PCAOB to Talk Judgment; FAS 157; More

Audit regulators have summoned their advisers to share views on whether and how regulators should establish a framework for the use of judgment among auditors.

The Public Company Accounting Oversight Board is convening a meeting of its Standing Advisory Group on Feb. 27 in Washington, D.C. The agenda asks the SAG to review a proposal from the SEC’s Advisory Committee on Improvements to Financial Reporting that recommends the SEC adopt a framework for accounting judgments and the PCAOB adopt one for auditing judgments.

CIFR, as the committee is called, has been meeting for months to study the U.S. financial reporting system and recommend ways regulators can simplify unnecessary complexity and make information more understandable for investors. The panel says the PCAOB should develop a professional judgment framework for applying and evaluating judgments made based on PCAOB auditing standards.

The framework should not limit the ability of auditors and regulators to ask appropriate questions regarding judgments, nor should it limit actions that could be taken to require correction of unreasonable judgments, according to the CIFR proposal. In a discussion paper to guide the SAG meeting, the PCAOB asks the SAG to discuss how the Board should develop such a framework and what effect it would have on public company audits.

Separately, the PCAOB plans to brief its advisory group on public accounting firms’ supervision of audit work and ask questions about whether there should be new rules or direction regarding firms’ duties. The Board is looking for guidance on whether individuals outside an engagement team should have some responsibility for auditor performance and whether rules regarding supervision of broker-dealers might provide some inspiration.

The Board also wants to hear views on whether there should be new rules around global audit networks and their quality control practices to assure audits from outside the United States meet U.S. auditing standards.

FASB Moves on Partial Fair-Value Delay

The Financial Accounting Standards Board has finished its plan to delay portions of its new standard on fair value measurements while it continues to work on implementation problems.

FASB completed a staff position that defers for one year the effective date of Financial Accounting Standard No. 157, Fair Value Measurements, for certain non-recurring, non-financial assets and non-financial liabilities. A separate staff position amends FAS 157 to exclude leases from the fair-value measurement requirements. A third position indefinitely defers a pronouncement of the American Institute of Certified Public Accountants: Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.

As FAS 157 neared its effective date at the end of 2007, FASB heard from Financial Executives International and the Institute of Management Accountants that numerous questions and problems emerged as companies dug deeper into the requirements of the new standard. The collapse in credit markets occurring alongside FAS 157 implementation only added to confusion about how to apply rules regarding market factors when those factors had become so suddenly volatile.

FASB’s Valuation Resource Group continues to study FAS 157 implementation issues. It plans to offer guidance to public companies on how to apply the new rules.

FASB Demonstrates Online Codification Tool

FASB is holding a free Webcast on March 13 to provide a demonstration of its online research tool codifying U.S. Generally Accepted Accounting Principles.

FASB Member Larry Smith and Project Director Tom Hoey will demonstrate the use of FASB’s recently unveiled online research system, which organizes all of U.S. GAAP by topic. The codification is undergoing a one-year verification, which allows users to access and search the system, then make comments while it undergoes necessary adjustments.

Participation in the Webcast is free of charge, but registration for the one-hour event is required. The Webcast also will be archived for later viewing.

To register for the live or archived Webcast, follow the audience URL at: The Move to Codification of U.S. GAAP.

Study: Auditors Active, but Not Active Enough

A recent academic study says audit committees have taken a more active role in financial reporting in recent years, but still are not seen as catalysts in resolving financial reporting disputes between auditors and management.

The study, titled “Corporate Governance in the Post Sarbanes-Oxley Era: Auditor Experiences,” examines the experiences of 30 audit managers and partners from three of the Big 4 firms. Auditors said they have seen significant improvement in the corporate governance environment in recent years, with audit committees holding greater expertise and power to fulfill their duties.

Cohen

In addition, CEO and CFO certifications are seen by auditors to validate the integrity of a company’s financial reporting. As a result, auditors rely to a greater extent on corporate governance in planning and performing audit engagements, says co-author Jeffrey Cohen, an accounting professor at Boston College.

Yet at the same time, management is still seen as a linchpin in the corporate governance process, with what is viewed as a key role in determining auditor appointments and determinations, the study showed.

“We definitely found a shift in the paradigm that auditors definitely view corporate governance factors, the audit committee, and the board to be generally effective monitors,” Cohen says. “The downside limitations, however, is management is still seen as an important factor in the appointment of auditors, and the audit committees are still not seen as that effective in helping resolve disputes auditors might have with management.”

Cohen says the results suggest senior executives wants to resolve as many disputes as possible before the audit committee has to get involved, so they may be more willing to make compromises in financial reporting positions. “Perhaps there’s less need for the audit committee to be more heavily involved,” he says.

As for management influence over auditor selection, Cohen says management needs to work with the auditor, so that may explain why management still has influence over the selection—but he worries about the implications. “This could result in perhaps too much of a chummy relationship between management and auditors,” he says, especially if they live and work in the same communities and, therefore, travel in the same social circles.