by John Covaleski
Washington - As the American Institute of CPAs moves into its diminished role as the setter of audit standards used only in private company engagements, some practitioners question if the market and the profession are ready for separate standards for private and publicly owned companies.
“We have to step forward in our role in setting standards for non-issuers [privately held companies that do not issue public stock],” AICPA Chairman William F. Ezzell said at the institute’s recent spring meeting of Council. That was just two days after the Securities and Exchange Commission declared that the Public Company Accounting Oversight Board is appropriately organized to assume duties as the reporting standard-setter for publicly held companies registered with the SEC.
The AICPA had been the standard-setter for both private and public companies until the Sarbanes-Oxley legislation created the PCAOB as an arm of the SEC, charged with overseeing public companies’ financial reporting. The reform law also established some new audit standards and several far-reaching independence standards for auditors of public companies.
The AICPA is now charged with setting the auditing standards that are used only on the typically much smaller privately held companies, and with representing the profession in the PCAOB’s public company deliberations.
While the transition was viewed as a slap at the institute during the Sarbanes-Oxley debate last year, Ezzell and other institute executives have put a positive spin on it by detailing the size of the non-SEC market.
Private or closely held companies account for half of the nation’s economy; just 17,000 of the nation’s 4.9 million corporations are SEC-registered, and just 900 of the 45,000 CPA firms represented by the AICPA handle SEC company audits.
The move could make the AICPA a white knight to small businesses, as Sarbanes-Oxley has spiked concerns that the law’s proposed new audit standards for SEC companies are unfeasible for privately held companies. The AICPA and other business observers note that, while SEC companies typically have thousands of shareholders and are much better capitalized, private or closely held companies have less money and their stakeholders are typically limited to a handful of owner/managers and some local lending institutions.
Meanwhile, some practitioners wonder how it could affect them. The most prominently mentioned concerns were confusion in the marketplace, added costs and complexities to firms handling both SEC and non-SEC clients, and the potential for the PCAOB’s standards to be deemed superior.
“My concern is that, as the standards become divergent, it will be a matter of doubling up our training and instead of one presentation on something like Ôinventory is to be observed,’ we will be providing different sets of explanations for SEC and non-SEC clients,” said Paul Rohan, accounting and audit director at Scillia Dowling & Natarelli Centerprise Advisors, a $9 million New Haven, Conn., firm that handles both SEC and non-SEC audit work.
Others, however, doubt the long-term viability.
“It’s going to be difficult for auditors to shift between two sets of standards, so in the long run, we could end up with a single set that will be expected to be used by all auditors,” said John L. Archambault, managing partner of professional standards in the Chicago offices of Grant Thornton, the profession’s seventh largest firm.
Margaret Butler, CPA and president of the 67,000-member Institute of Management Accountants in Montvale, N.J., said, “If the standards are different and should there ever be a lawsuit that challenges an auditor, my suspicion is that the courts would rule in favor of the higher standards.”
Chuck Landes, AICPA director of auditing standards, maintained that, “We are advocating that one standard be less rigorous; at the core, the procedures will be the same.”
Landes said that the distinction between the two sets of standards would be like the existing distinction between generally accepted audit standards and the generally accepted government audit standards used for work with government entities and agencies that receive federal funds.
“In that case, we have a core set of standards and the General Accounting Office makes changes that meet its constituency’s needs. And, in this case, the PCAOB will work from a core set to satisfy a constituency of stockholders,” Landes said.
“We are continuing on as we have been in our position as standard-setters for non-issuers; it’s not a matter of us taking over anything,” added Arleen Thomas, AICPA vice president of professional standards and services.
Asked whether the change will require additional re-sources from practitioners, she said, “The body of literature that they [CPAs handling non-SEC company audits] are responsible for has not changed.” But, she also said that it’s “too premature” to determine exactly how the institute will change its standard-setting processes.
Until now, the AICPA’s Audit Standards Board, with feedback from the profession at large, has developed and regularly updated the audit standards applied to public and privately held companies. Representatives of the SEC have participated in the process to ensure that the standards mesh with the publicly traded companies’ requirements to report to the commission.
The institute’s authority in setting independence standards has not been affected by Sarbanes-Oxley, since the AICPA has only set those standards for non-SEC company auditors. The federal government, which already was the independence standard-setter for public companies, has simply passed that responsibility on to the PCAOB, whose rulings must be approved by the SEC before they take effect.
How the AICPA’s privately held company audit standard-setting process will operate depends on the further actions of the PCAOB. It appears that the AICPA will maintain most or all of the existing standards, and that much of its new standard-setting will be in reaction to the new rules that the PCAOB adopts for SEC companies.
“It’s premature to say what might happen, because the PCAOB has not rolled out their processes. As the PCAOB sets standards, we’ll have to be aware to keep the confusion down as much as possible,” said Bill Balhoff, chairman of the AICPA’s Private Company Practice Section and a partner in Postlethwaite & Netterville, in Baton Rouge, La.
While the PCAOB, in April, issued an interim set of audit standards, which are essentially rules inherited from the AICPA, it is not expected to issue its first set of permanent rules until this fall.
Sarbanes-Oxley audit standard proposals that have triggered the most concern include a provision, which was recently approved by the SEC, requiring that a company’s auditor be rotated at least every five years. The accounting profession has argued that, in many cases, privately held companies are audited by firms that don’t have enough auditors on staff to rotate.
Whether the AICPA and PCAOB standards will differ enough to spark lawsuit concerns, as the IMA’s Butler suggested, is questionable. Nicholas J. Mastracchio Jr., CPA, an associate professor of Accounting at the University of Albany, N.Y., said that the PCAOB would likely keep many of the audit principles already established by the AICPA, but things could get dicey if it also starts setting procedures for audit work.
A PCAOB spokeswoman said that setting procedures has not come up at the agency, and added, “We have our hands full in just setting the standards.”
Mastracchio, one of the New York State Society of CPAs’ most vocal authorities on Sarbanes-Oxley, is among a chorus of CPAs and profession observ-ers who concur with the AICPA that some SEC standards would be unnecessarily burdensome on non-SEC companies.
“In public companies, the shareholders are the public, but, in private companies, the owners are the shareholders and they already know the business, while their banks are closer to the company and are more sophisticated [than public stockholders],” Mastracchio said.
“The regulators really have to keep in mind who the stakeholders are when setting these rules,” said Joseph “Leroy” Dennis, who was recently appointed executive partner of assurance services at McGladrey & Pullen, a regional firm in Bloomington, Minn.
Other problem areas cited include Sarbanes-Oxley requirements related to the composition of audit committees and the fact that many non-SEC companies lack audit committees entirely.
The AICPA’s Thomas agreed that the differing users of financial reports will be a driving factor in the AICPA’s non-SEC company work. “If I own a stock share, I am a user because I am an investor, but I have no influence over management. But with non-SEC companies, the user is usually a banker who has direct access to the owner and managers,” she said. “That’s what creates the need for different standards.”
