Activities of the Professional Practice Group
in the SEC's Office of the Chief Accountant
Brian T. Croteau, Office of the Chief Accountant of the SEC
Audrey A. Gramling, Kennesaw State University,
Member of the AAA's SEC Liaison Committee
This column is intended to inform the readers of The Auditor's Report of some of the current activities of the Professional Practice group in the U.S. Securities and Exchange Commission's Office of the Chief Accountant (OCA).
The Office of the Chief Accountant is organized into three complimenting groups: Accounting, Professional Practice, and International Affairs. These groups collaboratively serve as the principal adviser to the Commission on accounting and auditing matters. The primary activities of the OCA include:
- Overseeing and/or interacting with many other standard setting bodies, including the FASB; IASB; PCAOB; EITF; and IFRIC;
- Addressing registrant matters that are brought to the attention of OCA; and
- "Pre-Clearing" issuer questions.
In terms of developing rules and guidance, OCA has responsibility for:
- Together with the PCAOB, independence standards for auditors of public companies;
- SEC staff guidance (e.g. Staff Accounting Bulletins and frequently asked questions and answers); and
In general, OCA staff has a considerable amount of interface with preparers and auditors of financial statements. The activities of the Professional Practice group are of potential interest to the readers of The Auditor's Report. The Professional Practice group works closely with the Public Company Accounting Oversight Board (PCAOB) as the PCAOB develops auditing and related standards to promote the development of reliable financial reporting information. The group also assists in the resolution of auditor and preparer independence and ethical matters that gain the attention of the Commission.
This update focuses on some of the staff's activities that relate to SEC oversight of the PCAOB and independence standards for auditors of public companies. Both issues were discussed in December by the SEC staff at the 2005 AICPA National Conference on Current SEC and PCAOB Developments. Links to the full text of these speeches can be found below. We have summarized some of the key points raised in these speeches, and we encourage those interested to read the full text of the speeches. Another area of importance to the Professional Practice Group is internal control reporting. While this issue is not discussed in our comments below, the interested reader can refer to a recent SEC staff speech on the topic at http://www.sec.gov/news/speech/spch120505jmb.htm.
Independence Issues (http://www.sec.gov/news/speech/spch120505ewb.htm)
The speech referenced above provides insight into OCA staff reflections on auditor independence issues post Sarbanes-Oxley. Auditor independence is primarily overseen by the PCAOB and the SEC. Currently auditor independence relies on a system of fundamental principles based on a set of very specific rules. These rules were promulgated in 2000 and strengthened in 2003, based on the passage of Title II of the Sarbanes-Oxley Act.
An alternative to the current system that the staff in OCA has been considering would be a system that relies more on principles and objectives, rather than specific proscriptions. As noted in the speech, a possible "principles based" approach would encompass a set of principles, as well as a set of constant, concise and coherent rules, and, new safeguards. It is envisioned that such a system would be conditioned upon improvements in audit firms' independence monitoring and tracking systems and upon PCAOB's oversight of auditor independence. A principles-based system is thought to only work in an environment where auditor independence judgments are based on principles, and not on how close to a rule one can go without breaking the rule. Such a system would require that the profession not push the boundaries.
Given that the above referenced speech does not indicate that changes to the independence standards are imminent, the safeguards discussed (i.e., changes in attitudes, monitoring, and documentation) provide opportunities for academic investigations of the effectiveness and viability for ensuring auditor independence in a principles-based environment.
SEC Oversight of the PCAOB (http://www.sec.gov/news/speech/spch120505bc.htm)
The PCAOB is a private sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies to protect the interests of investors and further public interest in the preparation of informative, fair, and independent audit reports. The speech referenced above provides insight into how the SEC and the PCAOB interact on a day-to-day basis, and, how through those interactions the SEC effectively discharges its oversight responsibilities. OCA has a significant role in this oversight work, however, responsibilities extend across many offices and divisions within the Commission.
The SEC's oversight responsibility is outlined primarily in Section 107 of the Sarbanes-Oxley Act (Act). This oversight responsibility is accomplished through formal and informal activities and interactions between the PCAOB and its staff.
In additional to general oversight responsibility, the Commission has specific responsibilities, including the appointments of board members, the approval of the annual budget and accounting support fee, and the approval of rules and professional standards established by the PCAOB.
In terms of standard setting, the PCAOB works with the SEC though a variety of mechanisms. For example, the SEC staff participates in the PCAOB's Standing Advisory Group (SAG) meetings, where issues related to professional standards are often discussed. In addition, Commission staff meets regularly with the Board's staff to discuss emerging practice matters and to provide input on standard-setting activities. The SEC staff provides input and insights, recognizing that it is the PCAOB's rule or standard that is being drafted and interpreted. The PCAOB and SEC generally separately expose proposed rules and standards for public comment. Such rules and standards do not become effective unless approved by both the PCAOB and the Commission.
Section 104 of the Act requires that the PCAOB conduct a continuing program of inspections of registered public accounting firms. The SEC also has a role with respect to these inspections of registered public accounting firms. As part of the oversight process, the Commission receives copies of the final full inspection reports. Registered accounting firms can raise disputes to the Commission, within prescribed time limits, regarding findings in any final inspection reports and PCAOB determinations regarding the resolution of quality control criticisms. Although issuers may become aware that their audit is the subject of an inspection, they would not contact the PCAOB to discuss accounting matters. If the PCAOB raises questions to the accounting firm about the application of GAAP, the accounting firm and/or the issuer may ultimately conclude that consultation with OCA is appropriate.
The other areas where there is SEC oversight of, and interaction with, the PCAOB and its staff include investigations and review of disciplinary actions taken by the Board.
Brian T. Croteau is Associate Chief Accountant in the Office of the Chief Accountant at the SEC.
Audrey A. Gramling is an Associate Professor at Kennesaw State University and served as an Academic Fellow in the Office of the Chief Accountant at the SEC during 2004/2005.
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. Therefore, the views expressed in this article represent only the authors' views and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.
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