PCAOB

Glass Lewis Recommends That Alterra Shareholders Drop KPMG-Bermuda as Auditor

Remember Alterra Capital Holdings Ltd? They’re were exposed by Bloomberg’s Jonathan Weil last month as the KPMG-Bermuda audit client that was selected by the PCAOB for inspection. The audit didn’t go so hot as the inspectors found “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.” To put this in context, Weil explained that available-for-sale securities were the largest asset on Alterra’s balance sheet and it accounted for “half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.”


In wake of this little revelation, research firm Glass Lewis & Co. has recommended to Alterra Capital Holdings that they kick KPMG-Bermuda to curb (after nine glorious years), according to a copy of the “Proxy Paper” sent to Going Concern. The report rehashes the whole story and then concludes with this:

Despite the lack of any restatements of previous financial statements, we believe that shareholders should be concerned about the reappointment of KPMG following the lapses uncovered by the PCAOB. Therefore, we believe that shareholders should hold the audit committee responsible for reappointing the same audit firm.

Glass Lewis also wanted to make shareholders “aware” of the fact that Alterra’s Audit Committee Chair, CFO and CAO are all KPMG alumni but stopped short of citing it as a reason to oppose KPMG at the meeting on May 2. According to the report, Glass Lewis had recommended that Alterra retain KPMG as auditor prior to the last shareholder’s meeting which the shareholders did by an overwhelming margin with nearly 91 million votes voting “For,” 182k voting “Against” and 32k abstained.

PCAOB Chairman Doty Shares Some Confusing Statements Made by Auditors

Yesterday, prior to today’s excitement regarding Satyam and PwC, PCAOB Chairman James Doty spoke at the The Council of Institutional Investors 2011 Spring Meeting and he had some interesting things to say about the audit profession, specifically that auditors don’t always remember that “protecting investors” ≠ “client service”:

Time and time again, we’ve seen services that might be valuable to management reduce the auditor’s objectivity, and thus reduce the value of the audit to investors. While management may need the services, they just don’t have to get them from the auditor.

Audit firms call this “client service,” and it makes things terribly confusing. When the hard questions of supporting management’s financial presentation arise, the engagement partner is often enlisted as an advocate to argue management’s case to the technical experts in the national office of the audit firm. The mortgaging of audit objectivity can even begin at the outset of the relationship, with the pitch to get the client.

Consider the way these formulations of the audit engagement that we’ve uncovered through our inspections process might prejudice quality:

• “Simply stated we want management to view us as a trusted partner that can assist with the resolution of issues and structuring of transactions.”

• We will “support the desired outcome where the audit team may be confronted with an issue that merits consultation with our National Office.”

• Our audit decisions are “made by the global engagement partner with no second guessing or National Office reversals.”

Huh. Doty doesn’t name names but you could easily interpret those statements as one made by a client advocate, not a white knight for investors. He continues:

Or, to demonstrate how confusing the value proposition could be even to those auditors who try to articulate it:

• We will provide you “with the best, value-added audit service in the most cost effective and least disruptive manner by eliminating non-value added procedures.”

(What is a “non-value added procedure”? Whose value do you think the claim refers to? If a procedure is valuable to investors but doesn’t add value to management, will it be scrapped?)

In other words, “we promise that we won’t be pests” and “value” will be a game-time decision. And finally:

Or, consider this as a possible audit engagement formula for misunderstanding down the road:

• We will deliver a “reduced footprint in the organization, lessening audit fatigue.”

(What is “audit fatigue”? Does accommodating it add value to investors? How should investors feel about a “reduced footprint”?)

Yes, what is “audit fatigue”? Is that what happens to second and third-year senior associates every February/March? Or is this better articulated by “we know audits are annoying and our hope is that we won’t annoy you too much.”?

Taking this (the whole speech is worth a read) and everything else that happened today into account, it will be interesting to hear what Mr Doty has to say at tomorrow’s hearing.

Looking Ahead: Auditor Oversight [PCAOB]
Also see: Watchdogs caught nuzzling and wagging tails; auditor sales pitches exposed [WaPo]

(UDPATE) KPMG-Bermuda’s PCAOB Inspection Gets a Little Unwanted Attention

Most of you are acutely aware that PCAOB inspection reports, while chock full of interesting tidbits, are a little anti-climactic since we never learn who the auditees are. Oh sure, we can speculate until our heart’s content but the PCAOB says they took a vow of silence after 43 struck his signature on Sarbanes-Oxley.

The secrecy is frustrating (read: bor-ing) so it was especially cool to see Jonathan Weil let the cat out of the bag on at least one Big 4 client:

Two weeks ago,Accounting Oversight Board released its triennial inspection report on the Hamilton, Bermuda-based affiliate of KPMG, the Big Four accounting firm. And it was an ugly one. In one of the audits performed by KPMG- Bermuda, the board said its inspection staff had identified an audit deficiency so significant that it appeared “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

This being the hopelessly timid PCAOB, however, the report didn’t say whose audit KPMG-Bermuda had blown. That’s because the agency, as a matter of policy, refuses to name companies where its inspectors have found botched audits. It just goes to show that the PCAOB’s first priority isn’t “to protect the interests of investors,” as the board’s motto goes. Rather, it is to protect the dirty little secrets of the accounting firms and their corporate audit clients.

That’s why it gives me great pleasure to be able to break the following bit of news: The unnamed company cited in KPMG- Bermuda’s inspection report was Alterra Capital Holdings Ltd. (ALTE), a Hamilton-based insurance company with a $2.3 billion stock- market value, which used to be known as Max Capital Group Ltd.

