Transcript SARBANES-OXLEY ACT of 2002

State of the
Audit
Profession
Virginia Accounting & Auditing
Conference
Presented by
Chuck Landes, CPA
Agenda
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How did we get to where we are today?
The provisions and implications of
Sarbanes-Oxley
The cascade effect – what’s the next
front?
Honoring our heritage and moving forward
Overview of significant assurance
initiatives
What went wrong – corporate
culture and reporting model
► Simple
greed or arrogance
► Market pressure on short term earnings
► Lack of transparency or timely disclosures in
the reporting model
► Lack of mandated disclosures on
management’s accounting policies
► Too many rules leading to connect the dots
accounting and auditing
What went wrong – the work of
auditors
► Some
auditors did not step up to their
responsibilities
► Some auditors assumed good intent on part
of management
► Inherent weaknesses in our disciplinary and
monitoring processes
► Auditor dependency on fees from major
clients
What was the response
of Congress?
The Sarbanes - Oxley Act:
Oversight Board
► New
Public Company Accounting Oversight
Board (PCAOB)
► Requires 2 CPAs (but only 2) to serve
► Power to set auditing rules, inspect firms
and discipline wrongdoers
► Funding from accounting firms and
registrants
The Sarbanes - Oxley Act:
Standards Setting
► PCAOB
has authority to “adopt, amend,
modify, repeal or reject” standards
► Includes provisions for SEC oversight,
governance and funding of FASB
The Sarbanes - Oxley Act:
Independence/Scope of Services
► Proscribes
eight specific services to public
company audit clients
► Gives PCAOB authority to prohibit others
► Other nonaudit services not banned must be
pre-approved by audit committee
The Sarbanes - Oxley Act:
Banned Services
► Bookkeeping
► Information
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systems
design and
implementation
► Appraisals or valuation
services
► Actuarial services
► Internal audits
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Broker/dealer and
investment banking
services
Legal or expert services
related to audit services
Management and human
resources services
Other services as
determined by the board
The Sarbanes - Oxley Act:
Liability Concerns
► Statute
of limitations extended to 5 years
from occurrence or 2 from discovery
► No specific language on non-preclusive
effect
The Sarbanes - Oxley Act:
Report on Internal Controls
► Requires
auditor report on internal controls
assertions
► Must be part of audit - not separate
engagement
The Sarbanes - Oxley Act:
Corporate Governance
► Mandates
audit committee oversight of
audits
► Requires CEO/CFO certification of reports
► Prison terms of up to 10 years for senior
executives
The Sarbanes - Oxley Act:
Workpaper Retention
► Auditors
to retain documents in support of
report for 7 years.
► 5 yr retention requirement under “criminal
fraud accountability”
Sarbanes/Oxley Projects
► Internal
control task force
 Focus on reporting on internal controls over
financial reporting as part of the annual audit
► Audit
committee task force
 Focus on relationship and communications
Sarbanes/Oxley Projects
► Omnibus
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task force
Documentation retention
Concurring partner review
Foreign affiliate issues
Representation and attorney letter amendments
► Q.C.
Task Force
 Focus on inspection/monitoring guidance
 Audit partner rotation
 Objectivity issues
Possible Cascade at Federal Level
► DOL
rules for ERISA Audits
► Banking Regulators
► Future Action from the GAO
► Public Interest Entity – A concept that may
be coming
Senate’s Attempt to Address
State Issue
► The
bill says that state regulators:
“Should make an independent determination of
the proper standards applicable” in supervising
nonregistered accounting firms.
► Standards
applied by the Board “should not
be presumed to be applicable” for small and
medium sized firms
Overview of the Potential Impact
► New
rules could require mandatory rotation
of all partners on audit engagements.
► New auditor responsibility for “testing”
issuers’ compliance with laws and reporting
on “potential” violations.
► The new Board could have the authority to
enforce securities laws, duplicating SEC’s
powers.
► State legislative/regulatory proposals could
“pile on” and/or conflict with Federal laws.
Honoring our Heritage
and Moving Forward…..
