Edward Knauf didn't take long to get to work after rising to the chairmanship of the American Institute of CPAs' Technical Issues Committee. Within a month of his appointment, he met with the three organizations of most concern to the small and midsized accounting firms that comprise the TIC's constituents.All three - the Financial Accounting Standards Board, the Auditing Standards Board, and the AICPA's Professional Ethics Executive Committee - are, in the diligent pursuit of their respective missions, putting increased pressure on auditors, who are already stretched in one direction by the demands put upon them and in another by the scarcity of human resources available to satisfy those demands.
"The whole reason I wanted to get on TIC in the first place," Knauf said, "was because I was feeling drowned by the pace of change in standards coming from all standard-setters."
But nearly drowning hasn't scared Knauf out of the water. He agreed to take the chair of the TIC because, in his view, accounting and auditing are going through the most exciting period of change the profession has ever experienced, and he wants to be part of the excitement.
TIC member Douglas S. Mathison, a partner with Parent Dott & Co., in Beaver Dam, Wis., agreed that there's much to be done for small audit firms, and that Knauf is the man who can help the TIC do it.
"I've been very impressed with Ed," Mathison said. "He has a very good grasp of the issues that are facing the CPA world with respect to auditing and accounting standards. He recognizes concerns and expresses them in a way that everybody understands, and he's willing to stand up for the concerns he has for his firm and practitioners and clients who are affected by these things."
Knauf is pleased with the strengthened relationship between the committee and FASB. Though FASB can't always respond to the TIC's requests, he said, a board member attends all TIC meetings so that the needs of small accounting firms can be reported to the board.
"It's been good for our members, and it has helped us do a better job with our comment letters," Knauf said of FASB's participation. "We've been able to get a few things done at the FASB level that we wouldn't have been able to get done if we hadn't had that relationship. They make a real effort to listen to our concerns."
As the business group leader in the financial assurance practice of DeJoy, Knauf & Blood LLP, in Rochester, N.Y., Knauf handles not only auditing, but business valuation. That latter pursuit, he said, is being heavily impacted by FASB's ongoing effort to introduce more fair value accounting into accounting standards. The TIC's message to FASB, he says, has consistently been, "This stuff is great in theory, but it sure is hard to measure."
The TIC expressed concern over FASB's exposure draft of a standard on fair value measurement. The letter - the first comment letter to FASB bearing Knauf's signature - had little to criticize from a technical perspective, but it suggested that, given the difficulty of producing new measurement disclosures, accountants at non-public companies be given a later effective date. That would give them more time to assess practices at larger companies before trying to implement them themselves.
Lifting the burden
The concern over implementing a new and difficult standard is typical of the problem that small and midsized audit firms face. They are suffering a perfect storm, Knauf said - increasingly difficult standards from FASB, more standards from the Auditing Standards Board, more stringent requirements in ethics, more clients than ever before, and a shortage of qualified professionals to help with the work.
"We've got these standards that we're expected to audit to, and at the same time the profession in general is subject to greater scrutiny through Sarbanes-Oxley," Knauf said. "We are more concerned about the effects on the small-and-midsized firm practitioner of possible trickle-down from Sarbanes-Oxley. TIC is trying to be the voice of reason at FASB, the ASB, PEEC and other standard-setters."
PEEC has proposed a revision to its conceptual framework on independence that seems small, but could carry significant implications in certain situations. Under current standards, auditors are to use specific rules and definitions - a Code of Conduct - to assure themselves that independence of mind and appearance exists.
The proposed change, however, recognizes that the Code of Conduct cannot be perfectly comprehensive. In situations not covered by specific rules, the proposed change would require auditors to consult the conceptual framework and use it as a basis for concluding whether they can be independent in the situation.
Currently, the conceptual framework is used only by PEEC as it devises independence rules and standards. The proposed change would be the first time that auditors would be required to use the conceptual framework to draw their own conclusions when there is no specific guidance in the Code of Conduct.
"We have proposed revising the conceptual framework slightly to clarify certain concepts so that it could be used by members, as opposed to by just the professional ethics committee," said Lisa Snyder, AICPA director of professional ethics. "We changed it so that it not only can be used, but should be used by our members to analyze possible threats to independence where there is not specific guidance."
Knauf said that the TIC is studying the proposed change, but that the committee fears the proposal may make it more difficult for smaller audit firms to determine and document their independence - yet another burden on the overburdened.
The TIC's Mathison also expressed concerns over how that proposal and other changes in ethics and accounting standards will affect a small firm with small clients in a small town.
"From a theoretical standpoint, these pronouncements are very valid," Mathison said, "but from the standpoint of practical application, there are difficulties. In the practice of a small firm, we are very much involved with our clients. I believe we bring objectivity, integrity and consistency to financial statement preparation, and I think the users of these statements appreciate the fact that we're involved. Some of the ethics pronouncements are making it difficult to continue to provide those kinds of services, because they are approaching it from the old standpoint of whether we are independent. I think the issue has something to do with how you define independence at that level."
Knauf brought up similar thoughts.
"We aren't hearing a huge outcry for change from our clientele or the users of our work product, such as the bankers and sureties that use the financial statements that our names go on," Knauf said. "They seem pretty happy with what we're giving them and pretty confident in the quality of the work we do. TIC questions whether ratcheting up independence standards is going to provide additional value to users of the statements."
Asking questions
The TIC is submitting a comment letter and will be meeting with the ASB in January to discuss the board's proposed revisions to Statement on Auditing Standards 60. The TIC would like to see clearer guidance, more implementation time, and explanations of some of the potential practice issues.
Knauf said that TIC members are concerned with the possible conclusions that may be drawn from the proposal and its interplay with the COSO framework - that in situations in which the auditor prepares a client's financial statements, the auditor may need to report a significant deficiency or material weakness in internal control. He added that the vast majority of the TIC's constituency prepares financial statements in conjunction with the audit.
Committee members agreed that, whatever the ASB decides, it should provide very clear guidance as to what is expected, so as to minimize inconsistencies in the application of the standard.
"We're trying to meet the needs of our users," Knauf said. "I'm the first one to say let's fix it if it's broke, but we're trying to be a voice for reason for small and midsized audit firms, and I don't think there's been a more important time to be that voice."
