By Martin F. Baumann, Gregory Scates, and Dima Andriyenko*
This update addresses selected PCAOB developments that are likely to be of interest to accounting and auditing researchers, educators, and students. The developments discussed include: the announcement of the inaugural academic fellow for 2010-2011; the staff audit practice alert regarding using the work of other auditors and engaging outside assistants; the proposed auditing standard on confirmation; the new auditing standards on risk assessment; the release on failure to supervise; the PCAOB staff to develop a proposal to make certain enforcement proceedings public; the roundtable on the proposed standard regarding communications with audit committees; the report on inspection observations of auditing during the economic crisis; and two meetings of the PCAOB's Standing Advisory Group.
Inaugural Academic Fellow: The PCAOB named Professor Michael Stein as its inaugural academic fellow on June 15, 2010. Dr. Stein's fellowship began on July 26, 2010 for a term of 12 months.
Dr. Stein has been assigned to the Office of Research and Analysis (ORA) for the academic year 2010-2011. ORA identifies and analyzes emerging accounting and auditing issues, and other risk areas that may contribute to audit failures. Dr. Stein will provide analytical support and expertise to ORA and other PCAOB staff and undertake projects in support of both the Board's strategic plan and ORA's work plan. Such projects may include research on accounting and auditing matters, risk-assessment research, and other research and work relating to PCAOB activities.
Staff Audit Practice Alert No. 6: The PCAOB issued Staff Audit Practice Alert No. 6, Auditor Considerations Regarding Using the Work of Other Auditors and Engaging Assistants from Outside the Firm, on July 12, 2010, to remind registered firms of their obligations when using the work of other firms or using assistants engaged from outside the firm. The alert was prompted by observations in PCAOB inspections that some U.S.-based firms issuing audit reports based on work performed by others outside the United States are not properly applying PCAOB standards.
The alert describes the circumstances in which the firm issuing the audit report may use the work and reports of another auditor. It also notes that auditors who engage assistants from outside the firm are governed by the same standards regarding planning the audit and supervising assistants that apply when audit work is performed by assistants who are partners of, or employed by, the auditor's firm.
A copy of the alert can be found on the PCAOB Website at: http://pcaobus.org/Standards/Pages/Guidance.aspx.
Proposed Auditing Standard on Confirmation: On July 13, 2010, the PCAOB approved for public comment a proposed auditing standard, Confirmation. The proposed standard would strengthen the requirements under the current auditing standard, AU sec. 330, The Confirmation Process, and would replace AU sec. 330. The proposed standard would modernize the confirmation standard and strengthen its requirements to better protect investors. It would also more explicitly incorporate consideration of the risk of material misstatement due to error or fraud into the selection, design, and performance of confirmation procedures. The comment period on the proposed standard ended on September 13, 2010.
A copy of the proposed standard and related concept release and comment letters can be found on the PCAOB Website at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket028.aspx.
Standing Advisory Group (SAG) Meeting: The Board's SAG held its second meeting of the year on July 15, 2010. The meeting included a presentation on projects of the Financial Accounting Standards Board and International Accounting Standards Board relating to potentially significant developments affecting U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. The SAG discussion focused on the potential effect of these changes upon auditors of public companies.
The meeting agenda also included a discussion of standard-setting issues pertaining to the audits of broker-dealers. In addition, PCAOB staff updated the SAG on comments received on a proposed standard on communications with audit committees and sought input from the SAG regarding a standard-setting project that addresses audit requirements for subsequent events. The PCAOB staff also presented a possible approach to standard-setting projects pertaining to the auditor's reporting model.
The meeting agenda, briefing papers, and meeting webcast can be found on the PCAOB website at: http://pcaobus.org/News/Events/Pages/07152010_SAGMeeting.aspx.
New Auditing Standards on Risk Assessment: On August 5, 2010, the PCAOB adopted a suite of eight auditing standards related to the auditor's assessment of, and response to, risk in an audit. The risk assessment standards, Auditing Standards Nos. 8 through 15, set forth requirements that enhance the effectiveness of the auditor's assessment of, and response to, the risks of material misstatement in the financial statements. In addition, these standards address audit procedures performed throughout the audit, from the initial planning stages through the evaluation of the audit results.
These risk assessment standards supersede six PCAOB interim standards and related amendments: AU sec. 311, Planning and Supervision; AU sec. 312, Audit Risk and Materiality in Conducting an Audit; AU sec. 313, Substantive Tests Prior to the Balance Sheet Date; AU sec. 319, Consideration of Internal Control in a Financial Statement Audit; AU sec. 326, Evidential Matter; and AU sec. 431, Adequacy of Disclosure in Financial Statements.
