PCAOB Adopts New Risk Assess. Stds; Issues Release on Failure to Supervise – GUEST POST by Francine McKenna, Re: The Auditors

Following is a GUEST POST from my BBF (Best Blogger Friend), Francine McKenna, Managing Editor of the popular blog RE: The Auditors. I am on vacation the next two weeks and am pleased to have Francine kick off some guest posts from other bloggers. Visit her blog at http://www.retheauditors.com/ and on twitter at www.twitter.com/retheauditors.

If you are a blogger interested in potentially providing a guest post in the FEI blog during the next few weeks, please contact me by email at eorenstein@financialexecutives.org.

Reported by Francine McKenna, Guest Blogger today:

The Public Company Accounting Oversight Board held an Open Meeting this morning, Aug. 5 to address the following important items of business:

  • The adoption of eight auditing standards and related amendments that would revise the requirements for assessing and responding to risk during an audit., to cover two important issues, and

    A proposed release to address the PCAOB’s obligation under the Sarbanes-Oxley Act of 2002 to impose disciplinary sanctions on registered public accounting firms and their supervisory personnel who fail to reasonably supervise associated persons.

PCAOB Board Unanimously Adopts Suite of Risk Assessment Standards
The Board voted unanimously to adopt the suite of risk assessment standards, Auditing Standards No. 8 through No. 15. These standards were originally proposed on Oct. 21, 2008, and then reproposed in revised form on Dec. 17, 2009. Here is a link to the press release.

The standards set forth requirements that enhance the effectiveness of the auditor’s assessment of, and response to, the risks of material misstatement in the financial statements. They supersede six PCAOB interim standards and related amendments: AU sec. 311, Planning and Supervision; AU sec. 312, Audit Risk and Materiality in Conducting an Audit; AU sec. 313, Substantive Tests Prior to the Balance Sheet Date; AU sec. 319, Consideration of Internal Control in a Financial Statement Audit; AU sec. 326, Evidential Matter; and AU sec. 431, Adequacy of Disclosure in Financial Statements.

PCAOB Issues Release on Failure to Supervise
The Board also unanimously agreed to issue a release to address the PCAOB’s obligation under the Sarbanes-Oxley Act of 2002 to impose disciplinary sanctions on registered public accounting firms and their supervisory personnel who fail to reasonably supervise associated persons. Here is a link to the press release. The PCAOB’s proposed release highlights Section 105(c)(6) of the Act and seeks comment on conceptual approaches to rulemaking that would complement its application.

Through its inspections and investigations, the PCAOB has observed that supervision processes within firms are frequently not as robust as they should be, and that supervisory responsibilities are often not as clearly assigned as they should be,” said PCAOB Acting Chairman Daniel L. Goelzer. “Today’s Release seeks to highlight the Board’s views on the scope for using the authority provided in the Act to address those problems.”

The purpose is twofold:

• To remind auditors and their firms that the Board has the authority under 105 (c)(6) to impose sanctions on registered public accounting firms and their supervisory personnel for failing to reasonably supervise associated persons.

• To solicit comments for a rulemaking proposal that covers the full scope of supervisory professionals in a firm, not just the engagement partner.

PCAOB Board Member Steve Harris said:

“I think it is absolutely clear… that that system was intended to include accountability all the way up to the top of the firm. … One of the frustrations at the time — was …the inability to hold people at the top of the chain accountable for problems that had occurred on their watch.”

The PCAOB is soliciting public comment on the concepts discussed in Part II of the Release which focus on possible rulemaking or standard setting that would require firms to make and document clear assignments of the supervision responsibilities that are already required to be part of any audit practice. The comment period is open until November 3, 2010. (corrected from original post)

PCAOB Request to Congress to Amend Sarbox
Finally, PCAOB Acting Chairman Daniel Goelzer asked his legislative team to draft a request to Congress to amend the Sarbanes-Oxley Act to change the PCAOB’s rules regarding the assumption of privacy for PCAOB disciplinary proceedings.

“No other auditor, investor, audit committee, or member of the media is entitled to know what the PCAOB considers to merit discipline, whom it has charged, what issues are being litigated, or whether the PCAOB staff has prevailed or not,” said Acting Chairman Goelzer. “The public is in the dark about how the Board uses its enforcement authority until there is a settlement or an SEC decision on the Board’s sanctions.

Under Sarbanes-Oxley, PCAOB investigations and disciplinary proceedings – from beginning to end – are conducted in private, with no disclosure to investors and the public unless or until charges are settled or all appeals at the SEC level are exhausted.

“The privacy provisions for our disciplinary proceeding are biggest impediments to investor protection in Sarbanes-Oxley,” said PCAOB Board Member Bill Gradison.”

There is no assumption of privacy for SEC disciplinary proceedings against auditors once a decision on sanctions is reached. This misalignment, according to the PCAOB, may encourage delay and ongoing litigation by the audit firms rather than transparency and accountability for the benefit of investors and the profession. See related press release.