The Auditors Report

PCAOB Standards-Setting Update

By Gary L. Holstrum* and Douglas R. Carmichael**

This Update focuses on PCAOB standards-setting developments that have occurred since our first PCAOB Update, which appeared in the Spring 2005 issue of The Auditor’s Report. The first Update contained background material for understanding the PCAOB standards-setting process, its planned standards-setting priorities for 2005, and a call for related research. It also contained numerous hyperlinks to related PCAOB briefing papers and other materials that should be especially helpful to accounting and auditing researchers, educators, and students. Therefore, we recommend that readers refer to that article for critical background information related to issues mentioned in this article.

Audits of Internal Control—Subsequent to the issuance of Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements in March 2004, the PCAOB staff issued related staff guidance in the form of 37 Q&As through January 2005. On April 13, the PCAOB participated in an SEC Roundtable on Implementation of Internal Control Reporting Provisions, which provided an opportunity for the Board and the Commission to hear directly from issuers, auditors, investors, and others regarding aspects of the Section 404 implementation process that participants believed could be improved.

The PCAOB staff is in the process of developing additional staff guidance for auditors of internal control over financial reporting related to some of the issues raised at the Roundtable and through other sources. PCAOB Chairman, William McDonough, stated at the end of the Roundtable that we are committed to providing this additional staff guidance by May 16. Consequently, by the time that this Update article is available, readers should be able to locate the new staff Q&As on the PCAOB Web Site (www.pcaobus.org). At approximately the same time, the SEC staff also is planning to issue additional staff guidance for management reports on internal control, which readers can access on the SEC web site (www.sec.gov).

In addition, the next meeting of the Standing Advisory Group (SAG) on June 8 and 9 will focus on issues related to audits of internal control. Readers may access advance materials for this meeting as well as live or archived web casts of this meeting, just like for all SAG meetings and PCAOB Open Meetings, on the PCAOB Web Site.

Proposal of a Standard on the Elimination of a Material Weakness—On March 31, the Board proposed for public comment a standard that would apply when auditors are engaged to report on the elimination of a previously reported material weakness in a company’s internal control over financial reporting. The comment period ended May 16.

Independence, Tax Services, and Contingent Fees—On December 14, 2004, the PCAOB proposed for public comment certain ethics and independence rules concerning independence, tax services, and contingent fees. The comment period, which lasted for 60 days, ended on February 14, 2005. The Board received 805 comments. The proposed ethics and independence rules focus on three distinct areas. First, the rules lay a foundation by codifying the principles that a registered public accounting firm must be independent of its audit client and also requiring that persons associated with registered public accounting firms have a responsibility not to cause a firm to violate relevant laws, rules and professional standards. Second, the proposed rules would restrict registered public accounting firms from using contingent fee arrangements with their audit clients; planning or providing an opinion on aggressive tax positions for their audit clients; and providing tax services to officers in a financial reporting oversight role at their audit client. Third, the proposed rules would institute certain pre-approval requirements as they relate to permissible tax services.

Research Syntheses Being Developed for Two PCAOB Projects—Teams of academic researchers are in the process of developing syntheses of research related to two PCAOB standards-setting projects. One team, consisting of Roger Martin (University of Virginia), Jay Rich (Northern Illinois University), and Jeff Wilks (Brigham Young University), is preparing a synthesis of research related to auditing fair value. Another team, consisting of Dana Hermanson (Kennesaw State University), Robert Allen (University of Utah), Robert Ramsey (University of Kentucky), and Tom Kozloski (Wilfrid Laurier University), is preparing a synthesis of research related to auditor risk assessments.

The primary objective of the research synthesis teams is to identify the key researchable issues related to the target PCAOB project, synthesize the extant research that addresses each of these research issues, and highlight researchable issues that need additional research. The goal is to have each of the completed research syntheses published in a leading academic journal and made available to the PCAOB staff to help in the development of appropriate standards or staff guidance. Editors of several leading academic journals in accounting and auditing participated in a PCAOB Symposium in December, 2004, along with a number of auditing researchers. Following the Symposium, some editors expressed an interest in publishing the anticipated research syntheses, subject to an appropriate review process.

Other PCAOB Standards-Setting Projects—At the PCAOB Standing Advisory Group meeting in November, 2004, the Board sought advice on topics for consideration as possible priorities for 2005 standards-setting projects, including the following items, which are hyperlinked to related PCAOB staff briefing papers on the PCAOB Web Site:

The staff of the PCAOB Office of the Chief Auditor would like to have teams of academic researchers develop syntheses of extant research relevant to each of these standards-setting projects. More information will be provided later this summer regarding how this might be accomplished and how auditing researchers could be involved in these research-synthesis projects.

*Gary Holstrum is Associate Chief Auditor and Director of Research at the PCAOB.

**Douglas Carmichael is PCAOB Chief Auditor and Director of Professional Standards. The views expressed in this article are those of the authors and not necessarily those of the Board, individual Board members, or other PCAOB staff. Responses to the article or related research may be emailed to holstrum@pcaobus.org.

 

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