By Martin F. Baumann, Gregory Scates and Dima Andriyenko*
Prepared for The Auditor’s Report (Summer 2010)
This update addresses selected PCAOB developments since the Spring 2010 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. The developments discussed include: the proposed auditing standard on audit committee communications; the staff audit practice alert relating to significant unusual transactions; a meeting of the PCAOB Standing Advisory Group; the sixth annual PCAOB Academic Conference; a meeting of the PCAOB Investor Advisory Group; and the publishing of the list of issuer audit clients of non-U.S. registered firms in jurisdictions where the PCAOB is denied access to conduct inspections.
Proposed Auditing Standard on Audit Committee Communications: The PCAOB proposed for comment an auditing standard on audit committee communications, and a series of related amendments to its interim standards on March 29, 2010. The proposal addresses requirements for auditors to communicate with audit committees of public company boards of directors. It considers a number of factors, including the importance of accounting judgments and estimates in financial reporting. The proposed auditing standard would supersede PCAOB interim standard AU sec. 380, Communication With Audit Committees,and AU sec. 310, Appointment of the Independent Auditor, and amend a number of other interim standards. The comment period on the proposed standard and amendments ended on May 28, 2010. The comments received on the proposal and other information related to this project can be found on the PCAOB website at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket030.aspx
Staff Audit Practice Alert No. 5: The PCAOB issued Staff Audit Practice Alert No.5, Auditor Considerations Regarding Significant Unusual Transactions on April 7, 2010 to remind auditors of public companies about their responsibilities to assess and respond to the risk of material misstatement of the financial statements due to error or fraud posed by significant unusual transactions. Practice Alert No. 5 complements Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, by further addressing risks of material misstatement associated with significant unusual transactions, risks that the staff believe continues to exist today. A copy of Practice Alert No. 5 can be found on the PCAOB website at: http://pcaobus.org/Standards/Pages/Guidance.aspx
Standing Advisory Group (SAG) Meeting: The Board's SAG held its first meeting of the year on April 7-8, 2010. The meeting included a discussion of the PCAOB's current standard-setting activities and the recommendation from the Treasury’s Advisory Committee on the Auditing Profession that the Board consider changes to the auditor's reporting model. PCAOB staff also updated the SAG on comments received on the proposed suite of risk assessment standards and sought SAG input on the standard-setting project on the responsibilities of the principal auditor. The meeting agenda, briefing papers, and meeting webcast can be found on the PCAOB website at: http://pcaobus.org/News/Events/Pages/04072010_SAGMeeting.aspx. The next meeting of the SAG is scheduled for Thursday, July 15, 2010.
PCAOB Academic Conference: On April 22-23, 2010, the PCAOB held its sixth annual Academic Conference, which was planned jointly by the staff of the PCAOB and members of the Auditing Section of the American Accounting Association. The conference was attended by 54 auditing researchers and educators, as well as PCAOB Board members and staff, FASB staff, and representatives of the U.S. Securities and Exchange Commission (SEC) and the U.S. Government Accountability Office. The conference, included a panel discussion with PCAOB Board members; presentations by and discussions with the leaders of the PCAOB Office of the Chief Auditor, Division of Registration and Inspections, Division of Enforcement and Investigations, and Office of International Affairs; presentations and discussions of two academic papers on topics related to the risk of fraud in financial reporting; and a separate discussion of the auditor's reporting model. The opening remarks of Dan Goelzer, acting Chairman of the PCAOB can be found on the PCAOB website at: http://pcaobus.org/News/Events/Pages/04222010_AcademicConference.aspx
Inaugural Meeting of the Investor Advisory Group: The PCAOB held the inaugural meeting of the Board's Investor Advisory Group on May 4, 2010. The PCAOB created the Investor Advisory Group to provide a forum specifically for the Board to obtain the views of, and advice from, the broad investor community on auditor oversight matters affecting investors. The meeting agenda and other information can be found on the PCAOB website at: http://pcaobus.org/News/Events/Pages/05042010_IAGMeeting.aspx
List of Issuer Audit Clients of Non-U.S. Registered Firms in Jurisdictions where the PCAOB is Denied Access to Conduct Inspections: On May 18, 2010, the PCAOB published a list of more than 400 non-U.S. companies whose securities trade in U.S. markets, but whose PCAOB-registered auditors the Board currently cannot inspect because of asserted non-U.S. legal obstacles. The Sarbanes-Oxley Act of 2002 requires auditors to be registered with, and regularly inspected by, the PCAOB if they audit the financial statements that issuers file with the SEC. To date, the PCAOB has conducted more than 1,300 inspections of registered firms in the United States and 33 non-U.S. jurisdictions.
Because investors in U.S. markets may be relying on the audit work of certain firms without realizing that those firms are presently uninspected by the PCAOB, the Board published the list of issuers that have in 2009 or 2010 filed financial statements with the SEC that were audited by a firm in one of these jurisdictions. The auditors of these issuers appearing on the list are located in China, Hong Kong, Switzerland and 18 European Union countries. The PCAOB continues to work to eliminate obstacles to inspections in these jurisdictions.
The list can be found on the PCAOB website at: http://pcaobus.org/International/Inspections/Pages/IssuerClientsWithoutAccess.aspx
* 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