By Martin F. Baumann, Gregory Scates,
and Dima Andriyenko1
This update addresses selected PCAOB developments since the Spring 2011 Update that are likely to be of interest to accounting and auditing researchers, educators, and students. The developments discussed include: publication of the Board’s Research Note on Chinese reverse mergers; a meeting of the PCAOB Investor Advisory Group; PCAOB open meeting regarding the auditor's reporting model; a meeting of the PCAOB Standing Advisory Group; the announcement of a settled disciplinary order against five PricewaterhouseCoopers international firms in India for audit violations related to Satyam; signing of a cooperative agreement with the Swiss audit regulator; and the seventh PCAOB Academic Conference.
PCAOB Research Note on Chinese Reverse Mergers: On March 15, 2011, the PCAOB issued its first public Research Note, which provides new data on the growth of reverse merger transactions involving companies from the China region.
The Research Note, entitled, "Activity Summary and Audit Implications for Reverse Mergers Involving Companies from the China Region (January 1, 2007 through March 31, 2010)," was prepared by the PCAOB Office of Research and Analysis to provide further context to the issues discussed in Staff Audit Practice Alert No. 6, Auditor Considerations Regarding Using the Work of Other Auditors and Engaging Assistants from Outside the Firm, issued on July 12, 2010.
That Alert was based on observations from the PCAOB inspection process that some U.S. registered accounting firms may not be conducting audits of companies with operations outside of the U.S. in accordance with PCAOB standards.
A copy of the Research Note is available on the PCAOB website at: http://pcaobus.org/News/Releases/Pages/03152011_ResearchNote.aspx.
PCAOB Investor Advisory Group Meeting: On March 16, 2011, the PCAOB held its second Investor Advisory Group meeting. 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 related materials can be found on the PCAOB website at:
PCAOB Open Meeting Regarding Auditor's Reporting Model: On March 22, 2011, the PCAOB heard a presentation from the Office of the Chief Auditor on its outreach efforts to investors and others about potential changes to the auditor's reporting model. Staff from the Office of the Chief Auditor reached out to investors, auditors, preparers of financial statements, audit committee members, and other interested parties to seek their views on potential changes to the auditor's report.
The meeting was an important step in the Board's effort to develop a proposal for change in a concept release. The Board's intention is to expose such a release in the second quarter of 2011. The meeting agenda and webcast are available on the PCAOB website at:
PCAOB Standing Advisory Group (SAG) Meeting: The Board's SAG held its first meeting of the year on March 24, 2011. The meeting agenda included: an update from the Office of Chief Auditor on its standard-setting agenda and other related developments; a FASB update by FASB member Lawrence Smith; a presentation by David Landsittel, Chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and Miles Everson, member of the PricewaterhouseCoopers Project Team on COSO's project to update its Internal Control – Integrated Framework; and Office of the Chief Auditor staff-led discussions on auditing financial statement disclosures and 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/03232011_SAGMeeting.aspx.
In addition, Martin F. Baumann, the Board's Chief Auditor, informed the SAG that a task force of the SAG, known as the Pricing Sources Task Force, had been formed to focus on the auditing of fair value of financial instruments that are not actively traded and on the use of third-party pricing sources. This task force will assist the Office of the Chief Auditor gain insight into current issues related to auditing the fair value of financial instruments, which may result in the development of new standards or guidance. The task force is comprised of several members of the SAG, as well as other investors, preparers and auditors, and representatives from pricing services and brokers. Additional information can be found on the PCAOB website at: http://pcaobus.org/Standards/SAG/Pages/PricingSourcesTaskForce.aspx.
Announcement of Settled Disciplinary Order Against PricewaterhouseCoopers (PwC) International Firms in India for Audit Violations Related to Satyam: On April 5, 2011, the PCAOB announced a settled disciplinary order against five PwC International firms based in India (Price Waterhouse, Bangalore; Lovelock & Lewes; Price Waterhouse & Co., Bangalore; Price Waterhouse, Calcutta; and Price Waterhouse & Co., Calcutta), which included a $1.5 million penalty against two of those firms, the Board's largest civil money penalty to date, for violations of PCAOB rules and standards in connection with the audit of India IT service provider, Satyam Computer Services.
The PCAOB penalty was in addition to the $6 million penalty imposed on the same day by the SEC against the five firms in its own proceeding. The combined $7.5 million U.S.-regulatory penalty imposed in this matter is the largest penalty that the SEC and PCAOB have assessed against any registered foreign accounting firm.
PCAOB First Cooperative Agreement with Swiss Regulators: On April 6, 2011, the PCAOB announced that it had entered into a Statement of Protocol with Swiss regulators, establishing a cooperative framework for supervisory oversight of auditors that practice in each country. The agreement with the Swiss Federal Audit Oversight Authority and Financial Market Supervisory Authority allows the Board to commence joint inspections of accounting firms in Switzerland that audit, or participate in audits, of companies whose securities trade on U.S. markets.
The Sarbanes-Oxley Act directs the PCAOB to oversee and periodically inspect all accounting firms that regularly audit companies whose securities trade on U.S. markets. More than 900 audit firms currently registered with the PCAOB are located outside of the United States, spanning 84 countries. Eight of these firms are located in Switzerland.
2011 PCAOB Academic Conference: On April 14 –15, 2011, the PCAOB held its seventh 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 over 70 auditing researchers and educators from 53 universities, as well as PCAOB Board members and staff, and FASB and SEC staff.
The conference agenda included a panel discussion with PCAOB Board Members; presentations by and discussions with the leaders and representatives of the PCAOB Office of the Chief Auditor, Division of Registration and Inspections, Office of Research and Analysis, and Division of Enforcement and Investigations; a panel discussion regarding the auditor’s reporting model; and an update on the FASB convergence projects by Peter Proestakes, FASB Assistant Director for Technical Activities.
Additionally, the staff of the Office of the Chief Auditor and members of the Auditing Section announced the commencement of the second PCAOB Research Synthesis project on twelve topics relevant to PCAOB standard-setting activities, and solicited participation in this project.
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.