audit

Can AS5 really be enforced?

Tue, 07 Aug 2007 06:59:59 -0400

Jack Ciesielski, who publishes The Analyst's Accounting Observer, found this comment by Chris Cox on AS5 intriguing: "The SEC and the PCAOB expect a change in the behavior of the individuals who are responsible for following these new procedures. To that end, the PCAOB's inspection program will monitor whether audit firms are implementing the new auditing standard in a cost-effective way that is designed to achieve the intended results. And the SEC, in our oversight capacity, will monitor the effectiveness of the PCAOB's inspections." So you've got the SEC watching the PCAOB watching the audit firms who are watching the companies. But it is so very subjective. Can you really enforce a new top-down approach? Can you really enforce a principles-based mentality? There are many who think that the new AS5 isn't really going to do much because it lacks specifics. When push comes to shove in an audit, you might expect the auditors to revert to what has worked in the past--no matter how awful for the client. No one ever got fired for keeping their billable hours high.

For more:
- here's Cox's statement
- here's a copy of the blog post

More on the shape of the new AS2

Mon, 11 Dec 2006 19:01:39 -0500

We've known for some time that the PCAOB intends to re-write AS2. We've gotten hints that "materiality" will be redefined and so forth. It looks like we could be in for a fairly significant change. The board announced last week that it is considered a new auditing standard that would "supersede" AS2, the current, flawed guide for auditor assessments of internal controls. Chairman Mark Olson promises a "more efficient, risk-based, scalable implementation." So what to expect specifically? An emphasis on (1) higher-risk time periods when it comes to preparing and releasing financial statements, (2) identifying weaknesses before they result in misstatements, (3) limiting unnecessary focus on controls that are deemed of lesser importance, (4) clarify that the role of the auditor is limited to an evaluation of the controls in place. Stay tuned. This will be big news soon. The meeting is set for Dec. 19.

- here's an article from CFO.com

Related Article:
Revising AS2 is the PCAOB's top priority. Report

The shape of reform to become clearer soon

Mon, 20 Nov 2006 19:01:39 -0500

Chris Cox, chairman of the Securities and Exchange Commission, says that changes are coming soon. Most likely, various reform measures will be adopted at a Dec. 13 public meeting. This has been known for a while, but Cox has certainly kept up the drum roll. We've had a lot of hints as to what the SEC considers reform. The best bet is that it will embrace some of the changes that the PCAOB has already proposed to the agency. The PCAOB has been re-formulating Auditing Standard No. 2, aiming to clarify definitions of material weakness and significant deficiency among other things. The main problem seems to be that auditors have interpreted guidelines way too conservatively in order to protect themselves. Cox is moving with the political winds. Sarbox reform is certainly vogue in Washington.

For more on this:
- read this update

PLUS: Some accountants react to impending changes. Article

ALSO: Paulson keeps up the drumbeat for 404 change. Article

AND: The Bush Administration will review financial regulations. Article

The SEC's plans to ease small-company burdens

Mon, 13 Nov 2006 19:01:39 -0500

Some people have called for an end to small company audits. The Securities and Exchange Commission will not go that far, but it is moving to lighten the load. While all will be required to conduct audits, the SEC will categorize by size; companies with market caps under $75 million will have to evaluate internal controls but will not have to have the results audited for two years. In the third year, an audit will be required. Companies with market caps up to $700 million will also get relief, though the details have not been released. Also, the SEC is currently working with the PCAOB's Mark Olsen to deliver a set of guidance. One goal is to shift the focus of control assessments. Basically, the SEC is fine with audit firms focusing on the areas of greatest potential risk. An audit need not be so darn comprehensive. That's where a lot of the cost and frustration has been coming from. The wild card in all this is Congress. There are many relief efforts underway that could muddy the picture. We'll have to see what priorities bubble forth from the new house and Senate (see next item).

For more on this:
- read this New York Times article

PLUS: The SEC and the PCAOB met this weekend to discuss relief measures. Some wonder if there is some tension building between these two entities. Any changes would have to be put in place by March or April to affect the upcoming corporate audits. Article

Related Article:
Will bill change Sarbox audits? Report

Has Sarbox delivered higher quality financial statements?

Mon, 16 Oct 2006 20:01:39 -0400

Some recent stats suggest that big-name accounting firms are making lots of progress. By one measure, in 2005, the restatements filed by public companies was up 72 percent from the previous year. In the first half of 2006, restatements were up 14 percent. But much of the refiling is being done by clients of smaller accounting firms. Among clients of the top eight firms, restatements are down 31 percent from a year ago. That's with the recent options scandals. You have to credit the fact that the PCAOB exists. Recall that there was no official watchdog before Sarbanes-Oxley was passed in 2002. There may be problems, but the PCAOB is real. Even smaller accounting firms can expect to be audited; one would expect their numbers will improve over time.

For more on this:
- Here's an article in the International Herald Tribune

Revising AS2 is the PCAOB's top priority

Mon, 09 Oct 2006 20:01:39 -0400

It's no surprise that reformulating Auditing Standard No. 2 is the PCAOB's highest priority when it comes to setting standards. The board had already submitted a set of proposals to the SEC, a move that many of you see as way too late but still a step in the right direction. These proposed revisions have not yet been made public but that will happen, probably sooner rather than later. That will give the industry a chance to comment. Look for enhanced definitions of "significant deficiency," "material weakness" and "materiality." This is not the only standard-setting area that the PCAOB is considering. It will likely also tinker with rules governing reporting, reviewing (by a second partner) and the entire risk assessment process. The short take is that there will be plenty to keep you busy in 2007.

For more on this:
- Here's an update from CFO.com