Wednesday, October 14, 2009

PCAOB Announces Ambitious Agenda; May Be Time to 'Dial Up' on Fraud, Silvers Says

Earlier today, PCAOB Acting Chairman Dan Goelzer told the PCAOB's Standing Advisory Group: "We are embarking on a new phase in standard-setting, [with] a very ambitious standard-setting agenda in the coming year, focusing on some nuts and bolts issues, particularly issues our inspection program has highlighted where standards could be improved or modernized." He added, "In the coming months, we are likely to see more activity with more impact on financial statement auditing than any similar period in the board's existence."

Marty Baumann, Chief Auditor of the PCAOB, reviewed the PCAOB's recent standard-setting activities, including proposed standards, Concept Releases, and final standards issued Oct. 2008-2009. The PCAOB staff also presented a chart in a handout outlining the status of previous SAG standard-setting discussion topics, and presented the PCAOB Office of Chief Auditor (OCA) Standard-Setting Agenda.

As in prior years, the standard-setting agenda focuses on the board's current determination of near-term priority projects. Different from prior years, however, the agenda includes 'milestones' for projected dates of finalization of these projects, and the dates go out to 2011. Here are the dozen items listed on PCAOB's standard-setting agenda. [Target dates per PCAOB schedule shown in brackets next to each item.]
  1. Risk Assessment – Comment period on proposals ended Feb. 18, 2009. Staff is working toward re-proposing the standards for public comment. [Re-proposed standards: 4Q2009; Final standard: 3Q2010.]
  2. Audit Confirmations –Comment period on Concept Release ended May 29, 2009. The staff has analyzed the comments received and is discussing with the Board the staff's views on how to address the comments.[Proposed standard: 1Q2010; Final standard: 3Q2010]
  3. Signing the Auditor's Report - Comment period on Concept Release ended Sept. 11, 2009. The staff is analyzing the comments received and will be discussing with the Board the staff's views on how to address the comments.[Board decide whether to proceed with this standard-setting project 4Q2009; if decision to proceed, then proposal 1Q2010; final standard 3Q2010.]
  4. Application of the Sarbanes-Oxley Act's Provision on "Failure to Supervise" – Staff is preparing a draft release for the Board's consideration relating to the Board's application of Section 105(c)(6) of the Act, which authorizes the Board to impose sanctions on firms and individuals for failure to supervise. The release would also seek comment on concepts relating to what, if any, rulemaking or standard-setting might usefully supplement the Board's application of that provision.[1Q2010: consider whether to propose standards; if decision to proceed, proposal 2Q2010; final standard 4Q2010.]
  5. Accounting Estimates, Fair Value Measurements, and Specialists – Staff is evaluating potential revisions to the standards on accounting estimates, fair value measurements, and using the work of a specialist. [Proposal 2Q2010; re-proposed or final standard 4Q2010; adopt final standard 2Q2011.]
  6. Communication with Audit Committees –Staff is developing a briefing paper for the Board's consideration on whether the staff should pursue a standards-setting project. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
  7. Related Parties – Staff is evaluating potential revisions to the related parties auditing standard. [Proposal 1Q2010; re-proposed or final standard 3Q2010; adopt final standard 1Q2011.]
  8. Global Quality Control Standards, Including Control Over Work of Affiliated Firms – Staff is evaluating potential revisions to the quality control standards. This will include an evaluation of Appendix K. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  9. Principal Auditor – Staff is evaluating potential revisions to the 'principal auditor' auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  10. Going Concern – Staff is monitoring FASB's project on Going Concern, and plans to update the timeline when FASB determines their action plan for the accounting standard. Staff will assess if any conforming amendments are needed to the Board's auditing standards to align with the FASB's final standard, and will evaluate any additional issues and determine whether to pursue a standards-setting project on going concern.[Determine whether to add a project on this 1Q2010.]
  11. Subsequent Events – Staff is evaluating FASB's new accounting standard on subsequent events and analyzing how it may affect the Board's subsequent events auditing standard. [1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 4Q2010; adopt final standard 2Q2011.]
  12. Applicability of SECPS Requirements to all Registered Firms – Because registered firms (generally non-U.S. firms and some smaller firms) that were not members of the SECPS in April 2003 when the Board adopted certain of the SECPS [AICPA's former SEC Practice Section] requirements are not subject to these interim quality control requirements, the staff is analyzing different options to determine if it is feasible to extend the SECPS requirements to all registered firms. This excludes Appendices E (superseded by AS No. 7) and K (part of global quality control standards standards-setting project). .[1Q2010: determine whether to propose standards, if decision to propose, then propose 2Q2010; re-propose or adopt final standard 1Q2011; adopt final standard 4Q2011.]
The above list of projects is subject to change, noted Baumann, based on review of comment letters received on proposals and concept releases, board input on the agenda, and related effects of actions external to the PCAOB, including legislation, and standard-setting or rulemaking activity by the U.S. Securities and Exchange Commission or the Financial Accounting Standards Board.

"We Need To Move The Dial" With Respect to Fraud, Silvers Says
Although not part of the PCAOB's formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or 'foundational' standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as 'foundational' standards.

Baumann and other PCAOB staff emphasized that although they do not currently have a standard-setting project on fraud on their agenda, fraud-related aspects are woven into numerous standard-setting projects, including confirmations, risk assessment, and fair value, among others (with particular emphasis in the risk assessment standards).

