6. Conclusion
AU § 342.03 of the PCAOB’s interim auditing standards implies that auditors should be capable of containing,to a reasonable range, management bias in accounting estimates. Notwithstanding the dubiousness of that goal from an investor perspective, normative, empirical, and anecdotal evidence all indicate that excess management estimation bias has become prevalent. The PCAOB alone has conducted over 2,000 inspections of audit firms in the first 12 years of its existence. From these inspections, combined with inspections by audit regulators worldwide, we have learned that efforts to at least have auditors scrutinize management’s estimates to a degree consistent with extant professional standards have had little effect. Regulators are demanding that the audit firms look within themselves to take appropriate remedial steps, and they continually fret over new ways to supplement the dubious premise of AU § 342.03. If history is any guide, none of this is working. GAAP is becoming more susceptible to management estimation bias, and the problems are getting worse. Accordingly, we have proposed to fundamentally change the rules of engagement between the auditor and its client by transferring the responsibility for financial statement judgments to independent appraisers. Auditing would become solely a verification service, and financial statements would better serve investors and the public interest.
