PCAOB Standards Update
By Martin F. Baumann*, Gregory Scates and Dima Andriyenko
Prepared for The Auditor’s Report (Fall 2009)
This update addresses selected PCAOB developments since the Summer 2009 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. The developments discussed include a PCAOB report on the first year implementation of Auditing Standard No. 5, PCAOB's new Investor Advisory Group, staff questions and answers on references to accounting guidance in PCAOB Standards, new auditing standard on engagement quality review, and a concept release on signing the audit report. Additionally, this update includes information about the upcoming meeting of the PCAOB's Standing Advisory Group and change in leadership at the PCAOB.
Meeting of the PCAOB Standing Advisory Group: The next meeting of the PCAOB's Standing Advisory Group (SAG) is scheduled for Wednesday and Thursday, October 14-15, 2009. The SAG will discuss the Board's current standard-setting agenda, as well as standards-related activities during the past year. In addition, the Board will seek input from SAG members on standard-setting projects pertaining to fair value measurements, accounting estimates, and the use of specialists; communications with audit committees; and related parties.
The meeting will be held at 1201 15th Street N.W., Washington, D.C., and is open to the public. It will be Webcast live on the Board's Web site and available later by podcast. The public portion of the meeting on October 14 takes place from 9 a.m. to 2:30 p.m., and on October 15, from 8:30 a.m. to 3:15 p.m.
The meeting agenda and briefing papers can be found on the Board's web site HERE
Report on First Year Implementation of Auditing Standard No. 5: On September 24, 2009, the PCAOB issued a report on the first year of implementation of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AS No. 5).
This report is based on PCAOB inspections that examined portions of approximately 250 audits of internal control over financial reporting (ICFR) conducted by the eight largest domestic registered firms in 2007 and 2008. The PCAOB’s 2008 inspections of ICFR audits were focused on whether auditors were effectively transitioning to AS No. 5, and were designed to assess the quality of the firms’ AS No. 5 implementation in the following areas: risk assessment; fraud risk; using the work of others; entity-level controls; the nature, timing, and extent of controls testing; and evaluating and communicating deficiencies.
This report focuses on audits performed by the eight domestic firms that the Board has inspected annually in each year since 2004. Four of these firms audit public companies that represent approximately 98 percent of total U.S. market capitalization. In this report, the Board is not changing or proposing to change any existing standard, nor is the Board providing any new interpretation of any existing standards.
The report is available on the Board’s web site HERE
PCAOB Announces Members of Inaugural Investor Advisory Group: On September 17, 2009, the PCAOB announced the 19 members of the inaugural Investor Advisory Group. The Investor Advisory Group membership represents a broad spectrum of the investment community and consists of individuals who have a demonstrated history of commitment to investor protection. The list of members of the PCAOB Investor Advisory Group can be found on the Board’s web site HERE.
The purpose of the advisory group is to provide a forum for the Board to obtain the views of, and advice from, the broader investor community on matters affecting investors and the work of the PCAOB. The Board established the Investor Advisory Group in July and sought nominations for its membership at that time. Board Member Steven B. Harris will serve as the chair. More information about the PCAOB Investor Advisory Group can be found on the Board’s web site HERE.
Staff Questions and Answers on References to Authoritative Accounting Guidance in PCAOB Standards: On September 2, 2009, the PCAOB published staff questions and answers about references to authoritative accounting guidance in PCAOB standards.
The series of questions and answers is a reminder that auditors should look to the FASB Codification and the rules of the U.S. Securities and Exchange Commission for authoritative U.S. GAAP guidance for SEC registrants, even though PCAOB standards may contain descriptions of and references to U.S. GAAP. The questions and answers are available on the Board’s web site HERE.
The PCAOB publishes staff questions and answers to help auditors implement, and the Board’s staff administer, the Board’s standards. The statements contained in the staff questions and answers are not rules of the Board, nor have they been approved by the Board.
New Standard on Engagement Quality Review: On July 28, 2009, the PCAOB adopted Auditing Standard No. 7, Engagement Quality Review (EQR). The standard, if approved by the U.S. Securities and Exchange Commission, will become effective for both the EQR of audits and the EQR of interim financial information for fiscal years beginning on or after December 15, 2009.
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, by a qualified person (as prescribed by the Board) associated with the public accounting firm, other than the person in charge of the audit, or by an independent reviewer (as prescribed by the Board)." The Board initially proposed the auditing standard on EQR on February 26, 2008, and reproposed it on March 4, 2009.
The EQR standard provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement. AS No. 7 applies to all audit engagements, and engagements to review interim financial information, conducted pursuant to the standards of the PCAOB. The standard supersedes the Board’s quality control standard, SECPS Requirements of Membership, Section 1000.08(f); 1000.39, Appendix E. The adopting release and the standard can be found on the Board’s web site HERE
Concept Release Requiring the Engagement Partner to Sign the Audit Report: On July 28, 2009, the PCAOB voted to issue a Concept Release on requiring the engagement partner to sign the audit report.
The Board was seeking comment on the Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report. Any such requirement would be in addition to the existing requirement for the audit firm to sign its name on the audit report.
The comment period for this Concept Release ended on September 11, 2009. The comments are posted on the Board’s web site HERE.
Change of Leadership at the PCAOB: On July 27, 2009, Daniel L. Goelzer was named Acting Chairman of the PCAOB by the Securities and Exchange Commission, effective August 1, 2009. Mr. Goelzer’s appointment follows the announcement of the resignation of PCAOB Chairman Mark W. Olson, effective July 31, 2009.
Daniel L. Goelzer has been a Board Member of the PCAOB for six years and is currently serving his second term. He was appointed by the SEC as a founding member of the Board in October 2002. In 2007, the SEC unanimously reappointed him to serve an additional term of five years.
NOTE: Note the hyperlinks to various items on 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 Update articles in the Spring 2005, Summer 2005, Fall 2005, Spring 2006, Summer 2006, Fall 2006, Spring 2007, Summer 2007, Fall 2007, Spring 2008, Summer 2008, Fall 2008, Spring 2009, and Summer 2009 issues of TheAuditor'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 firstname.lastname@example.org.
* Martin F. Baumann is PCAOB Chief Auditor and Director of Professional Standards
Gregory Scates is PCAOB Deputy Chief Auditor
Dima Andriyenko is PCAOB Associate Chief Auditor