Using his detective skills, Weil pieced together the number clients KPMG Bermuda had inspected, the timing of said inspections and the details of the audit deficiency (“the failure to perform sufficient procedures to test the estimated fair value of certain available-for-sale securities”) to come up with Alterra. Of course no one – the PCAOB, KPMG Bermuda or Alterra – would comment/confirm for Weil’s column but you probably knew that was coming. Nevertheless, JW gets into the how bad of an audit this really was:

It’s when you look at Alterra’s financial statements that the magnitude of KPMG-Bermuda’s screw-up becomes apparent. Available-for-sale securities are the single biggest line item on Alterra’s balance sheet. They represented almost half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.

This sort of screw-up, some might argue, falls somewhere in the range of “horrendously bad” and “really fucking bad” and Weil wonders if Alterra shareholders will have the stones to throw the bums out at the shareholders meeting on May 2. We can’t say where any of the shareholders stand on the usefulness (or lack thereof) of the audit report, so maybe this revelation is NBD to them. But if that is the case, it seems to make an even stronger case for the irrelevancy of auditors.

Weil’s larger point is that the PCAOB continues to hide behind their policies that are supposed to protect investors but in reality come off as talking points, not so unlike the firms they regulate. The PCAOB says they’re working on that but we’ll have to wait until summer to find out how crazy things get and whether it will be enough to shove auditors back into some respectability.

Dirty Little Secret Outed in Bermuda Blunder [Jonathan Weil/Bloomberg]

UPDATE:
Alterra cops to it with an 8-K that was filed about 90 minutes ago:

Alterra is aware of a recently issued report by the Public Company Accounting Oversight Board (the “PCAOB”) related to the PCAOB’s review of KPMG Bermuda’s 2008 audit files of a public company client located Bermuda, as well as an article posted on Bloomberg that indicates that the public company client is Alterra (formerly Max Capital Group Ltd.). Alterra confirms that it is the client referenced in the PCAOB’s report.

The PCAOB report findings question the sufficiency of procedures performed by KPMG Bermuda in its audit of Alterra’s estimated fair value of certain available-for-sale securities as promulgated by generally accepted audit standards (“GAAS”). The PCAOB report questioned whether the audit procedures used by KPMG Bermuda in 2008 to verify such values were sufficient. The PCAOB report does not question the appropriateness of the values that Alterra attributed to assets available-for-sale in 2008.

Alterra notes that the PCAOB made substantially similar findings in a number of inspections of 2008 and 2009 audits performed by the larger accounting firms and, since 2008, we understand the firms have issued additional guidance to clarify the work to be completed on the audit of fair value investments.

KPMG Bermuda has represented to Alterra and its Audit Committee that it believes it properly and appropriately followed GAAS as defined at the time of the audit. KPMG Bermuda confirmed in its response to the PCAOB report that “none of the matters identified by the PCAOB required the reissuance of any of our previously issued reports.” Alterra reaffirms its belief that the asset values ascribed to its available-for-sale securities in 2008 and subsequent periods remain appropriate.

KPMG Bermuda issued an unqualified opinion for Alterra’s year end financial statements for each of 2008, 2009 and 2010.

Who’s Ready for Changes to the Auditor’s Report?

“We heard from investors that they want more information in the auditor’s report. Investor dissatisfaction with the current auditor’s reporting model should concern other constituents as well, including preparers, auditors and regulators,” said PCAOB Chairman James R. Doty. “Today’s report from our own staff, based on their discussions with a broad audience, will be vital to the Board’s effort to develop a meaningful proposal for change in a concept release. Our intention is to expose such a release as early as this summer.” [PCAOB]

Chart of the Day (From Yesterday): Audit Failure Edition

As if the combination of March Madness and St. Patrick weren’t enough, this slide from yesterday’s Investor Advisory Group meeting should drive many to drink.


After yesterday’s findings on the usefulness (or lack thereof) of the auditor’s report, we bring you “The Watchdog that Didn’t Bark … Again.” It’s not as caught up on surveys and whatnot, as it is just pointing out some of the well, failures by auditors during the financial crisis.

The presentation was prepared by The Working Group on Lessons Learned from the Financial Crisis of the IAG and includes past comments from critics like Francine McKenna and Jonathan Weil on the expectations gap between auditors and basically everyone else. But don’t worry, it also presents the audit profession’s defense of itself including past statements from the Center for Audit Quality and PwC’s Richard Sexton the head of audit it the UK, who said this:

Now, one could come to the conclusion that Mr Sexton works for his clients first and not investors but you might not agree with that.

Now before all the Big 4 auditors get in a huff, the presentation has some criticisms of the PCAOB as well, specifically on the report the Board issued in September 2010:

If you can manage to stop drinking your breakfast for two, check out the full presentation below and discuss.

The Watchdog That Didnt Bark

The PCAOB Has Some Thoughts on This Chinese Reverse Merger Trend

In the past few months you may have heard a thing or two about small Chinese companies making their way into the U.S. by virtue of a reverse merger. If you’re not familiar, it was a speciality of the firm formerly known as Frazer Frost who got out of the business altogether because of a “culture clash” and “issues in the Chinese reverse mortgage practice area.”

