auditors to negotiate as best they can.
To address these issues, I recommend integrating specialists more fully into the auditing team by having all team members work in the same space. Attending common training sessions helps break down social barriers and reduces any perceived threat to the auditors’ authority. In addition, the PCAOB should offer clear guidance on how to integrate valuation specialists into the auditing team.
Valuation specialists are critical to assessments of the most important and complex accounts, so firms must find ways to make the best use of their contribution. The candor of the participants in this study clearly indicates that this is an important issue to them. Unfortunately, PCAOB standards have not kept pace with the growing use of valuation specialists in auditing. Removing the ambiguity from current standards would go a long way toward improving collaboration between auditors and specialists and the quality of their work.