- fair value measurements and using the work of specialists,
- communication with audit committees, and
- related parties (and certain other matters)
In brief, SAG members generally concurred that auditing fair value measurements with a heightened risk of measurement uncertainty should not be labelled across the board as presumptively having a heightened risk of fraud (PCAOB staff had asked if they should label fair value measurement as presumptive risk of fraud), although SAG members concurred such measurements did have an inherent risk and auditors could be encouraged to exercise more professional skepticism regarding such amounts, including not only where fair value measurement appeared in the financial statements, but quantitative and qualitative disclosures in the footnotes.
On the second matter listed above, communication with audit committees, the discussion was kicked off with opening remarks by a panel of SAG members, including Margaret M. (Peggy) Foran, Vice President, Chief Governance Officer, and Corporate Secretary, Prudential; Jamie S. Miller, Vice President, Controller and Chief Accounting Officer, General Electric Company; and Lynn E. Turner, Senior Advisor and Managing Director, LECG, and former Chief Accountant, SEC.
Turner commented that written communications from auditors to the audit committee, and written communications from audit committees to investors, tended to be more boilerplate than he would like to see.
Foran and Miller did not believe auditor communications, in their experience, were overly boilerplate, although they and other SAG members, including Dow Chemical Chief Auditor Doug Anderson, concurred that written communications from auditors to the audit committee may tend more toward boilerplate by their very nature, in terms of establishing compliance with rules, but verbal communications between auditors and audit committees, according to Foran and Miller, were generally robust.
Some SAG members noted they were not aware of any inspection findings criticizing auditors' communication with audit committees, and had not heard of any audit committee members describe any shortfallings in information provided by the auditors; those SAG members asked if this issue was a solution in search of a problem.
Miller suggested it would be useful if, in addition to some refinements of the audit standard, such as changing the language in the standard to encourage more of a two-way dialogue with the audit committee, for information on best practices for audit committee communications to be published.
Some SAG members suggested that, rather than the PCAOB publishing 'best practices,' that other groups could be consulted which provide forums for board members, such as NACD and that various audit firms provide forums such as KPMG's Audit Committee Institute.
Anderson noted that the Canadian Institute of Chartered Accountants (CICA) had published pamphlets for audit committee members, outlining the types of questions they should ask to fulfill their responsiblities. Other SAG members noted they believe issues relating to audit committee operation and structure are more under the realm of the SEC (and the stock exchanges) than the PCAOB.
Joe Carcello, Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, cited various research studies, including one he was currently working on with USC Professor and former SEC Deputy Chief Accountant Zoe-Vonna Palmrose, which he noted could indicate concern about board members being too close to management to be effective.
SEC Deputy Chief Accountant Paul Beswick, an observer at the SAG meeting, said, "It's pretty clear a number of people in the room have some views about the regulation of audit committees or what audit committees are communicating to the public. I will take feedback back to the Commission and share it with the appropriate people, and talk about what are some things we can do to address [those] concerns." He asked Carcello to provide him with more information about the research that he cited.
During the final matter discussed, related parties, some SAG members indicated they would not be as adverse to labelling related party transactions as presumptively having a higher risk of fraud, relative to their objection earlier in the meeting to painting fair value measurements as presumptively having risk of fraud; at least one SAG member noted he had been 'burned' earlier in his career as an auditor, by a related party transaction.
Other SAG members advised the PCAOB to perhaps broaden the scope of the type of transactions they were aiming to encourage more auditor skepticism on, beyond related parties, since there were a variety of other tranactions where related parties are not involved, that should also prompt greater skepticism. They also noted that auditor focus on related parties is sometimes too narrowly focused on whether the issuer is providing required disclosures on related parties, but not sufficiently focused on the risk of financial statement misstatement, or fraud, arising from such transactions.
PCAOB Chief Auditor Marty Baumann closed day 2 of the SAG meeting by thanking SAG members for their feedback, and noted that upcoming SAG meetings were slated to take place on the following dates in 2010: April 7-8, July 15, and Oct. 13-14.
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