Auditor Filings Eyed; AICPA Data Missing

The Public Company Accounting Oversight Board is pushing new disclosure rules for CPA firms, which could ultimately force auditors to alert regulators when they—or their clients—encounter numerous types of governance woes.

Under new rules proposed last week, the PCAOB wants to be notified within 14 days if an audit firm withdraws a public company’s audit report and the company fails to report it to the Securities and Exchange Commission, or if a key member of an audit firm is charged with a crime or becomes involved with a government-initiated civil action. The Board also wants to be notified if a firm files for bankruptcy, decides to buy consulting services from parties with a “disciplinary history,” or has any change in its license status with state regulators.

Those are among several trigger events the PCAOB wants to include in its new filing requirement, contained in proposed registration rules. The Board says in its rule proposal that each trigger “is potentially of some immediate concern to the [PCAOB] for specific reasons.”

The Board says it is especially open to comment on the requirement for audit firms to tell the PCAOB when it withdraws an audit report but the client fails to report that fact as mandated by the SEC’s Form 8-K disclosures. Although SEC rules already require audit firms to report known illegal acts, such as failing to file an 8-K when appropriate, the PCAOB said it’s looking for a way to “draw investors’ attention to the problem relatively quickly.”

Niemeier

Board member Charles Niemeier said last week that he especially likes the requirement for audit firms to report an audit breakdown that otherwise might not be noticed by the SEC or investors. “To my mind, the proposed reporting system is not designed to function as a parallel to the 8-K disclosure system,” he said. “But I do think investors would benefit from having notice of withdrawals of audit reports in real time when an issuer doesn’t comply with the requirement to disclose a withdrawal.”

Goelzer

The PCAOB says its staff took care to establish a set of disclosure requirements that would minimize unnecessary redundancy with other existing reporting requirements, yet bring regulators’ attention to areas of concern. “The objective of these rules is to make sure the Board receives timely notice of key developments that are significant to the Board’s responsibilities, particularly its inspection programs, but without duplicating information that is available elsewhere,” Board member Daniel Goelzer said at last week’s meeting.

The proposed reporting requirements are contained in two rules the PCAOB unveiled for public comment last week, which are intended to keep the Board informed of changes at audit firms that might affect their registration status with the regulator (see box above, right, for details).

The first rule, which contains the disclosure requirements regarding any troubling events, also would require firms to update routine operating and identifying information annually. The second proposed rule would allow a new owner of a registered firm to retain the firm’s registration status for up to 90 days, while the newly reorganized firm seeks new registration with the Board.

Sarbanes-Oxley includes language that would require audit firms to alert the PCAOB annually to any changes in registration information, Board spokesman Michael Shore explained. “Under the current rule, there is no requirement for periodic registration,” he said. “This would be a way of updating firm information on an annual basis.”

The Board is open to comments on the proposed rules through July 24. When the Board might subsequently adopt the rules is unclear, depending on the feedback it receives.

SEC Accountant, EITF Member Tackle Revenue Recognition

Scott Taub, acting chief accountant at the SEC, has teamed up with Ashwinpaul Sondhi of the Financial Accounting Standards Board’s Emerging Issues Task Force to write a short monograph on the always tricky subject of how companies should distinguish between revenue and gain.

The monograph is included as a chapter in the 2006 Miller Revenue Recognition Guide, a comprehensive summary of the key concepts and issues that arise in determining when and how to recognize revenue. In their chapter, Taub and Sondhi warn that companies often enter into arrangements that result in receiving payment even when nothing of value changes hands, such as when a customer returns a product or cancels a service but must still pay a termination fee.

Taub

“In these and similar situations in which the vendor receives payments but is never required to provide a product or service to the customer, the payments should be reported as a gain, rather than as revenue, because no earnings process ever occurred,” they write. “The SEC staff continues to focus on income statement classification issues.”

Other examples of gains or losses that should not be classified as revenue include rental income for leasing excess space, interest income even when the invested funds are customer prepayments for goods or services, and gains or losses related to currency fluctuations, strikes, natural disasters, other insurance recoveries, and changes in fair value.

Talk About Poor Controls: AICPA Loses Membership Data

The American Institute of Certified Public Accountants is warning its members that a laptop computer loaded with their personal data has disappeared.

In a May 8 letter to members, Anthony Pugliese, the AICPA’s senior vice president of finance and operations, said a hard drive containing the names, addresses and Social Security numbers of virtually all its 330,000 members was sent out for repair—in violation of the AICPA’s internal control policy—and never returned. The hard drive did not contain credit card information. An investigation within AICPA and Federal Express has failed to locate the missing hard drive, he said.

“There is no evidence that the hard drive or its contents have been inappropriately accessed,” Pugliese said in the letter. “Based on the investigation to date, we believe this is a case of a package being lost.”

The AICPA said it will provide all members with a free year of access to credit reporting services to help them track any illicit activity involving their personal information, and plans to revisit its practice of gathering and storing Social Security numbers.

“The collection of Social Security numbers has been a long-standing procedure for the AICPA,” Pugliese said. “However, as a preventive measure, we are in the process of deleting those numbers from our member database. We will cease collecting and maintaining them, except in limited circumstances, and even for those we are accelerating our efforts to develop other means of uniquely identifying our members.”