Transcript No Slide Title

Changes in the Profession
Alan Anderson,
AICPA Senior Vice President
Agenda
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What has happened since we last met?
PCAOB
 SEC Rule-Making
 The Cascade Effect
 Internal Controls
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New PCAOB Chair and other key
appointments
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New SEC Chairman Donaldson selects new
PCAOB Chair.
Selected William McDonough
Chief Auditor Selected, Doug Carmicheal
Deputy Chief Auditor, Tom Ray
Public Company Accounting
Oversight Board
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Overview
Inspections
 Discipline
 Registration
 Audit Standards for Public Companies
 Recent Speech by PCAOB Member stating IAASB
should be separated from IFAC
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Sarbanes-Oxley Act
Implementation
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Requirements of Act take effect from
7/30/2002 -1/2004.
PCAOB & Public Company Auditing Standards.
GAO studies on Audit Firm Rotation and
Competition/Firm Consolidation due in July.
SEC Proposals and AICPA
Comment Letters
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AICPA comment letters on each SEC proposal-emphasis on protecting the public interest, as
well as concerns of smaller firms.
Comment letters posted to Sarbanes-Oxley
Act/ PCAOB Implementation Central on
AICPA.org:
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http://www.aicpa.org/sarbanes/index.asp
SEC Final Rules –
Non-Audit Services
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Consistent with law.
Tax services clarified.
Audit firms can continue to provide tax compliance,
tax planning and tax advice to audit clients, subject
to audit committee pre-approval requirements.
 Exception for tax court.
 Mounting Pressure to revisit the tax preparation
decision
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Prohibited Services
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(1) bookkeeping services
(2) financial information systems design and
implementation;
(3) appraisal or valuation services,
(4) actuarial services;
(5) internal audit outsourcing services;
(6) management functions or human resources;
(7) broker or dealer, investment adviser, or investment
banking services;
(8) legal services and expert services unrelated to the audit;
(9) any other service that the Board determines, by
regulation, is impermissible.
SEC Final Rules –
Independence Auditor Rotation
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Lead and reviewing partners are subject to a
mandatory 5-year-on, 5-year-off rotation.
Other key partners may work on an account for
7 consecutive years before facing a 2-year
cooling-off period.
Small firm alternative. (AICPA pushed hard for
small firm relief)
Foreign Public Accounting Firms
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The bill subjects foreign accounting firms who audit a
U.S. company to registrations with the Board.
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This also includes foreign firms that perform some
audit work, such as in a foreign subsidiary of a U.S.
company, that is relied on by the primary auditor.
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PCAOB held session to hear views of Foreign Auditors
SEC New Rules – Independence
Partner Compensation
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No specific compensation related to selling nonaudit services.
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Small firm exemption.
SEC New Rules –
Independence Fee Disclosures
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Disclosures must be made to investors of
information related to audit and non-audit
services provided by, and fees paid to, the
auditor.
Revised “buckets” for the reporting of fees paid
are (1) audit services, (2) audit-related services,
(3) tax services, and (4) other services.
"Audit Committee Financial
Expert"
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Experience preparing, auditing, analyzing or
evaluating financial statements comparable to
issues expected to be raised in the registrant's
financial statements, or experience actively
supervising 1 or more persons engaged in such
activities.
"Audit Committee Financial
Expert"
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Understanding of generally accepted
accounting principles and financial statements.
Ability to assess general application of such
principles in connection with accounting for
estimates, accruals and reserves.
Understanding of internal controls and
procedures for financial reporting.
Understanding of audit committee functions.
SEC New Rules on
Workpaper Retention
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Accounting firms must retain for 7 years
certain records relevant to their audits and
reviews of issuers' financial statements.
Records to be retained include an accounting
firm's workpapers and certain other documents
that contain conclusions, opinions, analyses, or
financial data related to the audit or review.
 Contrary opinion documentation must be
maintained.
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SOX-Mandated SEC
Enforcement Study
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SEC staff studied 5 years of enforcement
actions.