The standards, if approved by the Securities and Exchange Commission (SEC), will become effective for audits of fiscal years beginning on or after December 15, 2010.
A copy of the adopted standards and the accompaning release can by found on the PCAOB Website at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket026.aspx.
Release on Failure to Supervise: On August 5, 2010, the PCAOB issued a release discussing the provision of the Sarbanes-Oxley Act of 2002 (the "Act") that authorizes the PCAOB to impose sanctions on registered public accounting firms and their supervisory personnel for failing to reasonably supervise associated persons who violate certain laws, rules, or standards.
The PCAOB is considering whether specific rules would further the public interest and protect investors by increasing clarity about who, within a firm, is accountable for various responsibilities that bear on the quality of a firm's audits. The PCAOB is soliciting public comment on the concepts discussed in Part II of the release. The comment period on the release ends on November 3, 2010.
A copy of the Release can be found on the PCAOB Website at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket031.aspx.
Proposal to Make Certain Enforcement Proceedings Public: On August 5, 2010, PCAOB Acting Chairman Daniel L. Goelzer directed PCAOB staff to develop a proposal to send to Congress to request that it consider a change to the Act that would enable the PCAOB's disciplinary hearings and related proceedings to be made public.
Currently under the Act, these hearings and proceedings are required to be nonpublic unless the Board finds good cause to make them public and all parties consent to open them to the public. Public disciplinary hearings would conform to the long-standing practice at the SEC for public disciplinary hearings on matters regarding auditors.
Under current law, firms and auditors litigating with the PCAOB have little incentive to consent to public proceedings and can prevent proceedings from becoming public for long after the information would be most relevant to investors, other auditors, and interested parties.
Roundtable on Communications with Audit Committees: The PCAOB hosted a public roundtable regarding its proposed standard on auditors' communications with audit committees on September 21, 2010. In light of the roundtable, the Board reopened the comment period on the proposal until October 21, 2010. The roundtable participants included audit committee members, investors, auditors, issuers, and others.
The recorded webcasts, transcripts, and related briefing papers for this roundtable can be found on the PCAOB Website at: http://pcaobus.org/News/Webcasts/Pages/09212010_Roundtable.aspx.
Report on Inspection Observations of Auditing during the Economic Crisis: On September 29, 2010, the PCAOB released a report summarizing inspection observations of audits of financial institutions and other companies during the economic crisis. The Board issued the report to inform the public about the audit risks and challenges identified through its inspection program as a result of the disruption in credit and financial markets and the broader economic downturn.
The report covers aspects of PCAOB inspections conducted during the 2007 through 2009 inspection cycles, which generally involved reviews of audits of issuers' fiscal years ending in 2006 through 2008. The majority of the inspection observations discussed in this report were identified by inspectors during the 2009 inspection cycle and were included in 2009 inspection reports that the Board issued in 2010.
A copy of the report can be found on the PCAOB Website at: http://pcaobus.org/Inspections/Pages/PublicReports.aspx
Standing Advisory Group Meeting: The Board's SAG held its third and final meeting of the year on October 13-14, 2010. The SAG agenda included a discussion of the Office of Chief Auditor's standard-setting agenda and other developments affecting the work of the PCAOB. The SAG also discussed potential improvements to the Board's quality control standards, as well as the PCAOB's recently issued Report on Observations of PCAOB Inspectors Related to Audit Risk Areas Affected by the Economic Crisis (previously highlighted).
In addition, the SAG continued its July 15 meeting discussion on potential challenges to auditing that may result from accounting changes to U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards being considered by the Financial Accounting Standards Board and the International Accounting Standards Board.
The SAG's input also was sought on approaches to rulemaking that would complement the Board's authority to impose sanctions for supervision failures, as discussed in the Board's August 5, 2010 release, Application of the "Failure to Supervise" Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts (previously highlighted). An update on comments received on the Board's proposed standard on confirmation also was presented. Finally, the staff presented an overview of key provisions of the Board's recently adopted auditing standards on the assessment of, and response to, risk.
The meeting agenda, briefing papers, and meeting webcast can be found on the PCAOB website at: http://pcaobus.org/News/Events/Pages/10132010_SAGMeeting.aspx.
The next meeting of the SAG is scheduled for March 23-24, 2011.
* 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.