All this has gotten the attention of the PCAOB who issued a Research Note (full document after the jump) today discussing t–more–>
Recently minted PCAOB Chair Jim Doty sprinkled in some thoughts for the press release but we obtained this statement from the Chairmn in case you anyone thinks they aren’t taking this shit seriously (my emphasis):

“As the PCAOB Research Note describes, small Chinese companies are increasingly seeking access to capital and trading in U.S. securities markets. The PCAOB has inspected the audits of many of these companies, when they were performed by U.S.-based audit firms. In some cases PCAOB inspection teams have identified significant audit deficiencies and, as necessary, made appropriate referrals for enforcement to protect investors’ interests in reliable audit reports.

“Many other such companies are audited by accounting firms in China. To date, the PCAOB has been denied access to determine through inspection whether such firms have complied with PCAOB standards. This state of affairs is bad for investors, companies and auditors alike. If Chinese companies want to attract U.S. capital for the long term, and if Chinese auditors want to garner the respect of U.S. investors, they need the credibility that comes from being part of a joint inspection process that includes the US and other similarly constituted regulatory regimes.”

Depending on how you perceive the role of auditors, this might seem like be a meaningless statement. But since China’s economy is going gangbusters and Big 4 firms are salivating at the thought of the fees associated with their introduction to the U.S. market, the temptation to help these companies comply with the U.S. rules might be high for an ambitious parter, office or firm.

That said, according to Table 8 of the PCAOB’s Research Note, no Big 4 firm had more than three CRM companies as of March 31, 2010 and now after Deloitte’s resignation from CCME, any partners that were entertaining the idea of chasing these companies could be having second thoughts.

Chinese Reverse Merger Research Note

The UK Invites the PCAOB Over for Tea (and Some Audit Probing)

Convergence may not be that far off after all, here it is 2011 and now we finally have U.S. and U.K. audit harassment agencies working together to share information and polish up that whole bit about protecting investor confidence in capital markets. It may or may not have something to do with the collapse of Lehman Brothers (personally I think the paranoid mistrust in foreign accounting systems – or perhaps just ours – goes back a tad more than that) but soon enough the PCAOB will have an in (after at least one failed attempt) and get a chance to harass inspect foreign firms. We anticipate that this announcement will bring it with it a fantastic new acronym so we can all keep track of who is who.

The Public Company Accounting Oversight Board today entered into a cooperative agreement with the Professional Oversight Board in the United Kingdom to facilitate cooperation in the oversight of auditors and public accounting firms that practice in the two regulators’ respective jurisdictions.

This agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the United Kingdom and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.

Acting PCAOB Chairman Daniel L. Goelzer welcomed the arrangement, which will lay the foundation for the PCAOB and POB to work together to promote public trust in the audit process and investor confidence in capital markets.

The PCAOB can thank the Dodd-Frank WSCRA which amended SOX to permit the PCAOB to share information with foreign audit agencies under certain conditions.

In light of this event, we’re wondering what happens when the two work together sharing “information.” Does it get a brand new acronym that celebrates this new dawn in inter-obnoxious-regulatory-gossiping (IORG) or does it become a hybrid acronym like the Public Professional Company Oversight^2 Board Board or PPCO^2BB? Surely we can do better.

Party at the PCAOB DC office this evening to celebrate, bring your own acronym suggestions and IFRS pocket guide.

See also:
The PCAOB Is Finally Invited to Europe’s Financial Statement Party [JDA]

(UPDATE 2) Who Will Be the New PCAOB Board Members?

~ Update 2 includes statement from PCAOB and clips from the SEC press release.

The SEC is set to make announcement circa any minute this afternoon and rumor has it that there might be last minute changes that amount to “horse trading among commissioners.” Intrigue at the SEC that has nothing to do with porn! Who knew?!?

Francine McKenna also seems excited about it:


Your wild-ass guesses are welcome at this time. We’ll keep you updated once we hear the names.

UPDATE: Silly us. Tammy Whitehouse over at Compliance Week had the potentials yesterday and we somehow overlooked it:

The SEC is expected to name John Huber, former director of the SEC’s Division of Corporation Finance, Lewis Ferguson, former general counsel to the PCAOB, and Jay Hanson, national director of accounting for audit firm McGladrey & Pullen, to three seats that have been open at the PCAOB for more than a year. It’s not clear whether one of those three will be appointed chairman, or whether that title will be granted to Daniel Goelzer, the acting chairman who has held down the fort since Mark Olson resigned in July 2009.

Granted, there are lots of rumors swirling about this “horse trading” so we wouldn’t be surprised if one of these guys (i.e. Huber, Ferguson or Hanson) got dropped for [fill in the blank].

UPDATE 2: And now, perpetually acting PCAOB chair Dan Goelzer:

“I am very pleased that the SEC has appointed three outstanding individuals to the Board. I look forward to working with Jim Doty, Lew Ferguson, and Jay Hanson in continuing to carry out the Board’s mission to protect investors and promote public confidence in audited financial reporting.

“At the same time, I want to thank the retiring Board members, Bill Gradison and Charley Niemeier, for their immeasurable contributions as founding members of the Board and for their years of dedicated service. Investors owe them a debt of gratitude.”

So the trade was Huber for James Doty (who is taking the Chairmanship), the former SEC General Counsel. INTERESTING (at least in some circles). Fro the SEC press release:

Mr. Doty is currently a Partner at Baker Botts LLP in Washington, D.C. He has represented clients on a wide range of securities law matters. He also counsels boards of directors and audit committees on problems arising under the Sarbanes-Oxley Act and related issues. Mr. Doty served as the SEC’s General Counsel from 1990 to 1992. He received an LL.B. from Yale Law School, an M.A. from Harvard University, an A.B. from Oxford University, and a B.A. from Rice University.

Yale, Harvard, Oxford and Rice? Elijah Watt Sells winners, eat your hearts out.

