The CPA Journal

CPA firms have invested heavily in internal controls and procedures, yet reputable firms still fail to identify major problems that force material restatements of earnings, risking catastrophic consequences. Enron is not unique: In 2001, 327 federal securities lawsuits were filed, a 60% increase over the 207 in 2000. The sudden collapse of Arthur Andersen reminds us that accounting is a high-risk profession where all it takes to sink an entire firm is one rogue audit team.

Members of an audit team can generally spot behaviors associated with insufficient knowledge, misrepresentation of information, lack of objectivity, or plain sloppiness long before a formal report is submitted to a company’s audit committee. If CPA firms identify audit teams that demonstrate such behavior early on, they can greatly improve their chances of taking appropriate corrective actions before such teams cause harm. Firms can install early warning procedures right now without radically changing their audit processes and without incurring the high cost of conducting forensic audits, which catch mistakes only after they have been made and do little to prevent them.

One way that CPA firms can identify warning signs of risky behavior in audit teams is to adopt the 360-degree assessment, an approach businesses have been using for decades. As the name implies, a 360-degree assessment looks at an individual or team from every perspective. In a corporation, everyone who has frequent contact with a manager or executive would assess their performance. Typically, the evaluators include the person’s boss, peers, direct reports, and even clients, vendors, or customers. It is an efficient, systematic, and structured way of collecting information from those most suited to provide it.

The 360-degree assessment is particularly useful for learning what’s going on within an audit team because it can focus on critical performance factors such as the technical quality of the audit, how it is being conducted, and the attitudes of those working on it. In addition, many 360-degree assessments give evaluators an opportunity to explain their ratings.

In the 1980s and 1990s, as organizations became flatter, the average manager’s span of control increased dramatically. As a result, many managers no longer knew enough about their direct reports to make proper assessments. The growing irrelevance of top-down performance reviews led to more top-down/bottom-up assessments, and eventually to the 360-degree assessment. The International Personnel Management Association recently reported that nearly 90% of Fortune 1000 corporations now use some form of a 360-degree assessment.

The primary goal of 360-degree assessments is to have team rather than individual assessments and to identify at-risk teams before they become compromised.
The first step is to get a clear picture of risk factors, including such basic deficiencies as weak or incomplete technical accounting skills, lack of relevant experience, uncooperative or evasive internal financial staff, and reluctance to raise critical questions.

One way to identify and rate risk factors is to compare the capabilities of highly competent audit teams to those teams that have had compromised audits. Such comparative analysis can uncover warning flags and alert management that something is amiss.

A key step in applying the 360-degree approach is to construct a survey instrument to gather information about how the audit teams approach a specific audit or client, both technically and in the attitude toward the client and audit process. This method can measure the degree to which—

The survey can also assess how the members of the audit team define their work. For example, do they see their role as identifying accounting irregularities? Or are they more interested in putting the best face on questionable practices? The survey can collect both qualitative and quantitative information so the story behind the numbers can be readily examined and understood.

Assessment information can be gathered from all of the relevant members of the audit team, as well as clients, in a confidential and anonymous manner. Then an outside firm or an internal unit responsible for reviewing performance can analyze the results and single out audit teams that need new leadership, more support, or closer scrutiny. The results can also help the firm identify best auditing practices and provide feedback to audit teams that need improvement.

To speed the process and cut costs, surveys can be administered over the Internet. The firm can also spread the assessments out over the course of the year. This kind of electronic 360-degree assessment can be swift and economical, and, most important, can provide the firm with timely documentation of what is happening within its audit teams.

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The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.