Washington, D.C. - If the profession was expecting the Public Company Accounting Oversight Board to step gingerly after weathering a Supreme Court ruling that could have padlocked the audit overseer, or at least radically altered the way it operated, the board has been anything but timid.
In rapid succession, the PCAOB has issued a spate of announcements that include a series of stricter risk assessment standards and a plan to impose tougher sanctions on firms that don't adequately supervise their staffs, and drafted a petition to lawmakers to allow the board to make its disciplinary hearings of audit firms public.
"The PCAOB has been unrelenting in looking for ways that audit effectiveness can be enhanced," said Michael Young, an expert in securities law and partner at Willkie Farr & Gallagher in New York. "It's typically a matter of weighing benefits versus cost, and the right balance can be a challenge. The accounting profession, to its credit, has been responsive to an evolution of the audit approach."
The PCAOB's recent push has come on the heels of a 5-4 Supreme Court ruling that ended a five-year legal battle challenging the constitutionality of the board's make-up. The protracted imbroglio charged that the method of appointing members of the accounting overseer under the Sarbanes-Oxley Act of 2002 was unconstitutional, as the members were appointed by the Securities and Exchange Commission, and not directly by the president. The plaintiffs, led by the Free Enterprise Fund and Beckstead & Watts, a Henderson, Nev.-based audit firm that had received a deficient inspection report, had lost in two lower court decisions.
The High Court agreed with the plaintiffs that there were issues with the appointment of board members, but merely required that the SEC be able to remove members at will, and declined a broader injunction against the continued operation of the PCAOB or Sarbanes-Oxley.
Last month, Acting PCAOB Chairman Daniel Goelzer sent a letter to leaders of the Senate Banking Committee and the House Financial Services Committee in an attempt to repeal the requirement in Sarbanes-Oxley that disciplinary proceedings against auditing firms remain private and confidential.
Goelzer argued that the secretive process serves to encourage firms to drag out the proceedings for years and consume unnecessary staff time, while the investing public is unaware of any audit deficiencies at the firms or the companies that they have audited. As an example of that protracted process, he cited a trio of recent cases that had siphoned some 17,000 hours from the PCAOB staff.
In another example, Goelzer described the non-public proceedings against one firm, Gately & Associates, which issued 29 additional audit reports on public company financial statements between the commencement of the PCAOB's proceeding and the public disclosure of the board's charges, which did not occur until the SEC affirmed the PCAOB's decision to expel Gately from public company auditing. Over two years elapsed between the filing of the PCAOB's case and the public disclosure of the sanctions. During that time, the firm continued to pursue its public company audit practice while it litigated the board's case in private.
Goelzer maintained that the public, such as investors and audit committees, are denied access to critical information regarding PCAOB cases. During the course of proceedings, those parties are kept in the dark about a firm's alleged misconduct.
Conversely, he said, the SEC makes its enforcement hearings and injunctive actions public.
STIFFER SANCTIONS, STANDARDS
The PCAOB also unveiled plans to come down harder - via more sanctions - on firms and managers that don't adequately supervise their staffs.
In a two-part release, the board highlighted a SOX provision authorizing it to levy sanctions on firms and their supervisory personnel who fail to reasonably oversee associates who violate specific laws, rules and standards. It also discussed possible rulemaking and standard-setting that would require audit firms to make and document clear assignments of the supervision responsibilities that are already required to be part of any audit practice.
Meanwhile, the risk assessment standards - first proposed in October 2008 - if approved by the SEC would go into effect for audits of fiscal periods beginning on or after Dec. 15, 2010.
The new risk assessment standards address audit procedures performed throughout an audit, from the initial planning stages through the evaluation of the audit results (see "Busy with Standards," above).
Among the PCAOB's new standards are:
Auditing Standard 8 (AS No. 8) - Audit Risk. This standard discusses the auditor's consideration of audit risk in an audit of financial statements as part of an integrated audit or an audit of financial statements only. It describes the components of audit risk and the auditor's responsibilities for reducing audit risk to an appropriately low level in order to obtain reasonable assurance that the financial statements are free of material misstatement.
Auditing Standard 9 (AS No. 9) - Audit Planning. This standard establishes requirements regarding planning an audit, including assessing matters that are important to the audit, and establishing an appropriate audit strategy and audit plan.
Auditing Standard 10 (AS No. 10) - Supervision of the Audit Engagement. This standard sets forth requirements for supervision of the audit engagement, including, in particular, supervising the work of engagement team members. It applies to the engagement partner and to other engagement team members who assist the engagement partner with supervision.
Auditing Standard 11 (AS No. 11) - Consideration of Materiality in Planning and Performing an Audit. This standard describes the auditor's responsibilities for consideration of materiality in planning and performing an audit.
Auditing Standard 12 (AS No. 12) - Identifying and Assessing Risks of Material Misstatement. This standard establishes requirements regarding the process of identifying and assessing risks of material misstatement of the financial statements. The risk assessment process discussed in the standard includes information-gathering procedures to identify risks and an analysis of the identified risks.
Auditing Standard 13 (AS No. 13) - The Auditor's Responses to the Risks of Material Misstatement. This standard establishes requirements for responding to the risks of material misstatement in financial statements through the general conduct of the audit and performing audit procedures regarding significant accounts and disclosures.
Auditing Standard 14 (AS No. 14) - Evaluating Audit Results. This standard establishes requirements regarding the auditor's evaluation of audit results and determination of whether the auditor has obtained sufficient appropriate audit evidence. The evaluation process set forth in this standard includes, among other things, evaluation of misstatements identified during the audit; the overall presentation of the financial statements, including disclosures; and the potential for management bias in the financial statements.
Auditing Standard 15 (AS No. 15) - Audit Evidence. This standard explains what constitutes audit evidence and establishes requirements for designing and performing audit procedures to obtain sufficient appropriate audit evidence to support the opinion expressed in the auditor's report.
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