A Revitalized Accounting Culture
►What
is needed is not just legislation
but a revitalized accounting culture
►Build upon the profession’s traditional
values
 A rigorous commitment to integrity
 A passion for getting it right
 A commitment to rules and a zeal for
applying them
 Zero tolerance for those who break them
Getting the Right Answer
► We
are at a serious juncture in the history of our
financial markets and our profession
► Anyone who deceives investors must be held
accountable
► Regulators should have all the resources they
need to police the capital markets and enforce the
law
► Investors must have information that is accurate,
clear, timely and relevant
► The
reputation of the CPA profession must be
restored and our proud heritage honored
Honoring our heritage and moving
forward
► We
need to reaffirm our basic commitment
to professionalism
► Auditors must be willing to say NO
 Every day, auditors everywhere are telling a
corporate exec what must be disclosed, why a
transaction can’t be treated in a certain fashion
and why certain activity must be reflected on
the balance sheet
 “Trust, but verify,” this is the true spirit of the
profession
What saying NO means
► Rejecting
unsound corporate accounting
practices
► Reducing the risk of deceit and fraud
through diligent inquiry
► Ensuring that audited statements are not
just accurate, but illuminating
► Questioning management, challenging
management
► When justified – rejecting management’s
accounting decisions
Overview of Other
Significant Professional
Developments
Recently Issued Standards
► SAS
No. 95, Generally Accepted
Auditing Standards
► SAS No. 96, Audit Documentation
► SSAE No. 11, Attest Documentation
► SAS
97, Reports on the Application of
Accounting Principles
► SAS 98, Omnibus 2002
The ASB’s Current Agenda
► Fraud
► Risk
Assessments
► Fair Value
► SAS No. 71(Quarterly Reviews of SEC
Entities)
► Joint Task Force on Quality Control
► Sarbanes/Oxley related projects
► Horizons II
Horizons II Task Force
► Strategic
group looking at direction of ASB and
auditing standards over next 3 – 5 years
► Will continue to include convergence with
international auditing standards
► Explore expanding auditor’s communication
► Explore whether “reasonable assurance” is the
proper level of assurance with respect to the
auditor’s responsibility to plan and detect material
errors.
Where do we go from
here?
Working with Corporate America
► AICPA
to convene anti-fraud summit with
corporate leaders, accountants and market
professionals
► Will partner with corporations to design
and establish anti-fraud controls and
programs.
► Will created enhanced attestation
standards for CPAs to report on corporate
anti-fraud programs
Research
► AICPA
to sponsor academic research into
the who, what, when, where & why of fraud
► AICPA will establish an Institute for Fraud
Studies with the University of Texas and
Association of Certified Fraud Examiners
Education & Training
► AICPA
will develop training programs to
prevent fraud
► AICPA to work with academia on anti-fraud
curricula and materials
► AICPA calling for members to more antifraud CPE
► AICPA urges stock exchanges to mandate
anti-fraud education for corporate managers
and directors
Advancing Financial Reporting
► AICPA
to initiate a dialogue on differentiating
reporting needs of private vs. public companies
► Will work with FASB on more timely and better
quality reporting – particularly for off balance
sheet, intangibles & liquidity
► AICPA is co-sponsoring Value Measurement &
Reporting Collaborative
► AICPA supports more disclosure of accounting
policies and estimates and reporting in
Management’s Discussion and Analysis
Corporate Governance
► AICPA
calls for revision of auditing
standards to provide public notice of
internal control weaknesses
► Reportable conditions to include:
 One person as Chair and as CEO
 Audit committee that is not fulfilling its mission.
 It may include lack of mandatory anti-fraud
education, or lack of a Code of Conduct
Conclusion -- Moving Forward
► Core
values and traditional areas.
► Building on what we do best and what the
public needs us to do.
► Wrestle with such key issues as reporting
measures, transparency, fraud responsibility,
dependency, etc.
► Address state issues
► Enhance the public’s perception of our
profession
What the AICPA Will Do
► Continue
to communicate with you
► Work to keep the profession together
► Work to assist with the implementation of
this new regulatory structure
► Provide you with the assistance to deal with
the Legislative/Regulatory issues in your
State
Questions?