Guest Post @FEI Blog: PCAOB Open Meeting August 5th, 2010

On Thursday August 5th, I covered the PCAOB’s Open Meeting and wrote up a report for the FEI Blog over on the Financial Executives International site.

Edith Orenstein regularly mans this post – ably, attentively and astutely.  She is on vacation for the next two weeks.  If you blog on related topics and would like to help her keep her readers up to date, get in touch at

PCAOB Adopts New Risk Assess. Stds; Issues Release on Failure to Supervise

Reported by Francine McKenna, Guest Blogger:

The Public Company Accounting Oversight Board held an Open Meeting this morning, Aug. 5 to address the following important items of business:

  • The adoption of eight auditing standards and related amendments that would revise the requirements for assessing and responding to risk during an audit., to cover two important issues, and
  • A proposed release to address the PCAOB’s obligation under the Sarbanes-Oxley Act of 2002 to impose disciplinary sanctions on registered public accounting firms and their supervisory personnel who fail to reasonably supervise associated persons.

PCAOB Board Unanimously Adopts Suite of Risk Assessment Standards

The Board voted unanimously to adopt the suite of risk assessment standards, Auditing Standards No. 8 through No. 15. These standards were originally proposed on Oct. 21, 2008, and then reproposed in revised form on Dec. 17, 2009. Here is a link to the press release.


PCAOB Issues Release on Failure to Supervise

The Board also unanimously agreed to issue a release to address the PCAOB’s obligation under the Sarbanes-Oxley Act of 2002 to impose disciplinary sanctions on registered public accounting firms and their supervisory personnel who fail to reasonably supervise associated persons. Here is a link to the press release. The PCAOB’s proposed release highlights Section 105(c)(6) of the Act and seeks comment on conceptual approaches to rulemaking that would complement its application.


PCAOB Request to Congress to Amend Sarbox

Finally, PCAOB Acting Chairman Daniel Goelzer asked his legislative team to draft a request to Congress to amend the Sarbanes-Oxley Act to change the PCAOB’s rules regarding the assumption of privacy for PCAOB disciplinary proceedings. Here’s the press release.

“No other auditor, investor, audit committee, or member of the media is entitled to know what the PCAOB considers to merit discipline, whom it has charged, what issues are being litigated, or whether the PCAOB staff has prevailed or not,” said Acting Chairman Goelzer. “The public is in the dark about how the Board uses its enforcement authority until there is a settlement or an SEC decision on the Board’s sanctions…

For the rest of the post, please visit the FEI Blog.  Edith has created a treasure trove of materials on financial reporting, regulatory updates and technical accounting issues.  She is my go-to-gal when it comes to checking my facts on FASB, GAAP, and all things SEC.

I’d like to make a few more comments about the meeting yesterday.

I was both surprised and very pleased when Chairman Goelzer announced that he’ll request Congress to amend Sarbanes-Oxley to open the PCAOB’s disciplinary proceedings to public view, in line with the SEC’s rules.  I was also gratified.  I made this suggestion and have many times pointed out the challenge to investors’ right to know about an important gatekeeper – the auditors.

While we were waiting for the Supreme Court’s decision, I recommended several changes to the Sarbanes-Oxley law.  These changes drop the PCAOB’s veil of secrecy, restore the perception of the regulator’s independence and improve  timeliness and usefulness of inspection reports.

Goelzer’s request will respond to one of those recommendations. Unfortunately, the SEC went in the other direction when given the chance to support the PCAOB.  I wrote earlier this week about a  new rule, slipped in under the cover of the Supreme Court decision and the regulatory reform bill, that gives the SEC Chief Accountant, a former Deloitte partner, the power to review Board decisions at the request of the audit firms.

In hindsight, the SEC’s move now smacks of a peremptory end-run around the PCOAB’s intention to open up their proceedings.  The SEC said a review and appeal process allows the audit firms to address actions by the PCAOB that the auditors feel are  “arbitrary and capricious, or otherwise not consistent with the purposes of Sarbanes-Oxley.”

I’m incredulous that the SEC used the words arbitary and capricious” to indict the PCAOB in advance for being a strong regulator.  As much as I thought the SEC had turned over a new leaf and learned from its experiences with Madoff, for example, it seems they are still playing courtesan to the wrong constituency.  Instead of standing up and supporting their sister regulator, they’ve set up a major roadblock to effective regulation on behalf of the regulated.

