At a recent conference exploring liability issues, a Public Company Accounting Oversight Board official said companies are predicting a 10 percent decline in auditing fees under proposed new rules for auditing internal controls.
Laura Phillips, deputy chief auditor for the PCAOB, said large public companies tell the PCAOB they believe new rules governing the audit of internal control over financial reporting will reduce the amount of audit work necessary, trimming their audit bills by some 10 percent.
Phillips
Phillips made the remark during a Q&A session at the ALI-ABA Accountant’s Liability Conference. The remark came in the context of a discussion surrounding the effect of the proposed new rule on multilocation testing, according to PCAOB spokesman Michael Shokouhi.
The Securities and Exchange Commission has indicated it hopes to publish its amended management guidance for Sarbanes-Oxley compliance and the proposed new audit rule, informally dubbed Auditing Standard No. 5, within weeks. The overarching goal of both measures is to achieve a better cost-benefit relationship in the SOX-required internal control reporting and auditing process.
Shokouhi says Phillips’ remark popped up as the conference Q&A drilled into details about AS5’s requirements regarding multilocation testing. The goal of the new standards is to refocus the multilocation testing requirements on risk rather than coverage. Shokouhi emphasizes that the PCAOB itself is not predicting the decline in audit fees; Phillips was only relating what companies have been telling the PCAOB during the rulemaking process.
Popanz
Tony Popanz, an engagement manager with consulting firm Jefferson Wells, says AS5 could reduce cost in many ways and make the auditing process more efficient, most notably by focusing auditors more closely on a top-down, risk-based approach to deciding how must testing to do.
“In the first year of SOX compliance, accelerated filers generally gave the externals carte blanche to define materiality,” he says. With redirected audit rules and management-focused guidance, companies will be able to take back more control over defining what is material to their financial statements and in their internal controls, he says. “This will give companies some confidence to challenge their auditors about what is material.”
Popanz says he has heard the predictions of a 10 percent audit cost decrease as well. “We’ve become more adept in interpreting the standards and familiarized ourselves with what is truly material and what’s not,” he says. “AS5 invites continued discussion and continued collaboration between external auditors and management.”
Auditing Standards Groups Seek To Clarify Standards
Audit rulemakers in the United States and abroad are independently, but somewhat collaboratively, updating their auditing standards to make them clearer and more comparable across international borders.
The Auditing Standards Board of the American Institute of Certified Public Accountants—which writes audit rules for nonpublic companies and whose rules were adopted as interim standards by the PCAOB when it was formed—and the International Auditing and Assurance Standards Board are at different stages of updating their standards.
In the United States, the ASB has issued a discussion paper seeking comment on several changes the Board is considering to improve the clarity of its standards. Specifically, the ASB wants input on whether it should establish objectives for each of the standards that provide a conceptual framework for the application of professional judgment and then describe the obligation related to the objective. The Board also wants comment on whether it should make structural and drafting improvements to make the standards easier to read and understand.
In addition, the ASB wants feedback on including special considerations in the audits of public-sector entities and smaller entities in the explanatory material of each auditing standard, and whether it should establish a glossary of terms that would be presented in a separate section of standards.
Ahava Goldman, technical manager for the AICPA’s Audit and Attest Standards Team, says the project is part of an effort to harmonize its standards with the International Standards on Auditing authored by the IAASB. “The ASB believes that by undertaking a similar project, we’ll make our standards more understandable, clearer, and easier to converge to the ISA’s,” she says.
Meanwhile, the IAASB, which is overseen by the International Federation of Accountants, is on a clarity mission of its own. IAASB has already established its redrafting conventions and has issued four final and 15 proposed standards following the new conventions.
Sylph
James Sylph, executive director of professional standards for IFAC, says the clarity project is collaborative with other audit rulemakers in that each contributes to the rulemaking processes of the other. “There’s a close understanding of what’s being done internationally, and the ASB is clearly trying to pick up on the work of IAASB,” he says. “That’s the sole purpose for IAASB, seeking to have a single set of global auditing standards.”
Sylph says at least 100 countries around the world use IAASB standards as their own or base their system on the international standards. He says the European Commission plans to adopt ISAs by 2008 throughout Europe; other countries such as Canada, China, India, Australia, and South Africa have followed suit or plan to do so.
The PCAOB is one of the audit rulemaking bodies that comments on IAASB initiatives, and Sylph says the IAASB hopes the PCAOB will follow the international lead in its own audit standard setting.
“We’re hoping we’ll see the U.S. PCAOB standards end up being the same as or similar to international standards,” he says. “We’re delighted to observe the growth in acceptance and adoption of IAASB standards around the world.”
The ASB is seeking comment on its discussion paper, titled “Improving the Clarity of ASB Standards,” through June 15.
PCAOB Maps Out Audit Regulatory Model for Foreign Regulators
The Public Company Accounting Oversight Board has given more than 40 countries from around the work an intensive look at how it goes about overseeing the audit profession.
The Board convened an auditor regulatory institute in Washington, D.C., to give representatives from audit regulators and other government agencies outside the United States a chance to hear how the PCAOB oversees the audits of public companies. The forum covered the Board’s standard-setting process, inspection program, enforcement process, and cooperation with international counterparts.
Rhonda Schnare, the PCAOB’s director of international affairs, says the institute serves as an opportunity for other countries that either already oversee the audit profession or are thinking of doing so to get a firsthand look at how it’s done in the United States.
“Now that we’re in our fifth year of operations, we thought we were at the point where we had enough experience to start sharing it with other regulators,” Schnare tells Compliance Week.
The Board is hopeful its open-door policy with other country regulators might also enhance cooperation when it comes to the regulation of overseas auditing firms that audit companies doing business in U.S. capital markets. Sarbanes-Oxley requires periodic inspections of all such audit firms, and the PCAOB has 780 of them (located in 80 different countries) on its roster.
Given the regulatory scope and the resources available, PCAOB Chairman Mark Olson and other board members have met with their counterparts in Europe and Asia to discuss how they can work together to reduce regulatory overlap and rely on one another’s work.
“From the beginning, the Board has believed that when it comes to oversight of non-U.S. firms registered in the United States, cooperation with the home country regulator is critical,” Schnare says. “The best way to achieve cooperation is to achieve understanding.”
Schnare notes the institute devoted a full day to the PCAOB’s inspection and registration processes, with plenty of opportunity for questions and answers. The institute also covered the PCAOB’s code of ethics, along with how the Board assesses risk, how the standard-setting process works and the standards that have been issued so far, how the enforcement division operates, and how the Board’s operation is funded by fees charged to public companies.
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