PCAOB Planning More Guidance On Auditing, Expensing

Accounting regulators are planning to give auditors some new advice in two forms: a generalized report on its 2004 inspection findings—providing blanket advice on auditing for fraud and internal control reporting—and a question-and-answer piece on auditing accounting related to stock option expensing.

Carmichael

“We’ve been analyzing the results from our inspections of firms to determine what is working and what is not,” said Douglas Carmichael, chief auditor of the Public Company Accounting Oversight Board, in an opening statement to a meeting last week of the board’s Standing Advisory Group. “To the extent we find problems common to multiple audit firms, either in relation to Section 404 implementation, considering the risks of fraud in an audit, or in other areas, the Board may also issue, under the Board’s Rule 4010, more generalized reports that describe the problems and appropriate solutions.”

Rule 4010 is a PCAOB inspection rule that says the Board may publish summaries, compilations or other general reports regarding its inspection findings. It would not reveal any new information not already contained in an individual firm report, but would summarize the overall findings.

PCAOB spokeswoman Christi Harlan said Carmichael expects the report will focus mostly on how well audit firms are flagging signs of fraud. She said Carmichael hopes to issue such a report “in the next couple of months.”

An observer at the Board’s SAG meetings said the PCAOB inspections so far have uncovered instances where auditors both are under-auditing and over-auditing management internal control reports. The observer said the Board is planning to issue a report by the end of November to provide “additional useful guidance, based on what has been learned from inspections,” both on Sarbanes-Oxley Section 404 implementation and on how well auditors are assessing risks of fraud.

Separately, the PCAOB staff also is planning to offer auditors some advice on auditing stock option expensing. “We have been working on and will soon issue staff Q&As on auditing fair value measurements related to stock-based compensation pursuant to FAS 123R,” Carmichael said.

“As the accounting issues around stock option expensing have developed, it has raises questions for the audit, which is what we hope to answer,” Harlan said. She said the Q&A should be published “shortly.”

At its two-day meeting last week, the SAG also discussed various other standard-setting projects and prospective priorities, including engagement quality review, fraud, communications with audit committees, principles of reporting, and codification of PCAOB standards.