PCAOB Standards Update*Prepared for The Auditor's Report, Summer 2008By Gary Holstrum, Thomas Ray, and Gregory Scates**This update addresses selected PCAOB standards-setting developments since the Spring 2008 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. These developments include a proposed new auditing standard on engagement quality review, new ethics and independence rules related to tax services and communication with audit committees, issues addressed at the 2008 PCAOB Symposium, and an update of the status of PCAOB research synthesis projects. 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. Section 103 of the Sarbanes-Oxley Act of 2002 directs the Board to include in its auditing standards a requirement that each registered public accounting firm "provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance." The proposed standard, which would apply to all engagements performed in accordance with the standards of the PCAOB, is risk-based and designed to increase the likelihood that engagement deficiencies will be identified and corrected prior to the issuance of the auditor's report. The proposed standard provides a firmer framework for an engagement quality reviewer to objectively evaluate the significant judgments made by the engagement team and the conclusions reached in forming the overall conclusion on the engagement and in preparing the engagement report. The comment period for the proposed standard ended May 12 and the comments are posted on the Board’s Web site, under Rulemaking Docket 25. Ethics and Independence Rules on Tax Services and Communication with Audit Committees: On April 22 the PCAOB voted to adopt a new Ethics and Independence Rule (#3526) to enhance communication between registered firms and audit committees regarding the firm's independence and to amend a rule (#3523) on tax services for persons in financial reporting oversight roles. Rule 3526 will require a registered public accounting firm, before accepting an initial engagement pursuant to the standards of the PCAOB, to describe in writing to the audit committee all relationships between the firm or any of its affiliates and the issuer or persons in a financial reporting oversight role at the issuer that may reasonably be thought to bear on the firm's independence. Registered firms will also be required to discuss with the audit committee the potential effects of any such relationships on the firm’s independence. Rule 3526 will require firms to make a similar communication annually for continuing engagements. The Board also adopted an amendment to Rule 3523 on independence and tax services. As originally adopted by the Board, the rule provided that a registered public accounting firm is not independent of its audit client if it or any of its affiliates provides any tax service to a person in a financial reporting oversight role or an immediate family member of such a person during the audit and professional engagement period. The Board determined that providing tax services to such a person during the portion of the audit period preceding the beginning of the professional engagement period does not necessarily impair a firm's independence. Therefore, the Board amended the rule to exclude (from the scope of the rule) tax services provided during the portion of the audit period that precedes the beginning of the professional engagement period. 2008 PCAOB Symposium Issues: Approximately 40 auditing researchers and educators, along with 35 people from the PCAOB and representatives from the SEC, FASB, and GAO, participated in the 2008 PCAOB Symposium on April 24-25 in Washington, DC. The Symposium, which was jointly planned by representatives of the Auditing Section and the PCAOB, included discussions of recent PCAOB standards and standards-setting projects, PCAOB inspections, audits of fair value measurements, the impact of International Financial Reporting Standards, the future of the auditing profession, future auditing research and education, and the role of the PCAOB. Status of PCAOB Research Synthesis Projects: The PCAOB Research Synthesis Program, which included teams of auditing research teams formed by the Auditing Section Executive Committee, has contributed significant research input for nine of the standards-setting projects. All nine of the research synthesis reports have been published, accepted for publication, or conditionally accepted for publication, subject to acceptable revisions. The attached report shows the status and publication information for all of the projects as of May 2, 2008. **Gary Holstrum is a consultant in the PCAOB Office of 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, and Spring 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. |