PCAOB PLANS TO FOCUS ON REVENUE AUDITS

Provo, Utah -- The Public Company Accounting Oversight Board plans to turn its attention to auditing standards involving revenue recognition, according to one of the board's members.

Speaking at the Brigham Young University Accountancy Alumni Conference in Provo, Utah, in late October, PCAOB member Jay Hanson told the audience: "Another audit area that we will need to turn to in the near future, although it is not yet on our standard-setting agenda, is auditing revenue," he noted. "Revenue is probably the most important number on the financial statements for most investors, and it is one in which our inspectors frequently find problems. Revenue recognition also is a complex accounting area."

Hanson noted that standard-setters are working on a joint project to issue updated standards that will fundamentally change the basis for revenue recognition. "It is my hope that the PCAOB will soon devote substantial resources to an audit standard project in this area," he said, "and that we will be able to issue a proposal on auditing revenue with sufficient lead time to allow new accounting and auditing standards to become effective at or around the same time." 

 

DELOITTE TO PAY $2 MILLION TO SETTLE PCAOB CHARGES

Washington, D.C. -- Big Four firm Deloitte & Touche has agreed to pay $2 million to settle charges with the Public Company Accounting Oversight Board for violating the Sarbanes-Oxley Act and PCAOB rules by allowing a former partner to perform or continue to perform activities as an "associated person" that were prohibited while he was subject to a PCAOB suspension order.

The PCAOB has also ordered Deloitte to undertake certain remedial actions to ensure that similar violations do not occur in the future. The firm consented to the entry of the order without admitting or denying the PCAOB's findings.

The $2 million penalty against the firm equals the PCAOB's single largest civil money penalty.

 

STUDIES BACK NEED FOR LEAD AUDITOR IDENTIFICATION

Washington, D.C. -- A trio of new research studies support the Public Company Accounting Oversight Board's proposal to require the identification of the lead auditor on public company financial reports.

Two of the studies were published by the American Accounting Association in its journal The Accounting Review, and another was presented at a recent academic research conference. The studies focus on Sweden, China and the U.K., three of the countries that require identification of lead auditors in company financial statements.

The first study, entitled "Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions," is based on an analysis of audits performed over a seven-year period by the Swedish subsidiaries of the Big Four firms. The study found that aggressive or conservative reporting is associated with the particular engagement partners who head the audits over and above any influence of the Big Four firms that employ them. In addition, these individual differences in reporting style persist over time and across clients, and they contribute significantly to such economic factors as the credit ratings that client firms receive and how they are assessed by stock investors.

The second research study, "Do Individual Auditors Affect Audit Quality? Evidence from Archival Data," is based on an analysis of 15,000 corporate annual reports issued over a 12-year period in China. The researchers analyzed financial reports signed by approximately 800 auditors and concluded that, despite the constraints imposed on them by their accounting firms, "The effects that individual auditors have on audit quality are both economically and statistically significant, and are pronounced in both large and small audit firms."

The third study, "Costs and Benefits of Requiring an Engagement Partner Signature: Recent Experience in the United Kingdom," probes the effect on audit quality and cost of a U.K. regulation, effective April 2009, requiring engagement partners to sign corporate financial reports. The authors concluded that the requirement "benefited investors and other financial users," even though it resulted in "significantly higher audit fees." Describing the benefits that ensued from the requirement, the professors noted that it prompted several statistically significant changes in audit performance.

 

PCAOB WARNS OF DEFICIENCIES IN INTERNAL CONTROL AUDITS

Washington, D.C. -- The Public Company Accounting Oversight Board has issued an alert cautioning auditors about the significant number of audit deficiencies that the PCAOB staff has seen in the past three years related to audits of internal control over financial reporting.

The PCAOB noted that effective internal control over financial reporting helps ensure that companies produce reliable published statements that investors can use in making investment decisions.

Staff Audit Practice Alert No. 11: Considerations for Audits of Internal Control over Financial Reporting discusses the application of certain requirements of Auditing Standard No. 5 and other PCAOB standards to specific aspects of audits of internal control.

The alert discusses subjects such as the auditor's risk assessment and the audit of internal control; selecting controls to test; the testing of management review controls; information technology considerations, including system-generated data and reports; roll-forwards of control testing performed at an interim date; using the work of others; and evaluating identified control deficiencies.

Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements, establishes requirements for performing and reporting on audits of internal control. AS5 is designed to focus auditors on the most important matters in the audit of internal control and avoid procedures that are unnecessary to an effective audit.

In December 2012, the PCAOB issued a report on observations from 2010 inspections of audits of internal control over financial reporting performed by domestic annually inspected firms. It found that in 15 percent of the 309 integrated audit engagements inspected, firms failed to obtain sufficient audit evidence to support their opinions on the effectiveness of internal control due to one or more deficiencies.

Inspections in subsequent years have continued to identify similarly high levels of deficiencies in audits of internal control at other registered firms, the PCAOB noted. It pointed out that the audit committees of public companies for which audits of internal control are conducted may want to take note of the alert.

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