by Ken Rankin
Washington - The Public Company Accounting Oversight Board approved investigative rules for accounting firms that audit public companies, as well as procedures that would allow firms to withdraw from registering with the oversight body.
The rules, which were unanimously approved on Sept. 29, empower thePCAOB to subpoena records from accounting firms under investigation, impose monetary penalties against Sarbanes-Oxley violators, and deny firms the right to audit public companies.
But the board softened key provisions in the regulations that had drawn criticism, and clarified other language that had been attacked as unfair to accountants under investigation by the PCAOB.
In a potentially significant clarification, the board stated that accounting firms and auditors who exercise their legal privileges — including any “valid assertion of the privilege against self-incrimination” under the Fifth Amendment —will not be deemed to be engaged in non-cooperation with a PCAOB subpoena simply because they exercised that right — a escape clause allowing audit firms targeted for investigation to avoid subpoenas for records by “taking the Fifth.”
But while accountants would be allowed to “take the Fifth” before the board, PCAOB associate general counsel Michael Stevenson explained that staff investigators will reserve the right to report any assertion of constitutional privilege to federal or state criminal authorities.
In another significant change from the original proposal, PCAOB rule-makers abandoned plans to subject accountants and CPA firms to disciplinary action for making a “material omission” in testimony before the organization.
A number of accounting firms objected to that provision, arguing that it would place “an unfairly vague obligation on witnesses” at board hearings.
PCAOB staffers also agreed to significantly restructure separate provisions of the proposed rule governing the board’s power to withhold privileged documents and other information from accounting firms under investigation.
Under the original proposal advanced by the board on July 28, the PCAOB reserved the right to deny defendants access to a broad range of information, including investigative records that may disclose the identity of confidential sources, and other materials for which there is a “good cause” to keep secret.
According to Stevenson, granting potential targets of PCAOB investigations such rights “could really tie the board’s hands at a time when the public interest and the interests of investors demand very quick action by the board.”
Separately, the oversight body also approved the final rules regarding how an auditing firm may withdraw its registration by filing a request with the board — which would automatically prohibit it from auditing a publicly held company.
The board, however, would be empowered to delay an audit firm’s withdrawal by up to 18 months if the firm is under investigation, or is facing disciplinary action from regulators. The board also has the authority to void a firm withdrawal if it believes that said firm filed a false withdrawal form.
The board also moved a step closer to a final rule establishing standards for audit documentation during a free-wheeling “roundtable” meeting with representatives of major firms, investor groups and regulatory agencies in Washington.
The new standards are required by provisions of the Sarbanes-Oxley Act that direct the board to adopt an audit documentation standard that will require auditors to prepare and maintain work papers and other materials in sufficient detail to support the conclusions of the audit.
During the meeting, which attracted over 20 participants from the public and private sectors, representatives from several accounting firms conceded the need for the PCAOB to issue national standards governing audit documentation, but urged the board to avoid overly burdensome new rules.
Noting that some large corporate audits can take 2,000 hours to complete, Crowe Chizek’s James L. Brown expressed concern that an overreaching regulation could effectively require auditors to document everything they’ve done and everyone they’ve talked to on the job for the past year.
“We’re all in favor of documentation, but how far do you want to go?” he asked. “Some of this could be carried to an extreme.”
A key issue that was examined during the roundtable meeting was whether the new standards should require that audit documentation “contain sufficient information to determine who performed the work and the date that such work was completed, as well as the person who reviewed the work and the date of such review.”
McGladrey & Pullen’s Bruce P. Webb told the board that few, if any, firms would object to such disclosure standards “in theory,” but he warned that, in practice, it would be difficult to place a completion date on audit work papers.
Craig W. Crawford of Big Four firm KPMG said that it is “entirely appropriate” to expect audit work papers to indicate who did the work and when, but he urged the board to provide accountants with some flexibility to update and review the work papers, because audits are an ongoing process.
In discussing whether all audit work papers should be dated and signed by both the accountant who performed the work and the supervisor who reviewed that work, Susan Markel, chief accountant for the Securities and Exchange Commission’s Division of Enforcement, told the PCAOB: “I view this question as having a simple answer, and that answer is yes.”
“All levels of persons associated with the engagement team should be willing to sign their work and indicate what specifically was done,” Markel said.
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