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This update addresses selected PCAOB standards-setting developments since the Summer 2008 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. The developments discussed here relate to evaluating consistency of financial statements, engagement quality review, risk assessment, potential standards projects for 2009, input from federal advisory committees, research input to the standards-setting process, and other developments.
Auditing Standard No. 6—Evaluating Consistency Of Financial Statements: On September 16 the SEC approved PCAOB Auditing Standard No. 6, Evaluating Consistency Of Financial Statements and conforming amendments to PCAOB Interim Standards, which were adopted by the Board on January 29. This is the final step in the PCAOB standards-setting process. The new standard and conforming amendments were described in the Spring 2008 Update and will become effective 60 days after SEC approval. Pursuant to Section 107(b) of the Sarbanes-Oxley Act, a PCAOB standard or other rule that the PCAOB adopts becomes effective only after the SEC has published the item for public comment in the Federal Register, considered the related comments, and subsequently approved the item. Notice of SEC approval of the standard is available on the SEC website.
Engagement Quality Review: On February 26 the Board proposed for public comment a new auditing standard on engagement quality review and a conforming amendment to the Board’s interim quality control requirements, which were described in the Summer 2008 Update. The comment period for the proposed standard ended May 12 (see comments at Rulemaking Docket 25) and the PCAOB staff is working to complete revisions to the proposal based on comments.
Risk Assessment: The PCAOB staff is working on the development of a suite of potential risk assessment standards that in some form will likely address some of the following issues:
- Audit risk in an audit of financial statements
- Identifying and assessing risks of material misstatement
- Auditor’s responses to the risks of material misstatement
- Audit planning and supervision
- Considering materiality in planning and performing an audit
- Audit evidence
- Evaluating audit results
Potential Standards Projects for 2009: Each year, the October meeting of the PCAOB Standing Advisory Group (SAG) typically addresses priorities for standards-setting projects for the subsequent year. The Board has reserved October 22-23, 2008, for the next SAG meeting. Readers are typically able to listen to live or archived Webcasts of SAG meetings and to view the meeting agenda and related support materials on the PCAOB web site a few days before the meeting. Some of the potential standards-setting projects that may be considered for 2009 include:
- Fair value measurements and the use of specialists
- Confirmations
- Related parties
Input from Federal Advisory Committees: On September 26 the U.S. Treasury Department’s Advisory Committee on the Auditing Profession adopted its final report, which includes recommendations related to the general areas of human capital, firm structure and finances, and firm concentration and competition as well as more specific recommendations concerning
- Enhancements in the auditor’s standard reporting model and other improvements in the auditor’s report
- Signing the auditor’s report
- Establishing a national center at the PCAOB to provide a forum to share fraud detection experiences and improve audit quality
- Establishing and publishing audit firm audit quality indicators
- Compilation of SEC and PCAOB independence rules
The SEC’s Advisory Committee on Improvements to Financial Reporting made a number of recommendations including a proposed framework and guidelines for evaluating judgments made by financial statement preparers and auditors. The proposed framework was discussed at the February 27 SAG meeting and in a related Briefing Paper.
The PCAOB will carefully consider these recommendations because they may have an impact on the Board’s oversight of auditors of U.S. public companies.
Proposal and Roundtable on Reliance on Non-US Auditor Oversight Bodies: The PCAOB hosted a roundtable on June 25 on a PCAOB proposal regarding the conditions under which it could rely on non-U.S. auditor oversight bodies in inspections of registered firms. Readers may listen to the Webcast of this roundtable and view the proposal and related comments on the proposal on the PCAOB Website.
Impact of IFRS: Accounting and auditing educators, students, researchers, practitioners, and financial regulators (including the PCAOB) are affected significantly by the recent decision by the SEC to allow foreign private issuers to file financial statements based on International Financial Reporting Standards (IFRS) without requiring reconciliation to US GAAP as well as its issuance of a proposed timeframe or “roadmap” for moving toward allowing US issuers to file financial statements based on IFRS instead of US GAAP. As an example of the immediate impact, almost 900 non-US firms are currently registered with the PCAOB and about 250 of these firms in over 50 countries audit issuers and are therefore subject to periodic inspections. Now that foreign private issuers are no longer required to reconcile their financial statements to US GAAP, PCAOB inspectors will be reviewing audits based on IFRS alone, which requires extensive training of PCAOB international inspectors. Of course, a move towards IFRS has tremendous implications for accounting and auditing education.
Research Input to the Standards-Setting Process: All of the standards-setting projects discussed above have benefitted significantly from organized input through the Auditing Section’s PCAOB Research Synthesis Program regarding research that is relevant to each project. The attached report (Research Synthesis Projects) shows the status and publication information for all of the nine research synthesis projects as of September 30, 2008. We encourage readers who have recently completed research that is relevant to any of these projects (and that was not already included in the related research synthesis report) to email a copy of their research paper to the team leader of the related research synthesis team (listed in the status report), along with a brief summary of the implications of the research for the related PCAOB standards project. If you wish, you also may email a copy of these directly to us.
**Gary Holstrum is a consultant in the PCAOB Office of Chief Auditor (formerly PCAOB Associate Chief Auditor and Director of Research).
Thomas Ray is PCAOB Chief Auditor and Director of Professional Standards.
Gregory Scates is PCAOB Deputy Chief Auditor.
Note the hyperlinks to the PCAOB Web site (www.pcaobus.org) and to the Auditing Section web site. A convenient history of PCAOB standards-setting activity and related briefing papers are available through the hyperlinked previous PCAOB Standards-Setting Update articles in the Spring 2005, Summer 2005, Fall 2005, Spring 2006, Summer 2006, Fall 2006, Spring 2007, Summer 2007, Fall 2007, Spring 2008, and Summer 2008 issues of The Auditor's Report. The views expressed in this article are those of the authors and not necessarily those of the PCAOB, individual Board members, or other PCAOB staff. Responses to the article or related research may be emailed to holstrumg@pcaobus.org.
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