By Martin F. Baumann, Gregory Scates,
and Dima Andriyenko 1
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: selection of Standing Advisory Group members for 2011-2012; PCAOB's Fourth Annual International Auditor Regulatory Institute; solicitation of candidates for the Academic Fellowship Program for the 2011-2012 academic year; proposals for an interim inspection program for auditors of brokers and dealers and funding rule amendments; Staff Audit Practice Alert No. 7; SEC approval of PCAOB's risk assessment standards; appointment of the new Chairman of the PCAOB and two new Board members; and signing of a cooperative agreement with the United Kingdom audit regulator.
Announcement of Standing Advisory Group Members: On October 27, 2010, the PCAOB announced 14 new and re-appointed members to its Standing Advisory Group (SAG). These members will serve two-year terms beginning in January 2011.
The PCAOB issued a request for SAG nominations in May 2010. The Board received over 70 applications. From these the Board selected individuals with expertise in a variety of fields, including accounting, auditing, corporate finance, corporate governance, and matters affecting investors.
The SAG is chaired by PCAOB Chief Auditor and Director of Professional Standards Martin F. Baumann. The names of the current SAG members and their biographies may be found on the PCAOB Website at http://pcaobus.org/Standards/SAG/Pages/Current.aspx.
PCAOB's Fourth Annual International Auditor Regulatory Institute: The PCAOB held its Fourth Annual International Auditor Regulatory Institute (Institute) on November 11-12, 2010. Seventy-five representatives of auditor oversight bodies and government agencies from 42 countries convened in Washington, D.C. to learn more about the PCAOB's programs and exchange views on issues that have an impact upon the oversight of auditors.
The two-day Institute offered seminars on the structure of PCAOB auditor oversight programs, considerations relevant to international inspections, and current topics in enforcement and standard setting. The Institute also included a panel discussion with representatives of several of the PCAOB's international counterparts, addressing a range of issues related to auditor oversight worldwide. This year's international panel included representatives from Canada, Japan, the Netherlands, Norway, and the United Kingdom.
The PCAOB established the Institute in 2007 to provide a forum for open discussion among regulators around the world about approaches to auditor oversight and improvements to audit quality.
Solicitation of Candidates for the 2011-2012 Academic Fellowship Program: On December 1, 2010, the PCAOB announced that it was soliciting candidates for its Academic Fellowship Program for the 2011-2012 academic year. The Board is seeking an experienced accounting researcher and academic with an active interest in auditing and regulatory oversight matters. The Academic Fellow will serve at PCAOB headquarters in Washington, D.C., for a term of up to 12 months. The Academic Fellow provides analytical support and expertise to the Office of Research and Analysis as well as other offices. Specific work assignments depend upon current needs of the PCAOB as well as the Academic Fellow's interests and personal qualifications. The application period closed on January 15, 2011.
Proposal for Interim Inspection Program for Broker-Dealer Audits and Broker and Dealer Funding Rules: On December 14, 2010, the PCAOB proposed for public comment certain rules to begin implementation of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that expand the Board's oversight authority to encompass audits of securities brokers and dealers.
Specifically, the Board proposed for public comment a temporary rule to establish an interim inspection program for registered public accounting firms' audits of brokers and dealers. The Board also proposed rules related to assessing and collecting a portion of its Accounting Support Fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers, consistent with the Act. Certain amendments to existing funding rules for issuers were also proposed for public comment. The comment period for both proposals closed on February 15, 2011.
The proposed temporary rule for an interim inspection program for the audits of brokers and dealers and the proposed funding rule amendments for allocating the Board's Accounting Support Fee among issuers, brokers, and dealers can be found on the PCAOB website at: http://pcaobus.org/Rules/Rulemaking/Pages/default.aspx.
Staff Audit Practice Alert No. 7: On December 20, 2010, the PCAOB published Staff Audit Practice Alert No. 7, Auditor Considerations of Litigation and Other Contingencies Arising from Mortgage and Other Loan Activities (Practice Alert No. 7), to inform auditors of public companies about their responsibilities when auditing loss contingencies, disclosures, and related items. The staff has taken this action in light of reports that began to surface in the fall of 2010 alleging that companies may have misrepresented the quality of many loans sold for securitization and that those companies could be required to repurchase the affected mortgages, creating an exposure for the banking industry of up to $52 billion. Additionally, allegations have surfaced that irregularities in the foreclosure process could result in further losses.
The Practice Alert advises auditors that these mortgage- and foreclosure-related activities or exposures could have implications for audits of financial statements or of internal control over financial reporting. These implications might include accounting for litigation or other loss contingencies and the related disclosures.
Practice Alert No. 7 can be found on the PCAOB website at: http://pcaobus.org/Standards/Pages/Guidance.aspx.
SEC Approval of Auditing Standards Related to the Auditor's Assessment of and Response to Risk: On December 23, 2010, the SEC approved the PCAOB auditing standards related to the auditor's assessment of and response to risk (risk assessment standards) and related amendments to PCAOB standards. The PCAOB adopted the risk assessment standards and the related amendments on August 5, 2010. The risk assessment standards benefit investors by establishing requirements that enhance the effectiveness of the auditor's assessment of and response to the risks of material misstatement in an audit. The risk assessment standards are effective for audits of fiscal years beginning on or after December 15, 2010.
The risk assessment standards (Auditing Standards No.8 through No.15) can be found on the PCAOB website at: http://pcaobus.org/Standards/Auditing/Pages/default.aspx.
New Chairman of the Board and New Board Members: On January 7, 2011, the SEC appointed James Doty as the new Chairman of the PCAOB. The SEC also appointed Lewis Ferguson and Jay Hanson as Board members to take the positions of the retiring Board members, Bill Gradison and Charley Niemeier. The Acting Chairman Daniel L. Goelzer and Board member Steve Harris will remain on the Board. The biographies of the new Chairman and the other Board members of the PCAOB can be found on the PCAOB website at: http://pcaobus.org/About/Board/Pages/default.aspx.
Cooperative Agreement with United Kingdom Audit Regulator: On January 10, 2011, the PCAOB entered into a cooperative agreement with the Professional Oversight Board (POB) in the United Kingdom to facilitate cooperation in the oversight of auditors and public accounting firms that practice in the two regulators' respective jurisdictions.
This agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the United Kingdom and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.
This is the first cooperative agreement that the PCAOB has concluded since the passage of the Dodd–Frank Act, which amended the Sarbanes-Oxley Act to permit the PCAOB to share confidential information with its non-U.S. counterparts under certain conditions. That amendment removed one of the obstacles to PCAOB inspections asserted by European and certain other officials.
1 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.