Claudius B. Modesti, Director, PCAOB Division of Enforcement and Investigations:

“The Division of Enforcement would very much welcome a change to the Act’s requirement for nonpublic disciplinary proceedings.  Over the last few years, we have commenced litigation involving a broad range of audits and the enforcement program also has a significant inventory of ongoing investigations. Nonpublic disciplinary proceedings are a major stumbling block for the Board’s enforcement program to most effectively protect investors and improve audit quality.”

I also applaud the PCAOB for making major progress on the other two initiatives announced yesterday. Board Members Harris, Gradison and Niemeier were especially vocal on both the risk assessment standards and the release regarding auditors’ repeated failures to supervise.

Board Member Steve Harris: Since coming to the Board, I have been struck by the volume of supervisory concerns brought to our attention by our Inspections Division.  For example, in the Board’s December 2008 Report on Large Firm Inspections, the Board identified “inadequate supervision and review” as an important factor that allowed audit deficiencies to occur.[1] In addition to questions about the supervision and review activities of engagement managers and partners,[2] the Board identified supervision and accountability related concerns in several other areas, including partner evaluation and compensation processes,[3] concurring review policies and procedures,[4] internal inspection programs[5] and the evaluation, supervision and control of work performed by foreign affiliates.[6]

Specifically, the Board’s large firm inspection report noted, in various findings:

  • Inspection teams identified instances where firms failed to appropriately evaluate …, supervise, and control the work performed by their foreign affiliates on the foreign operations of U.S. issuers. The deficiencies included failing to (a) resolve findings or matters identified by the foreign affiliates, and (b) obtain the required information from one or more foreign affiliates.[1]

On the subject of auditors’ responsibility to assess the risk of a material misstatement due to inaccurate and incomplete disclosures – surely motivated by the failure of EY to push harder at Lehman – Chairman Goelzer commented on the new Risk Assessment standards:

“Disclosures beyond simply the numbers on the face of the financial statements have become increasingly important to meaningful financial reporting. The risk assessment standards underscore that the auditor’s responsibilities extend to those disclosures and that the risk that the disclosures will be incomplete or misstated needs to be considered as part of planning and performing an audit and evaluating the results.”

Board Member Gradison on failure to supervise:

“Inspection findings have shown too frequently that audit quality breakdowns are exacerbated by poor planning and supervision, especially of specialists.”

And on the subject of the failure of auditors to supervise specialists and, in particular, the work performed by their foreign member firms in multinational audits, Board Member Niemeier commented:

“The model for multinational audits is anything but seamless and does not serve investors well.”

Where have you heard that before?

[1] PCAOB, Report on the PCAOB’s 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms, PCAOB Release No. 2008-008 at 20 (December 5, 2008)

[2] Id.

[3] Id. at 21.

[4] Id. at 20.

[5] Id. at 22.

[6] Id. at 23.

5 replies
  1. Edith Orenstein
    Edith Orenstein says:

    Thanks again for covering PCAOB mtg for FEI blog readers in my absence, and your additional insights above are very interesting. Thanks also for your kind words about our blog. We have a slightly different focus (FEI blog is a bit more accounting oriented than auditing, whereas you specialize more in the auditing profession) but I think our blogs and many other outstanding blogs like Broc Romanek’s The Corporate are very useful in keeping practicing professionals (and bloggers, too!) up to date. Thanks again. Edith

Trackbacks & Pingbacks

  1. […] enforcement order as absolving…I can’t comment on the rest of our investigative process because it’s confidential… If courts of law or other regulators are developing new facts or making findings we are always […]

  2. […] have a sympathetic ear at Mary Schapiro’s SEC. Will this new stacked Board withdraw Acting Chairman Goelzer’s request to Congress to amend Sarbanes-Oxley to make PCAOB disciplinary proceedings […]

  3. […] written about the PCAOB’s request to have the Sarbanes-Oxley law changed to allow transparency in discipolinary porceedings. I’ve also written about the SEC’s […]

  4. […] In fact, I think the SEC trumped the PCAOB’s own announcement a week later that the PCAOB would request Congress to amend the Sarbanes-Oxley Act to make all PCAOB disciplinary proceedings public. PCAOB Request to Congress to Amend Sarbox […]

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