In 227 enforcement matters, actions were taken
against 164 entities (18 audit firms) and 705
individuals (89 individual auditors).
Of 57 matters with actions against auditors,
16 involved Big Five, 41 smaller firms.
SOX-Mandated SEC
Enforcement Study
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In 140 of 227 enforcement matters, auditor was
Big Five.
Actions were predominantly not fraud related.
Study confirms risk areas we were already aware
of and have incorporated into SAS 99 and
Audit Risk Alerts.
SOX-Mandated SEC
Enforcement Study
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Report recommendations:
Uniform approach to public reporting of
restatements.
 MD & A reforms beyond those already adopted
because of Sarbanes-Oxley.
 Allowing issuers to provide SEC with internal
reports, including those now covered by attorney
client privilege, without waiving privilege.
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Cascade Impact For Non Public
Companies.
Principal Themes as we consider
cascade impact
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The profession should advocate for a “Reasoned
Approach to Reform” at the state level.
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The complexity of the issues needs to be
articulated and communicated.
Series of white papers available on AICPA.org
A Reasoned Approach to Reform
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Allow the process to work (SEC, PCAOB).
Emphasize the work of AICPA technical
committees (PEEC, PRB, ASB).
Advocate for protection of small business.
Underscore state economic development issues.
Emphasize that uncoordinated state law
changes are ineffective.
The marketplace is already adjusting.
Federal Cascade is a Strong
Possibility
GAO reaction to legislation
 DOL reaction to legislation
 Banking and other regulators’ reaction
 Pension reform initiatives
 Tax shelter focus by Congress
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Auditing Internal Control
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The ASB is issuing an exposure draft that provides
and enhances the standards for the auditor to use
when reporting on the effectiveness of a
registrant’s system of internal control over
financial reporting.
The AICPA has long supported this requirement.
The New Requirement
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Section 404 of Sarbanes-Oxley Act of 2002 requires
that auditors of most public companies also attest to
management’s assessment of the effectiveness of
internal control over financial reporting.
These additional procedures and the attestation report
shall not be the subject of a separate engagement.
Audits covering internal control therefore will become
an integral part of a public company audit.
Management’s and the auditor’s report will be part of
the public filing.
Major Provisions of
Proposed Standards
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Establishes conditions for engagement performance.
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Provides enhanced guidance on planning the engagement,
including:
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Management’s process and responsibilities.
Management’s documentation of controls.
Factors to consider when the entity has multiple locations or
business units,
Implications for the engagement when service organizations are
used, and the role of the internal audit function.
Provides enhanced guidance on testing and evaluating the
operating effectiveness of controls, including :
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The nature, timing, and extent of auditor tests and the limits on the
auditor’s ability to use the results of management’s or internal auditor’s
tests.
Major Provisions of
Proposed Standards (Continued)
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Defines internal control deficiency, significant deficiency (this
term replaces and therefore eliminates the term
reportable conditions), and material weakness.
Provides enhanced guidance on identifying significant
deficiencies and material weaknesses.
Major Provisions of
Proposed Standards (Continued)
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Establishes a requirement that the criteria will be:
 Suitable and established through due process,
 Example being the framework of internal control established in
the report, Internal Control—Integrated Framework (COSO report).
Requires that material weaknesses be disclosed in the auditor’s report
even if management discloses in their report.
Requires that significant deficiencies not only be disclosed to the audit
committee but disclosed by management in their public report. The
auditor’s report will state that significant deficiencies have been
identified and communicated to the audit committee.
Provides for issuance of a combined report with two opinions or
separate reports and provides examples of both.
Other Actions taken by the
AICPA in this Environment
New Fraud Standard
 Free Corporate Governance Training- How
Fraud Hurts you and your organization. Jointly
developed by AICPA and ACFE
 Anti-Fraud Criteria and Controls
 Additional CPE – 10% to fraud training
 Institute for Fraud Studies
 Fraud Specialist Competency Model
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