PCAOB Wants Broker-Dealers to Pony Up for the Privilege of Increased Enforcement

Yesterday, Caleb shared the details on a tentative new plan hatched by Dodd-Frank that would require nonpublic brokers and dealers to open their doors to that special brand of attention known as PCAOB inspections. We also learned that if the PCAOB gets their way, those special little broker-dealers will be asked to pony up the cash for the privilege of getting PCAOB patdowns.


Via Business Week:

The Public Company Accounting Oversight Board may require the biggest U.S. broker-dealers to pay more than $1 million a year to fund auditor inspections required under the Dodd-Frank Act.

PCAOB board members voted unanimously Tuesday to seek comment on the proposal, which would create a mechanism for raising the $15 million needed to perform reviews dictated by the financial- regulation overhaul enacted in July.

Unlike audit firms, of which 97% of the littler ones get constantly pestered by the PCAOB while the big boys get their boxes checked and can hit the ranges by noon for cocktail hour on the putting green, the new funding requirement would only affect 14 percent of broker-dealers large enough to meet the PCAOB’s tentative net-capital requirements.

These fees would account for seven percent of the PCAOB’s total funding, guesstimated terminally-acting PCAOB chair Dan Goelzer.

PCAOB board member Bill Gradison is sure that the PCAOB is serious about identifying issues and doing its job protecting the public or whatever the hell it is they are there to do. That means no working things out as they go, I suppose. He swears the interim inspection program is not “just a learning experience for the PCAOB” and “could have consequences for the firms involved.” That’s if anyone finds anything fishy, I am guessing.

PCAOB to Start Inspecting Firms Who Audit Broker-Dealers…Sort Of

Prior to Dodd-Frank, auditors who inspected the books of nonpublic brokers and dealers were required to register with the PCAOB but managed to avoid being subjected to the Board Insepctors’ Monday Morning QBing. Now that we’ve entered a new, exciting era of mind-numbingly complex financial regulation, auditors of all broker-dealers will soon know the pleasure of the PCAOB inspection process.

But before any of you get your knickers in a twist, it’s technically an “Interim Program,” because, in all honesty, the Board isn’t exactly sure who should be getting extra-special attention and who they can ignore.


This is part of the statement from Perpetual-acting Chair Dan Goel://pcaobus.org/News/Releases/Pages/12092010_OpenBoardMeeting.aspx”>today’s open meeting (full statement on following slide):

About 520 brokerage firms provide clearing or custodial services. Many of the others are introducing firms that, at least in theory, do not have access to client funds or securities. Some are floor brokers without public clients; some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories undoubtedly exist. This diversity raises questions about whether we should devote resources to inspecting the auditors of all of these types of brokers and dealers or whether some of their auditors can safely be exempted from PCAOB oversight without compromising investor protection.

While the Board does not yet have the answers to those questions, the temporary rule will allow the Board to begin inspections of broker-dealer audits so that we can develop an empirical basis on which to eventually address them.

So, in other words, the Board has NFI where to start since the broker-dealer biz encapsulates a lot of different services. The unfortunate thing for auditors is that the inspectors have to start somewhere and that’s what this interim program will do. Mr Goelzer gives you a taste of the fun to come:

The interim inspections will focus both on reviewing the work performed on specific audits and on gathering facts to inform the Board’s consideration of a permanent program. The information-gathering aspect of the interim inspections will provide the Board with insight about the potential benefits of broker-dealer inspections to the investing public and about the potential costs and regulatory burdens that would be imposed on different categories of accounting firms and classes of brokers. Armed with this type of information, the Board will be in a better position to decide on possible exemptions from oversight and to determine the objectives, nature, and frequency of inspections for firms that remain subject to PCAOB jurisdiction.

So if you’re lucky, you might – just might! – get out of the whole process altogether, although, we suggest you don’t get your hopes up. When will this all get sorted out, you ask?

Decisions about the permanent inspection program are probably at least a year away. In the mean-time, there will be ample opportunity for the public to learn what the Board is finding in the interim program and to participate in the decision process.
The proposed temporary rule provides for transparency, in that the Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The permanent broker-dealer auditor inspection program will be predicated on rules that will only be adopted by the Board after public notice-and-comment and will only take effect after Securities and Exchange Commission approval.

So if this whole thing sounds like a dry run, it is. However if inspectors stumble across some über-shoddy audits (bound to happen), the Board is reserving the right to lay the smackdown. From Board Member Steven Harris’s statement (full text on last slide), “While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm’s audit work.” Likewise, if the inspectors happen across out of the ordinary at the B-D (again, a distinct possibility), they will be ringing up the SEC.

So while on the one hand they’re testing the waters, if you happen to be a downright horrible auditing firm, they’re going to make an example out of you. Investor protection is still at stake, you know.

1 — 101214 Proposed Temporary Broker Dealer Inspections–Goelzer Statement


Harris Broker Dealer Open Meeting 12 14 10 FINAL

Update on Censured Ernst & Young Manager

Just a brief follow-up on the manager who received the disciplinary action handed down by the PCAOB on Monday.

We attempted to reach Jacqueline Higgins late yesterday at her office number in Boston, however we discovered that when we were transferred to her extension we simply bounced back to reception, who needless to say, was very confused about that phenomenon. After attempting to page Ms. Higgins, only then did the receptionist learn and then relay to us that Ms. Higgins was no longer with the firm.

We checked with Ernst & Young spokesman Charlie Perkins on this development and he confirmed that Ms. Higgins “will be leaving the firm at the end of the year.”

And lest there still be any confusion due to the carefully worded E&Y statement, the partner and senior manager in question have been dismissed from the firm.

We’ll keep you updated if we hear more from inside at the firm or if further action is taken by the PCAOB.

PCAOB Chair: We’re Kicking Around Some Ideas for a New and Improved Audit Model

Part of perpetually-acting PCAOB chairman Dan Goelzer’s speech at the AICPA’s Conference on SEC and PCAOB Developments had to do with the future and it kinda, sorta sounds like the Board might start asking for more than just the auditor’s opinion of yore. He spoke this afternoon at the conference, saying, “it is clear that there is considerable investor hunger for more insight from the auditor into the audit process and the company’s financial reporting. Further, the 2008 report of the Treasury Advisory Committee on the Auditing Profession recommended that the Board reconsider the audit report.”


What kind of ideas? Glad you asked!

The Board will have to make some difficult choices next year if it decides to change the time-honored pass/fail report. There is no shortage of ideas. During a discussion of the reporting model at our Standing Advisory Group meeting last April, some suggested that the auditor should provide more information about the audit itself and how it was performed. Others want the auditor’s views on the management judgments embodied in the financial statements regarding such things as estimates and the selection of accounting policies. Auditors have proposed that their reports should be clearer about limitations on the ability to detect fraud. Some users have suggested expanding the auditor’s current opinion to include new material; others have suggested that the pass/fail report should be accompanied by a separate auditor’s report akin to the MD&A.

Do investors really want to know how the audit sausage is made? Some auditors have trouble pulling things together so we see little up side there.

If you’ve got your own suggestions on making audits even better, feel free to share them at this time.

Goelzer_AICPA National Conference 2010

(UPDATE 2) PCAOB Gives Ernst & Young Manager the Charlie Rangel Treatment

~ Update includes statement from Ernst & Young.

~Update 2 includes statement from Claudius Modesti, PCAOB Director of Enforcement and Investigations

Today in obscure accounting oversight board enforcement actions, an Ernst & Young Manager in the Boston office was censured by the PCAOB for repeated violations oy to Cooperate with Inspectors, and Auditing Standard No. 3 (“AS3”), Audit Documentation.


The violations occurred when 27 year-old Jacqueline Higgins “(1) added documents to the working papers without indicating the dates that documents were added to the working papers, the names of the persons preparing the additional documentation, and the reason for adding the documentation months after the documentation completion date; and (2) removed a document from the working
papers after the documentation completion date.”

The timeline goes like this: E&Y was given notice by the PCAOB that an inspection of the unknown company’s audit was being performed on March 30, 2010 and the partner, senior manager and manager on the engagement were given notice on March 31, 2010. The inspection fieldwork was set to begin on April 19, 2010.

On April 5th, the three Ernsters began preparing for the inspection and that’s when problems started cropping up which led to more trouble. The order has the details:

First, Respondent reported to the Engagement Partner and the Senior Manager that a “Review Procedures Memorandum” was missing from the external working papers. The Engagement Partner and the Senior Manager directed Respondent to create and print out the missing document, and to backdate the document to November 30, 2009. The Engagement Partner and the Senior Manager directed Respondent to backdate her sign-off on this working paper to November 30, 2009, and to add this document to the external working papers.

17. Second, Respondent reported to the Engagement Partner that the tie-out of the financial statements contained in the external working papers was performed upon a pre-final set of financial statements. The Engagement Partner directed Respondent to remove this document from the external working papers, and to replace it with a newly created document which tied-out the final financial statements, and which the Engagement Partner directed Respondent to backdate to November 2009.

18. Third, Respondent reported to the Engagement Partner that the Average Forward Foreign Currency Contracts Calculation (“A3a Working Paper”) was missing from the external working papers. The Engagement Partner directed Respondent to gather the missing document, backdate it to November 2009, and add it to the external working papers.

19. Finally, Respondent reported to the Senior Manager that three checklists were missing from the external working papers. The Senior Manager directed Respondent to assemble the missing checklists as a single document (“HH6.8 Working Paper”) and to backdate her sign-off on this working paper to November 2009. The Senior Manager directed Respondent to add the document to the external working papers. The Senior Manager and Respondent reported to the Engagement Partner the facts and circumstances related to the creation of the HH6.8 Working Paper, and the Engagement Partner took no steps to cause the document to be properly dated, or to have it removed from the external working papers.

So those are the wonky details. Where this particular story is most interesting (in our opinion) is that Ms Higgins was, prior to this little mishap, on the fast track. According to the order, she graduated in May of 2005 and started with E&Y in September. She was promoted to senior associate in October of 2007 and then promoted to manager in October of 2009. Now, perhaps she was an audit-savant or perhaps not but in just over four years, she was a manager, which is a much quicker pace than usual.

Granted, she was still under the supervision of the senior manager and partner on the engagement but a young manager nevertheless. Now, you might be asking yourself, “what about the senior manager and partner? Are they getting their wrists slapped?” Conventional wisdom tell us, “absofuckinglutely” but the PCAOB isn’t saying. We were told by a spokesperson that the Board cannot comment on any other action related to this case.

As far as what a censure by the PCAOB actually entails, we were told that “It is an official reprimand from the PCAOB.” Some might call it a wrist slap but we’re damn sure you don’t want that in your file when you’re 27 years old. The action also states that Ms. Higgins was removed from the engagement in July 2010 and “at that time Higgins ceased participating in issuer audit engagements.”

Messages with E&Y spokesperson Charles Perkins and A message left with an attorney for Ms. Higgins were not immediately returned.

Ernst & Young has issued the following statement:

Our firm policy clearly prohibits persons from supplementing audit workpapers in circumstances like those described in the disciplinary order. When we determined that firm policy had been violated, we put the three individuals involved on administrative leave and subsequently separated the partner and senior manager. We have advised the PCAOB of these facts and have cooperated fully with the PCAOB throughout its investigation of this matter.

Based on the above, you might conclude that more disciplinary action will be coming from the PCAOB but like we said, they’re not talking.

UPDATE 2 – circa 3:30 pm: Claudius Modesti, PCAOB Director of Enforcement and Investigations, explained the seemingly light punishment in an email to Going Concern:

As to the censure, under the facts and circumstances, the censure is appropriate given Higgins’ relatively junior position on the audit team and her overall role in the conduct. We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”

It was then explained to us that the PCAOB has never explained a disciplinary action in this way: “We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”

If that’s not quite clear, consider this: It is significant because, had Ms Higgins acted in the alternative (i.e. not settled), litigation would have been necessary and no one outside of the PCAOB, Higgins, her lawyers and E&Y would have known about the proceedings. Granted, it’s fairly common for lighter disciplinary action to result from a settlement but it also makes sense from a PR perspective (not to mention, transparency and investor protection) if the PCAOB can actually announce that they are taking action against people who break the rules. Part of the challenge the Board has faced is convincing anyone that they have teeth.

It will be interesting now to see if the senior manager and partner follow the same track as Ms. Higgins and how the PCAOB will respond to their cooperation (or lack thereof).

Jacqueline a Higgins CPA[1]

Get to Know Your PCAOB Standing Advisory Group Members

The PCAOB managed to roll out some news at a time other than 4 pm on Friday, announcing new appointments and reappointments to their Standing Advisory Group.

All the major firms are represented as well as some regionals (BKD, EKS&H), academics, industry pros, and others. We haven’t had the pleasure of knowing any of these fine folks (minus Lynn Turner – probably the biggest pot-stirrer on the list) but we’ve got it on good authority that everyone can get audit wonky (e.g. broker dealer auditing, the audit report model, FASB changes affecting auditing). The ushe. So you can rest soundly knowing your audit rules are in good hands.

Standing rs

New Appointments
• Stephen J. Homza, Managing Director of Internal Audit, Legg Mason, Inc.
• Lisa Lindsley, Director of Capital Strategies, American Federation of State, County, and Municipal Employees
• William T. Platt, Deputy Managing Partner, Professional Practice, and Deputy Chief Quality Officer – Attest, Deloitte & Touche, LLP
• D. Scott Showalter, Professor of Practice, Department of Accounting, College of Management, North Carolina State University
•Dan M. Slack, Chief Executive Officer, Fire and Police Pension Association of Colorado

Reappointments
• Joseph V. Carcello, Ernst & Young and Business Alumni Professor, Department of Accounting and Information Management, and Co-Founder and Director of Research, Corporate Governance Center, University of Tennessee
• James D. Cox, Brainerd Currie Professor of Law, School of Law, Duke University
• Elizabeth S. Gantnier, Director of Quality Control, Stegman & Company
• Arnold C. Hanish, Vice President of Finance, Chief Accounting Officer, Eli Lilly & Company
• Gail L. Hanson, Deputy Executive Director, State of Wisconsin Investment Board
• Jamie S. Miller, Vice President, Controller and Chief Accounting Officer, General Electric Company
• Steven B. Rafferty, Professional Practices Partner, BKD, LLP
•Samuel J. Ranzilla, Audit Partner and National Managing Partner, Audit Quality and Professional Practice, KPMG LLP
• Lynn E. Turner, Senior Advisor and Managing Director, LECG

Continuing Members
• John L. (Arch) Archambault, Senior Partner, Professional Standards and Global Public Policy, Grant Thornton LLP
• Dennis R. Beresford, Ernst & Young Executive Professor of Accounting, Terry College of Business, The University of Georgia
• Neri Bukspan, Executive Managing Director, Chief Quality Officer, and Chief Accountant, Credit Market Services, Standard & Poor’s Financial Services, LLC
• Douglas R. Carmichael, Claire and Eli Mason Professor of Accountancy, Zicklin School of Business, Baruch College
• Margaret M. Foran, Chief Governance Officer, Vice President, and Corporate Secretary, Prudential Financial, Inc.
• Michael J. Gallagher, Assurance Partner and U.S. Assurance National Office Leader, PwC
• Gaylen R. Hansen, Audit Partner and Director of Accounting and Auditing Quality Assurance, Ehrhardt Keefe Steiner & Hottman PC
•Patricia Ann K. (Kiko) Harvey, Vice President, Corporate Audit and Enterprise Risk Management, Delta Air Lines
•Gary R. Kabureck, Vice President and Chief Accounting Officer, Xerox Corporation
•Anthony S. Kendall, Chief Executive Officer, Mitchell & Titus LLP
•Wayne A. Kolins, Partner and National Director of Assurance, BDO USA, LLP; Global Head of Audit and Accounting, BDO International Limited
•Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors
•Mary Hartman Morris, Investment Officer, Global Equity, California Public Employees’ Retirement System
•Kevin B. Reilly, Americas Vice Chair, Professional Practice and Risk Management, Ernst & Young LLP
•Barbara L. Roper, Director of Investor Protection, Consumer Federation of America
•Lawrence J. Salva, Senior Vice President, Chief Accounting Officer and Controller, Comcast Corporation
•Kurt N. Schacht, Managing Director, CFA Institute
•Damon A. Silvers, Director of Policy and Special Counsel, AFL-CIO
•John W. White, Partner, Corporate Department, Cravath, Swaine & Moore LLP

If you’re completely raptured with anyone listed, you can check out there bios over at the PCAOB’s website.