Damon Silvers, Associate General Counsel, AFL-CIO, and a member of the Congressional Oversight Panel appointed by Congress for the Troubled Asset Relief Program, stated, "The overall fraud standard needs to be strengthened at the same time you undertake this exercise."

In response to questions, Silvers said, "We should not expect that every audit is a forensic audit... that's absolutely not what I'm saying." However, he added, "I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud."

"This was subject to some extensive discussion in the Treasury committee (Treasury's Advisory Committee on the Auditing Profession or ACAP]," said Silvers, adding, "some people, [e.g.] Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don't find fraud, it's the auditors fault; but it's also not my view that looking for fraud is not related to the audit, that doesn't parse with the public's [perception] of the audit profession."

Joe Carcello, Director of Research, Corporate Governance Center, and Ernst & Young Professor, University of Tennessee, said, "I agree with Damon [Silvers], I think an absolute liability standard would be a big mistake. As someone who has spent a lot of my professional career studying fraud, some of these [frauds] are very elaborate, I don't have strong opinion on embedding [in] fraud standard or separate [standards, e.g. risk assessment standards]. (See also our related post today, citing Carcello's remarks on an upcoming COSO fraud study: COSO Updated Fraud Study Coming; Garrett Proposes Sarbox Exemption)

Status of PCAOB's Response to Treasury ACAP Recommendations
Also on the subject of fraud, SAG members asked the PCAOB staff what the status was of PCAOB's response to recommendations directed at the PCAOB included in the final report of the Advisory Committee on the Auditing Profession (ACAP). ACAP was cochaired by former SEC Chairman Arthur Levitt, and former SEC Chief Accountant Don Nicolaisen, and their final report was issued in fall, 2008. A number of SAG members or other individuals from their companies served on ACAP.

Fraud center: Among ACAP's recommendations was that the PCAOB launch a Fraud Center to gather and share information about fraud prevention and detection. A couple of SAG members noted they had heard that the SEC may have placed a budget constraint on the PCAOB with respect to forming a Fraud Center.

Baumann responded, "We are continuing to gather evidence with respect to what we might want to do with respect to [a fraud center]." He added, "That is a bit outside the standard setting area."

Goelzer added, "In this year’s budget, we were given what we asked for in terms of implementation of [ACAP's] recommendations." He noted that the PCAOB's budget authorization approved by the SEC "asks that we consult with the SEC, keep them advised."

"On the fraud center specifically," Goelzer continued, "we do regard that as a priority recommendation; it has real potential to benefit audit quality; we are going through the process of gathering input on how a fraud center would best be structured, and what its responsibilities would be. We will go back to the SEC and tell them... what budget [would be appropriate]. He added he was not aware of any budget limitations with respect to the fraud center.

SEC Chief Accountant Jim Kroeker, an observer at the SAG meeting, added he was not aware of any budget limitations with respect to the fraud center.

Audit quality indicators: Another ACAP recommendation called for the PCAOB to consider requiring large audit firms to provide disclosures relating to a set of audit quality indicators. A number of SAG members encouraged the PCAOB to launch a project in this area.

Baumann replied, "We had a lengthy session on audit quality indicators at a SAG meeting about a year ago, a discussion group and breakout groups, that was a very valuable discussion." He added, "We received significant input at that discussion, a lot of support for the importance of measuring and defining audit quality; on the other hand, for virtually all audit quality indicators we discussed at that meeting, there seemed to be as many potential negative unintended consequences." He noted while there was general agreement that audit quality indicators were a good idea, PCAOB staff believed further exploration would be necessary on this subject due to the potential unintended consequences..

SAG member Lynn Turner, a former chief accountant at the SEC, and a member of ACAP, commented, "Just because people said there are some unintended consequences, that is probably the most overused phrase .... these days... used as a reason by people to not do something."

Ranzilla Cautions On "Presumptions" In Audit Standards
Sam Ranzilla, Audit Partner and National Managing Partner, Audit Quality and Professional Practice, KPMG LLP, referencing comments made earlier in the SAG meeting by Liz Gantnier, Director of Quality Control, Stegman & Company (and a member of the Center for Audit Quality's Professional Practice Executive Committee), said: "I agree with Liz, there is a theme running through the [SAG briefing] papers, to adding requirements in a very prescriptive set of standards."

"I think you ought to think very long and hard about going down a path that is very prescriptive," said Ranzilla, "and I also warn you about the presumptive nature, if you presume something is a risk factor, or is a 'bad thing,' and therefore you go to an extended audit response - but you can avoid that by documenting in some level of detail why you overcame that presumption - human behavior will accept whatever you presumed was in the standard, because the risk of getting second guessed by me as an internal inspector, then the [PCAOB] inspector." As a result, according to Ranzilla, "It might be more efficient to do unnecessary work, than to document why you don't need to do unnecessary work." Therefore, he advised, "Going down the presumptive path is a very significant decision, and one you should not take without a great deal of soul searching."

More Details from SAG Meeting
If you are an FEI member, you can read more in FEI's seven-page summary of the SAG meeting. Not an FEI member? What are you waiting for? FEI membership entitles you to our members-only news summaries, networking events, discounts on conferences, free reports from FEI's research affiliate, the Financial Executives Research Foundation, and more! Learn more about FEI membership.

Print this post

No comments: