Changes in the Changes in the ProfessionProfession

Alan Anderson, Alan Anderson, AICPA Senior Vice President AICPA Senior Vice President

AgendaAgenda

What has happened since we last What has happened since we last met?met? PCAOBPCAOB SEC Rule-MakingSEC Rule-Making The Cascade EffectThe Cascade Effect Internal ControlsInternal Controls

New PCAOB Chair and New PCAOB Chair and other key appointmentsother key appointments

New SEC Chairman Donaldson New SEC Chairman Donaldson selects new PCAOB Chair. selects new PCAOB Chair.

Selected William McDonoughSelected William McDonough Chief Auditor Selected, Doug Chief Auditor Selected, Doug

Carmicheal Carmicheal Deputy Chief Auditor, Tom Ray Deputy Chief Auditor, Tom Ray

Public Company Public Company Accounting Oversight Accounting Oversight

BoardBoard OverviewOverview

InspectionsInspections DisciplineDiscipline RegistrationRegistration Audit Standards for Public CompaniesAudit Standards for Public Companies Recent Speech by PCAOB Member Recent Speech by PCAOB Member

stating IAASB should be separated from stating IAASB should be separated from IFACIFAC

Sarbanes-Oxley Act Sarbanes-Oxley Act ImplementationImplementation

Requirements of Act take effect from Requirements of Act take effect from 7/30/2002 -1/2004. 7/30/2002 -1/2004.

PCAOB & Public Company Auditing PCAOB & Public Company Auditing Standards.Standards.

GAO studies on Audit Firm Rotation GAO studies on Audit Firm Rotation and Competition/Firm Consolidation and Competition/Firm Consolidation due in July. due in July.

SEC Proposals and SEC Proposals and AICPA Comment LettersAICPA Comment Letters AICPA comment letters on each SEC AICPA comment letters on each SEC

proposal--emphasis on protecting the proposal--emphasis on protecting the public interest, as well as concerns of public interest, as well as concerns of smaller firms.smaller firms.

Comment letters posted to Sarbanes-Comment letters posted to Sarbanes-Oxley Act/ PCAOB Implementation Oxley Act/ PCAOB Implementation Central on AICPA.org:Central on AICPA.org: http://http://www.aicpa.org/sarbanes/index.aspwww.aicpa.org/sarbanes/index.asp

SEC Final Rules – SEC Final Rules – Non-Audit ServicesNon-Audit Services

Consistent with law.Consistent with law. Tax services clarified.Tax services clarified.

Audit firms can continue to provide tax Audit firms can continue to provide tax compliance, tax planning and tax advice compliance, tax planning and tax advice to audit clients, subject to audit to audit clients, subject to audit committee pre-approval requirements. committee pre-approval requirements.

Exception for tax court.Exception for tax court. Mounting Pressure to revisit the tax Mounting Pressure to revisit the tax

preparation decisionpreparation decision

Prohibited ServicesProhibited Services

(1) bookkeeping services (1) bookkeeping services (2) financial information systems design and (2) financial information systems design and

implementation; implementation; (3) appraisal or valuation services, (3) appraisal or valuation services, (4) actuarial services; (4) actuarial services; (5) internal audit outsourcing services; (5) internal audit outsourcing services; (6) management functions or human (6) management functions or human

resources; resources; (7) broker or dealer, investment adviser, or (7) broker or dealer, investment adviser, or

investment banking services; investment banking services; (8) legal services and expert services (8) legal services and expert services

unrelated to the audit; unrelated to the audit; (9) any other service that the Board (9) any other service that the Board

determines, by regulation, is impermissible. determines, by regulation, is impermissible.

SEC Final Rules – SEC Final Rules – Independence Auditor Independence Auditor

RotationRotation Lead and reviewing partners are Lead and reviewing partners are

subject to a mandatory 5-year-on, 5-subject to a mandatory 5-year-on, 5-year-off rotation. year-off rotation.

Other key partners may work on an Other key partners may work on an account for 7 consecutive years account for 7 consecutive years before facing a 2-year cooling-off before facing a 2-year cooling-off period. period.

Small firm alternative. (AICPA Small firm alternative. (AICPA pushed hard for small firm relief) pushed hard for small firm relief)

Foreign Public Accounting Foreign Public Accounting FirmsFirms

The bill subjects foreign accounting firms who The bill subjects foreign accounting firms who audit a U.S. company to registrations with the audit a U.S. company to registrations with the Board. Board.

This also includes foreign firms that perform This also includes foreign firms that perform some audit work, such as in a foreign some audit work, such as in a foreign subsidiary of a U.S. company, that is relied on subsidiary of a U.S. company, that is relied on by the primary auditor.by the primary auditor.

PCAOB held session to hear views of Foreign PCAOB held session to hear views of Foreign Auditors Auditors

SEC New Rules – SEC New Rules – Independence Partner Independence Partner

CompensationCompensation No specific compensation related to No specific compensation related to

selling non-audit services.selling non-audit services. Small firm exemption.Small firm exemption.

SEC New Rules – SEC New Rules – Independence Fee Independence Fee

DisclosuresDisclosures Disclosures must be made to Disclosures must be made to

investors of information related to investors of information related to audit and non-audit services audit and non-audit services provided by, and fees paid to, the provided by, and fees paid to, the auditor. auditor.

Revised “buckets” for the reporting Revised “buckets” for the reporting of fees paid are (1) audit services, of fees paid are (1) audit services, (2) audit-related services, (3) tax (2) audit-related services, (3) tax services, and (4) other services. services, and (4) other services.

"Audit Committee "Audit Committee Financial Expert"Financial Expert"

Experience preparing, auditing, Experience preparing, auditing, analyzing or evaluating financial analyzing or evaluating financial statements comparable to issues statements comparable to issues expected to be raised in the expected to be raised in the registrant's financial statements, or registrant's financial statements, or experience actively supervising 1 or experience actively supervising 1 or more persons engaged in such more persons engaged in such activities.  activities. 

"Audit Committee "Audit Committee Financial Expert"Financial Expert"

Understanding of generally accepted Understanding of generally accepted accounting principles and financial accounting principles and financial statements.statements.

Ability to assess general application of such Ability to assess general application of such principles in connection with accounting principles in connection with accounting for estimates, accruals and reserves.for estimates, accruals and reserves.

Understanding of internal controls and Understanding of internal controls and procedures for financial reporting.procedures for financial reporting.

Understanding of audit committee Understanding of audit committee functions.functions.

SEC New Rules on SEC New Rules on Workpaper Retention Workpaper Retention

Accounting firms must retain for 7 years Accounting firms must retain for 7 years certain records relevant to their audits certain records relevant to their audits and reviews of issuers' financial and reviews of issuers' financial statements. statements. Records to be retained include an Records to be retained include an

accounting firm's workpapers and certain accounting firm's workpapers and certain other documents that contain conclusions, other documents that contain conclusions, opinions, analyses, or financial data related opinions, analyses, or financial data related to the audit or review.to the audit or review.

Contrary opinion documentation must be Contrary opinion documentation must be maintained.maintained.

SOX-Mandated SEC SOX-Mandated SEC Enforcement StudyEnforcement Study

SEC staff studied 5 years of SEC staff studied 5 years of enforcement actions.enforcement actions.

In 227 enforcement matters, actions In 227 enforcement matters, actions were taken against 164 entities (18 were taken against 164 entities (18 audit firms) and 705 individuals (89 audit firms) and 705 individuals (89 individual auditors).individual auditors).

Of 57 matters with actions against Of 57 matters with actions against auditors, 16 involved Big auditors, 16 involved Big Five, 41 smaller firms.Five, 41 smaller firms.

SOX-Mandated SEC SOX-Mandated SEC Enforcement StudyEnforcement Study

In 140 of 227 enforcement matters, In 140 of 227 enforcement matters, auditor was Big Five.auditor was Big Five.

Actions were predominantly not Actions were predominantly not fraud related.fraud related.

Study confirms risk areas we were Study confirms risk areas we were already aware of and have already aware of and have incorporated into SAS 99 and incorporated into SAS 99 and Audit Risk Alerts. Audit Risk Alerts.

SOX-Mandated SEC SOX-Mandated SEC Enforcement StudyEnforcement Study

Report recommendations:Report recommendations: Uniform approach to public reporting of Uniform approach to public reporting of

restatements.restatements. MD & A reforms beyond those already MD & A reforms beyond those already

adopted because of Sarbanes-Oxley.adopted because of Sarbanes-Oxley. Allowing issuers to provide SEC with Allowing issuers to provide SEC with

internal reports, including those now internal reports, including those now covered by attorney client privilege, covered by attorney client privilege, without waiving privilege.without waiving privilege.

Cascade Impact For Non Cascade Impact For Non Public Companies. Public Companies.

Principal Themes as we Principal Themes as we consider cascade impactconsider cascade impact The profession should advocate for a The profession should advocate for a

“Reasoned Approach to Reform” at “Reasoned Approach to Reform” at the state level.the state level.

The complexity of the issues needs to The complexity of the issues needs to be articulated and communicated.be articulated and communicated.

Series of white papers available on Series of white papers available on AICPA.orgAICPA.org

A Reasoned Approach to A Reasoned Approach to ReformReform

Allow the process to work (SEC, PCAOB).Allow the process to work (SEC, PCAOB). Emphasize the work of AICPA technical Emphasize the work of AICPA technical

committees (PEEC, PRB, ASB). committees (PEEC, PRB, ASB). Advocate for protection of small business.Advocate for protection of small business. Underscore state economic development Underscore state economic development

issues.issues. Emphasize that uncoordinated state law Emphasize that uncoordinated state law

changes are ineffective.changes are ineffective. The marketplace is already adjusting.The marketplace is already adjusting.

Federal Cascade is a Federal Cascade is a Strong PossibilityStrong Possibility

GAO reaction to legislationGAO reaction to legislation DOL reaction to legislationDOL reaction to legislation Banking and other regulators’ Banking and other regulators’

reactionreaction Pension reform initiativesPension reform initiatives Tax shelter focus by CongressTax shelter focus by Congress

Auditing Internal Control Auditing Internal Control

The ASB is issuing an exposure draft The ASB is issuing an exposure draft that provides and enhances the that provides and enhances the standards for the auditor to use when standards for the auditor to use when reporting on the effectiveness of a reporting on the effectiveness of a registrant’s system of internal control registrant’s system of internal control over financial reporting.over financial reporting.

The AICPA has long supported this The AICPA has long supported this requirement. requirement.

The New RequirementThe New Requirement Section 404 of Sarbanes-Oxley Act of 2002 Section 404 of Sarbanes-Oxley Act of 2002

requires that auditors of most public requires that auditors of most public companies also attest to management’s companies also attest to management’s assessment of the effectiveness of internal assessment of the effectiveness of internal control over financial reporting. control over financial reporting.

These additional procedures and the These additional procedures and the attestation report shall not be the subject of a attestation report shall not be the subject of a separate engagement.separate engagement.

Audits covering internal control therefore will Audits covering internal control therefore will become an integral part of a public company become an integral part of a public company audit.audit.

Management’s and the auditor’s report will be Management’s and the auditor’s report will be part of the public filing.part of the public filing.

Major Provisions of Major Provisions of Proposed StandardsProposed Standards

Establishes conditions for engagement Establishes conditions for engagement performance.performance. Management’s process and responsibilities.Management’s process and responsibilities. Management’s documentation of controls.Management’s documentation of controls.

Provides enhanced guidance on planning the Provides enhanced guidance on planning the engagement, including:engagement, including: Factors to consider when the entity has multiple Factors to consider when the entity has multiple

locations or business units, locations or business units, Implications for the engagement when service Implications for the engagement when service

organizations are used, and the role of the internal organizations are used, and the role of the internal audit function.audit function.

Provides enhanced guidance on testing and Provides enhanced guidance on testing and evaluating the operating effectiveness of evaluating the operating effectiveness of controls, including :controls, including : The nature, timing, and extent of auditor tests and the The nature, timing, and extent of auditor tests and the

limits on the auditor’s ability to use the results of limits on the auditor’s ability to use the results of management’s or internal auditor’s tests.management’s or internal auditor’s tests.

Major Provisions of Major Provisions of Proposed Standards Proposed Standards

(Continued)(Continued)

Defines Defines internal control deficiencyinternal control deficiency, , significant deficiency significant deficiency (this term replaces (this term replaces and therefore eliminates the term and therefore eliminates the term reportable conditionsreportable conditions), and ), and material material weakness.weakness.

Provides enhanced guidance on Provides enhanced guidance on identifying significant deficiencies and identifying significant deficiencies and material weaknesses.material weaknesses.

Major Provisions of Major Provisions of Proposed Standards Proposed Standards

(Continued)(Continued) Establishes a requirement that the criteria will be:Establishes a requirement that the criteria will be:

Suitable and established through due process, Suitable and established through due process, Example being the framework of internal control Example being the framework of internal control

established in the report, established in the report, Internal Control—Internal Control—Integrated FrameworkIntegrated Framework (COSO report). (COSO report).

Requires that material weaknesses be disclosed in the Requires that material weaknesses be disclosed in the auditor’s report even if management discloses in their auditor’s report even if management discloses in their report.report.

Requires that significant deficiencies not only be Requires that significant deficiencies not only be disclosed to the audit committee but disclosed by disclosed to the audit committee but disclosed by management in their public report. The auditor’s report management in their public report. The auditor’s report will state that significant deficiencies have been will state that significant deficiencies have been identified and communicated to the audit committee.identified and communicated to the audit committee.

Provides for issuance of a combined report with two Provides for issuance of a combined report with two opinions or separate reports and provides examples of opinions or separate reports and provides examples of both. both.

Other Actions taken by Other Actions taken by the AICPA in this the AICPA in this

Environment Environment New Fraud StandardNew Fraud Standard Free Corporate Governance Free Corporate Governance

Training- How Fraud Hurts you and Training- How Fraud Hurts you and your organization. Jointly developed your organization. Jointly developed by AICPA and ACFEby AICPA and ACFE

Anti-Fraud Criteria and ControlsAnti-Fraud Criteria and Controls Additional CPE – 10% to fraud Additional CPE – 10% to fraud

trainingtraining Institute for Fraud Studies Institute for Fraud Studies Fraud Specialist Competency ModelFraud Specialist Competency Model