PCAOB Announces Standing Advisory Group Members [PCAOB]

Is Citi One of the Issuers in the PCAOB’s Inspection Report of KPMG?

The long-awaited PCAOB inspection report of KPMG came out on Friday and while we were excited for this unveiling, the Board managed to issue the report at around 4 pm on Friday. Since the Board lacks any sense of timing whatsoever, we opted to punt on our respective post until today because well, we’re human and not a soulless blogging robot as likely perceived by TPTB at the PCAOB.

It’s worth mentioning that this is the first PCAOB report that has been issued since the SEC’s final rule on the inspections that allows audit firms to postpone the release of the report simply by taking issue with any of the findings. Since any appeal could reportedly delay the report by “30 to 100 days,” it’s safe to assume that, with a report date of October 5th, KPMG didn’t have a beef with the findings. You could also assume that since the SEC is taking a peek at these reports now, there’s going to be a ten day lag on the release of the report to allow the Commission enough time to give it their extra-special sniff test.

Anyway, back to the matter at hand –

KPMG had eight issuers noted in the Board’s inspection report and the first two are doozies. “Issuer A” runs approximately two pages and includes failure on testing of “allowance for loan losses” to “test[ing] the issuer’s estimates of fair values of financial instruments” and goodwill impairment.

“Issuer B” is a little more interesting since one of the failures the Board found was related to deferred tax assets which makes us wonder if this is Citi, since analyst Mike Mayo was loudly questioning the bank’s treatment of its DTA. Francine McKenna not-so-subtly solicited guesses on Friday as to who this “bank” might be (even though no issuer is identified as such) but it does make us wonder.

The Board cites run-of-the-mill failures for the rest of the issuers (e.g. fair value testing, pension plan testing, failure to confirm cash[!]) and the House of Klynveld’s response letter was cordial and anticlimactic.

But if you’re KPMG, do you really care what the PCAOB thinks when you’ve got an adorable gnome-ish looking analyst giving you the tepid thumbs-up (despite not knowing your name)? That’s the only endorsement we would need.

2010_KPMG_LLP

Exquisite Insults: PCAOB Edition

“The Accounting Board Is a Sinecure Qua Non”

~ Headline over at Bloomberg BusinessWeek

The PCAOB Wants to Talk More About Talking

Why? Apparently because they just considered the needs of auditors. Audit committee members were feeling left out (and are, presumably, just as uncomfortable conversing with humans as auditors) so it’s back to the drawing board:

At a July 15 meeting of the PCAOB’s Standing Advisory Group, Goelzer said comments reflected a wide range of views. “A number of comments suggested that we needed to do more homework, more outreach on this subject,” he said. “Some thought we approached the subject too much from the perspective of the auditor and without a full appreciation of what audit committee members wanted or needed.”

A briefing paper to set the stage for the Sept. 21 roundtable says the board is holding the roundtable to get more insight from investors, audit committee members, auditors, and management on the proposed standard. The briefing paper outlines a number of questions the board wants to explore focused primary on what information is most relevant to audit committees, and how auditors and audit committees should communicate on those issues.

PCAOB Reopens Comment on Communications Standard [Compliance Week]

PCAOB Puts Congress On Notice; Requests Public Enforcement Proceedings

Despite the setback that was the creation of the PCAOB, the Big 4 have to be pret-tay, pret-tay, pret-tay pleased with the privacy they get when it comes to the Board’s disciplinary actions.

Perpetually-acting chair Dan Goelzer wrote a letter to the Senate Banking and House Financial Services Committees saying that by keeping the proceedings mysterio and out of the public eye. The current arrangement “gives firms and auditors an incentive to drag out litigation, sometimes for years,” and that simply won’t do.

Despite the general public’s disinterest in all things accounting (until the shit hits the fan, of course), the Board is still trying to find its place as the relatively new kid on the bureaucratic block. This request seems to be an attempt at fitting in:

The Public Company Accounting Oversight Board’s proposal would repeal a requirement that its disciplinary actions remain secret, according to a copy of the document reviewed by Dow Jones.

The public now is denied access to information about accountants that have been sanctioned or charged by the PCAOB, acting Chairman Daniel Goelzer said in an Aug. 24 letter to several members of the Senate Banking Committee and House Financial Services Committee.

Since the federal government has been all about transparency lately, it would be surprising for Congress to take the Board up on the offer. The problem is, it won’t really do much to speed anything along and transparency will remain an issue. If you remember, last month the SEC issued its final rule on the PCAOB appeals process that goes into effect next week.

That rule will: allow firms to dispute findings during the inspection process; prohibit the PCAOB from making those disputed findings public until the SEC investigation is completed and the SEC still has the option to make findings permanently private, if it so chooses.

So even if Congress is convinced that the PCAOB’s plan to make the proceedings public is utter genius , accounting firms will still be able to drag things along (and keep things secret) as they see fit.

Accounting Board Seeks Public Enforcement [WSJ]

Is the SEC Taking the “O” Away from the PCAOB?

The PCAOB has had a pretty good run of late. It all started with the SCOTUS handing them a loss that was really a win and the Board has, most recently, gotten ambitious with new risk assessment standards. What’s more is the call of acting Chair Dan Goelzer to have the Board’s enforcement inspections held publicly so audit firms can’t get all mysterio about what they did and did not do to warrant said inspection.

