U.S. corporations and accountants concerned over rising audit costs due to Sarbanes-Oxley requirements may soon have more to worry about — including another spike in audit charges as a result of the Public Company Accounting Oversight Board’s proposed new standard for engagement quality review.The stricter standard, which was initially proposed back in February and would apply to audits of public companies performed under PCAOB standards, is risk-based and designed to ease identification and speed correction of audit deficiencies prior to issuing the auditor’s report.

Currently, under Section 103 of SOX, each registered public accounting firm is required to provide a “concurring” or second-partner review and approval of each audit report (and other related information), as well as concurring approval in its issuance. The new standard would strengthen the second-partner review, while the proposed guidelines provide a framework for an EQR to evaluate the judgments and conclusions of the engagement team in preparing the engagement report.

If passed, the new rule would go into effect Nov. 15, 2008, and supersede the board’s interim quality control standard. The Securities and Exchange Commission would have final approval on its passage.

APPROPRIATE, OR OVERKILL?

The PCAOB decided to propose the upgrade based on advice from the board’s Standing Advisory Group, as well as anecdotal observations from its inspections of registered accounting firms.

A 75-day comment period on the standard ended in mid-May.

In comments filed with the board, Dennis Beresford, Ernst & Young Executive Professor of Accounting at the University of Georgia and former chairman of the Financial Accounting Standards Board, said that the “principal objective [of the board’s proposed change] seems to be to extend the concurring-partner review requirement to certain smaller accounting firms. It’s an appropriate step to ensure reasonably consistent quality controls for the audits of all public companies.”

Others, however, have raised concerns that the PCAOB’s proposed strengthening of the standards for engagement quality review represents regulatory overkill.

Although most of the accountants and corporate CFOs who have expressed opinions on the plan voiced support for the PCAOB’s efforts to improve audit quality, many found the EQR proposal unnecessarily costly and problematic.

Big Four firm KPMG warned that the plan would significantly alter the nature of EQR and result in additional costs that will not provide a commensurate benefit to audit quality.

Similar concerns were raised by another Big Four firm, PricewaterhouseCoopers, which told the PCAOB that the provisions of the proposed standard could impose substantial new burdens on the audit quality reviewer, without a corresponding improvement in the quality of audits.

Corporate officials expressed even blunter objections to the plan.

Officials at Computer Sciences Corp., an El Segundo, Calif.-based IT and professional services provider, warned the oversight body that under the proposed new standards, “The review of engagement documentation would be substantially more expansive than currently required and could, in addition to the scope of procedures, present formidable challenges in practice.”

In that company’s formal comments on the proposal, vice president and chief financial officer Donald G. DeBuck said that in addition to driving up the cost of audits, “The desired level of assurance, scope of procedures and documentation required under the proposed standard could significantly impact the timing of the final stages of an audit, which could adversely impact the timeliness of issuer filings.”

Executives at cable TV and Internet provider Comcast also voiced concerns about financial reporting delays, noting that the new rules may “result in concurring partners believing that it’s necessary to repeat a large amount of review work of the engagement partner, resulting in unnecessary costs and perhaps a delay in finalizing year-end audits.”

QUESTIONS ABROAD

The PCAOB proposal also drew criticism for being inconsistent with international audit standards. Representatives from the Institute of Public Auditors in Germany called on the board to resolve conflicts with international audit standards by changing its EQR proposal to reflect the European practice of requiring engagement audit quality reviews, but allowing audit firms to decide which audits would be subject to quality reviews.

The plan’s inconsistencies with international standards also came under fire from the U.S. Government Accountability Office. In lecturing the PCAOB on the importance of “universally accepted” audit standards, GAO financial management director McCoy Williams said that the board’s “decision to issue an engagement quality review standard that differs from [international] standards would create inconsistencies in core standards that may increase audit costs and lead to potential confusion and misapplication of the standards.”

Still other critics of the proposal cited difficulties for small audit firms under the plan.

Los Angeles-based CPA Jeffrey Gilbert, a sole practitioner not currently required to obtain concurring-partner reviews, told the PCAOB that the proposed November 15 effective date for the new standard “is just not enough time to allow me to maintain the level of audit services while attempting to engage a reviewer or merge with a firm that would allow me to satisfy the objectives of the proposed standard.”

“Basically, my current method of operations will be obsoleted by this standard,” he told the board.

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