PCAOB Talks Shop; Small-Firm Audits; More

The Public Company Accounting Oversight Board is gathering its advisers for a routine session on where regulators should focus their attention, but little of that attention is expected to turn to new or existing auditing standards.

The PCAOB’s Standing Advisory Group will meet Oct. 5 in Washington, D.C., devoting most of its time to how the Board should measure its success and how it can address the numerous compliance issues faced by smaller companies and smaller audit firms.

Only 75 minutes of the one-day session is slotted to discuss proposed standards-setting activities for 2007, and the Board has not provided the SAG with discussion papers in advance of the session. It customarily does so with significant topics, to help guide the inquiry and dialogue.

PCAOB spokesman Michael Shore said he anticipates the session will be left open for SAG members to raise any standards-setting activities that they believe should be a priority for the Board going forward.

SAG member Donald Chapin, a financial-management consultant, says the PCAOB is busy enough with its promised revisions to Auditing Standard No. 2 that it is not seeking any specific new rulemaking ideas. The Board, in conjunction with the Securities and Exchange Commission, promised earlier this year to revise AS2 and deliver several other regulatory tweaks to Sarbanes-Oxley compliance, to address ongoing concerns of excessive cost and inefficiency.

Carcello

Joseph Carcello, also an SAG member and director of research for the corporate-governance center at the University of Tennessee, has the same take on the meeting’s light agenda. “I think there is no discussion scheduled for these topics because there are currently no outstanding exposure drafts,” he says. “My sense is that the PCAOB is focusing on the revision to AS2 and it must not be ready for SAG comment yet.”

That doesn’t sit well with Chapin. “While these efforts at cost-effectiveness are important, my concern expressed to both the board and the SEC—that there are insufficient auditing processes in AS2 to uncover management-led fraud—is not on the SAG agenda,” he says. He hopes the short session will address what the Board can or should do to help prevent and detect fraud.

“Plans for prior years have called for such revisions, but no action has been taken,” he says. “It is not clear to me why so relatively little has been accomplished in the last two years.”

PCAOB spokespersons said in August that the Board is still working on a report related to fraud detection, but has no timetable for when it will be complete.

Instead of focusing on new or existing auditing standards, the Board is asking its advisers for advice on strategic planning, specifically what yardstick it should use to measure its success in regulating the audit profession.

In a discussion paper, the Board asks advisers to consider whether it should gauge success by measuring investor confidence in the auditing profession through an assessment of the number and severity of financial scandals and investigations, or through a look at the stability of the accounting profession.

Separately, the PCAOB also is assembling a panel of auditors from smaller firms and preparers representing smaller companies, to discuss whether small audit firms and their clients need additional guidance on compliance with AS2.

Top Problem Found By Small Firms: Revenue Issues

Problems with revenue are the most frequently identified deficiency in financial statements audited by smaller firms, according to a recent independent analysis of inspection reports issued by the Public Company Accounting Oversight Board.

The Center for Public Company Audit Firms has tallied the results of PCAOB audit-inspection reports for smaller audit firms dated Jan. 21, 2005, through Aug. 15, 2006. The CPCAF says the board has issued 324 such reports for smaller firms, defined as firms that audit 100 or fewer public companies.

The tally reveals that equity and stock transfers are right behind revenue as a recurring problem area, followed by allowance for loan losses, expenses, and inventory. From an auditing perspective, the top problem areas include service organizations, reliance on the work of other auditors, and overall audit performance and documentation.

A similar CPCAF analysis in January among the eight largest audit firms showed the majority of reporting problems identified by PCAOB inspections focused on the balance sheet, with allowance for loan losses, accounts receivable, and inventory getting the largest number of red flags. On the income statement, revenue raised the largest number of concerns.

The CPCAF report said recurring audit problems throughout inspection reports included inadequate confirmations, insufficient audit of management assumptions and estimates, insufficient substantive or analytical procedures, inadequate documentation, failure to align testing and audit procedures with risk assessments, and failure to assure compliance with Generally Accepted Accounting Principles. The report also noted frequent problems with materiality assessments, from excessive reliance on third-party services to inadequate sample sizes and a failure to assess contractual arrangements or agreements.

The CPCAF is an arm of the American Institute of Certified Public Accountants, focused exclusively on auditing for public companies. Lillian Ceynowa, director of the CPCAF, was unavailable to discuss the study last week.

IIA Surveys Worldwide About Internal-Auditing Education

The Institute of Internal Auditors, which has experienced unprecedented growth in membership the past several years, is reaching out to its global membership to conduct the organization’s biggest-ever study of the internal auditing profession.

The IIA has just begun distributing a survey with the help of its 66 affiliates around the world to examine such topics as an auditor’s skills, educational background and types of projects in which they are involved. The survey aims to help the IIA formulate guidance, standards and certification examinations for its members. It also may provide individual auditors with a better understanding of their roles in organizations, as well as ways to benchmark their performance and position against their peers.

The study was inspired partly by the rapid growth the internal-audit profession has seen in recent years amid a sharpening regulatory environment, with Sarbanes-Oxley being only one example; its compliance requirements have sent demand for auditing skills soaring. Regulators in other countries also have been adopting, or at least considering, similar measures as they seek ways to bolster the transparency of organizations in their own lands.

Richards

“Sarbanes-Oxley has had a ripple effect in other countries,” says Dave Richards, president of the IIA. “Every country that I have visited in the last year or more has some initiative on internal controls assessment.”

Known as the “Common Body of Knowledge,” the study will be conducted by the IIA’s Research Foundation, a tax-exempt corporation that helps sponsor and disseminate educational resources to the internal-auditing profession. To encourage participation, the survey was translated into 15 languages.

The study also will look at such topics as the size of internal-audit operations within an organization, hiring practices, types of assignments, and the use of outsourcing, says Jeffrey Swerdlow, the IIA’s director of project management research.

The IIA hopes the results, which will be released at its annual conference in Amsterdam next June, will help it guide the profession more accurately, for example by making sure that the industry’s standards for professional practice are realistic, or by ensuring that internal auditors receive the education and training they need to perform their jobs, Swerdlow says. The project also will help the IIA examine trends in specific geographic areas, allowing the organization to tailor initiatives for developing the profession according to the needs of individual countries.

In the future, the IIA plans to conduct a CBOK review every three years.