The Public Company Accounting Oversight Board churned out another bundle of audit reports recently, most notably for Deloitte & Touche and McGladrey & Pullen, continuing to point out specific instances where audits fell short in complying with the Board’s auditing standards.
Making good on its promise to quicken the inspection reporting process, the Board’s reports based on the 2006 inspection cycle are pouring out faster and in greater numbers than last year. PCAOB member Daniel Goelzer tells Compliance Week that reports have been published for four of the eight largest firms that are inspected annually and for 66 smaller firms, “a considerably faster cycle than in earlier years.”
Schrock
Critics still wonder, however, how the process can affect audit planning for future years when reports are issued well into the following year’s audit cycle. “Auditors start the process well before reports are issued,” says Kathy Schrock, partner and national SOX compliance director with executive services firm Tatum. “It may even create a greater inefficiency to issue reports in midyear.”
Deloitte took PCAOB inspectors to task on the same point. “Given the timing of this feedback, we had only limited opportunity to use the observations noted to impact calendar year-end audits,” the firm wrote in its response to the inspection report. (Firm responses are included as part of the inspection reports.) “We suggest that the wording included in the draft report with respect to this subject be modified or removed and in the future that feedback be provided on a real-time basis during the course of fieldwork.”
Goelzer
Goelzer counters that firms see a draft report prior to publication of the final report and receive written comments during the course of the inspection. “The firm is usually well aware of the matters in the report long before it is issued in final form,” he says. “The firms do not need to wait until they have the final report before taking any necessary corrective action or strengthening their quality controls to address issues in the report.”
Deloitte took heat from PCAOB inspectors on eight separate audits for various problems in documenting its audit opinion or challenging assertions in fair value measurements. In one case, where inspectors say a company departed from U.S. Generally Accepted Accounting Principles in determining the fair value of warrants issued to purchase common stock, the inspection process led to a restatement, according to the report.
Deloitte’s response letter concedes inspectors’ findings in six of the eight flagged audits, but notes that with the exception of the restatement, the additional audit procedures called for by inspectors “did not change our conclusions or affect our reports on the issuers’ financial statements.” In the remaining two audits, Deloitte disputed inspectors’ findings and contested their inclusion in the report.
The post-audit review remains a concern to public companies, which bristle at the added layer of second-guessing in accounting issues that require significant judgment. “That will continue to be a problem,” Schrock said. “The areas we’re seeing in inspection reports are around complex issues that require significant judgments and use of specialists. It’s difficult to do an after-the-fact review and reach the same conclusions without participating in the dialogue” of the original determination process.
Goelzer challenges the notion that the inspection process second-guesses professional judgments. “In cases where the work papers fail to demonstrate that the auditor had evidence to support his or her opinion in some significant respect, that failure will be cited in the inspection report,” he says. “That doesn’t necessarily mean that the financial statements that were the subject of the audit are wrong. But it does mean that the audit may not have been conducted in accordance with PCAOB standards.” Goelzer says work papers should reflect where auditors spot an issue that requires judgment and exercise their judgment in a rational way.
FASB, IASB Prepare Drafts On Merger Standards
The Financial Accounting Standards Board and the International Accounting Standards Board hope to unveil their reworked joint draft for a new standard on business combinations by June 30, FASB Chairman Robert Herz said at a Board meeting last week.
Herz
FASB and IASB want their boards to vote on the proposed standard by the end of the month, when two IASB members and one FASB member will see their terms expire. The joint draft contains a common description of the Boards’ decisions about how business combinations should be accounted for in financial statements, the reasons for the decisions, and departures where the two boards could not agree, Herz said. Those typically focus on legacy accounting issues, he said.
The Boards have sparred long and hard over how to measure noncontrolling interests in a business combination. Ultimately, FASB determined it would require noncontrolling interests to be measured at fair value at the acquisition date, while IASB determined it would permit measurement at fair value. IASB also plans to allow an acquirer to measure its proportionate interest in the acquired entities identifiable net assets on the acquisition date, acquisition by acquisition.
The business combinations project is the first joint project of the FASB and IASB directed at achieving a converged standard for how companies would report a business combination. For FASB, it would replace Financial Accounting Standard No. 141, Business Combinations, which the Board adopted in 2001. For the IASB, the draft would be an amendment to International Financial Reporting Standard No. 3, Business Combinations.
Worries About Regulatory Burdens, Poor Competitive Edge
The costs and risks related to regulatory compliance are becoming top-of-mind operational concerns for financial services firms, along with growing alarm over the decline of U.S. competitiveness in the global capital markets, according to a recent PricewaterhouseCoopers survey.
While financial services firms are among the most heavily regulated in U.S. capital markets, their concerns can be seen as a leading indicator of concern in other markets as well, says Dennis Chesley, a partner in the financial services advisory practice of PwC. “Costs are still growing at a pretty significant rate,” he says. “It doesn’t seem that a lot of respondents are looking at compliance risk in the context of performance.”
PwC says concern about the decline of U.S. competitiveness has increased significantly in the past year alone. A similar survey last year found concerns about competitiveness ranked fifth on executives’ minds.
Chesley
Chesley says the survey findings suggest respondents don’t believe any loss of competitiveness is tied solely to regulatory issues. “A lot of the cost equation has grown over the last 10-plus years, not just due to one regulatory move or another,” he says. “It's due to a sequence of events that is not just regulatory driven. It’s market driven.”
Other issues expected to have significant consequence for financial services firms, according to the survey, include the increasing use of fair value in accounting, the increasing emphasis on simplifying financial reporting, and the movement to converge global financial reporting and accounting standards.
Nearly half of survey respondents said that so far they rely on their own internal resources to muscle through the increasing use of fair value measures, but one-fourth are turning to third-party valuation specialists. Nearly 90 percent of respondents agreed the markets should move to a single set of accounting standards globally, but two-thirds said the United States is not prepared to give up control of established U.S. Generally Accepted Accounting Principles.
IFAC Launches Financial Reporting Survey
The International Federation of Accountants is looking for input from those in the financial-reporting trenches to help determine where improvements can be made.
IFAC is conducting a survey among investors and other users of financial reports, standard setters, preparers, auditors, academics, and regulators to gather information that it hopes can help strengthen the financial-reporting process. Specifically, the survey seeks views on corporate governance, financial reporting, and financial auditing, and asks what actions would further improve the quality of the financial reporting process.
Norman Lyle, who chairs the project for IFAC, says the survey also seeks opinions on the usefulness of financial reports and how reports might be made more relevant, understandable, and reliable. “This information is especially valuable as, ultimately, it is the financial reports that influence investors and other stakeholders in their decisions about public companies," he said in a statement.
The survey, which can be completed through July 6, is part of an IFAC project designed to analyze the financial reporting supply chain and to develop recommendations to further improve the quality of financial reporting.
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