Well, the run of luck appears to have come to an end as the SEC issued a new rule that takes effect next month that marginalizes the Board to the benefit of the accounting firms it oversees (our emphasis).

Going into effect September 7, the rule explains how accounting firms can dispute the PCAOB’s findings during its inspection process. The firms have always had this ability under the Sarbanes-Oxley Act, but the SEC lacked a formal appeals process. (Indeed, the June 28 Supreme Court decision, which affirmed the constitutionality of the PCAOB, arose out of a small accounting firm’s dissatisfaction with its 2004 inspection report.)

A key feature of the process is secrecy. If an accounting firm appeals to the SEC, the PCAOB will be prohibited from making disputed portions of its inspection report public until the commission completes its review, which could take anywhere from 30 days to over 100 days. Moreover, the SEC could decide to keep the information permanently private if its reviewers determine that the PCAOB’s findings were “arbitrary and capricious.”

Meanwhile, the public will learn nothing about the appeals process or the issues under contention, which will further cloud the results of PCAOB inspections for the accounting firms’ corporate clients who read them. “Until now, the SEC has not restricted the transparency of inspection reports pending the opportunity to seek review,” a PCAOB spokesman tells CFO.

So let’s get this straight – if an accounting firm takes issue with anything in the PCAOB’s report, the firm can then run crying to the SEC – which makes that portion of the report secret – and then the report will sit dormant until that portion reads to their liking which can take 30 to 100 days? OH! And on top of that, if the SEC finds something to be ‘arbitrary and capricious’ that issue will never see the light of day?

It’s not like these inspection reports are being issued at a rapid clip (PwC’s and KPMG’s reports for ’09 are still MIA) or filled with details that are actually meaningful to regular folks (e.g. the clients inspected) and now the SEC is going to let the firms write their own inspection reports.

So much for that small matter of “Oversight.” At least the SEC is being (somewhat) transparent about a power grab.

Auditors Can More Easily Dispute PCAOB Findings [CFO]

The PCAOB Is Pleased with How the Whistleblowing Has Gone

“We thought auditors and investors would like to have an avenue to report violations of accounting and auditing standards and financial fraud.”

~ Claudius Modesti, PCAOB Enforcement and Investigations Division director. Last year, the Board fielded 179 tips – a record – that alleged wrongdoing by audit firms and their employees.

While They Were at It, The PCAOB Thought They Might Chime in on Auditors’ Babysitting Skills

As we mentioned late yesterday, the PCAOB has been working hard these days. Late nights, weekends, ordering in and whathaveyou. Adrienne told you about the new eight auditing standards that you’re all expected to have memorized by Labor Day, and we wrapped up with Dan Goelzer snagging QOTD for the Board’s move towards open enforcement proceedings. This move will, presumably, be used in order to shame the pants off of those of you that dare to break the rules.

But the Board had one more thing to serve up yesterday and that was to put it out there that they don’t think too highly of the job auditors are doing supervising the worker bees:

“Through its inspections and investigations, the PCAOB has observed that supervision processes within firms are frequently not as robust as they should be, and that supervisory responsibilities are often not as clearly assigned as they should be,” said PCAOB Acting Chairman Daniel L. Goelzer. “Today’s Release seeks to highlight the Board’s views on the scope for using the authority provided in the Act to address those problems.”

For an industry that depends so heavily on a hierarchal structure, this does not bode well. There are several possible scenarios that led the PCAOB to jump in with their thoughts, including but not limited to:

1. Dozens of audit engagements of publicly traded companies have aloof partners that pop in once or twice a week, observe a handful of staff people feverishly ticking and tying, only to assume everything appears a-okay.

2. The PCAOB has incredible “luck” picking the biggest shitshow engagements.

3. The PCAOB is just blowing the shortage of experienced SAs out of the water.

4. Inspectors don’t buy the “we got this” story from the A1 and A2 running an accelerated filer engagement.

If you’re on one of these free-for-all audits, for crying out loud, get in touch. We want details.

PCAOB Issues Release on Failure to Supervise [PCAOB]

Gird Your Loins, Big 4

“I believe the time has come for us to ask Congress to change the law and make our enforcement proceedings public, unless there is some good reason for a particular matter to be closed.”

~ Dan Goelzer, Acting Chair of the PCAOB, would like to get things out there.

8.5.10 Goelzer Public Enforcement

Somebody Has Been Busy: PCAOB Issues Eight New Audit Standards

Since the PCAOB was only up to Audit Standard 7 last time we checked and seems to take the conservative approach when it comes to issuing new ones, we have to say we were more than shocked to see them almost double their audit standards overnight. Gee, must be serious.


Via the PCAOB:

The Public Company Accounting Oversight Board today adopted a suite of eight auditing standards related to the auditor’s assessment of, and response to, risk in an audit.

The suite of risk assessment standards, Auditing Standards No. 8 through No. 15, sets forth requirements that enhance the effectiveness of the auditor’s assessment of, and response toial misstatement in the financial statements.

The risk assessment standards address audit procedures performed throughout the audit, from the initial planning stages through the evaluation of the audit results.

“These new standards are a significant step in promoting sophisticated risk assessment in audits and minimizing the risk that the auditor will fail to detect material misstatements,” said PCAOB Acting Chairman Daniel L. Goelzer. “Identifying risks, and properly planning and performing the audit to address those risks, is essential to promoting investor confidence in audited financial statements.”

What does this mean for auditors? Let’s check them out.

AS No. 8 – Audit Risk. This standard discusses the auditor’s consideration of audit risk in an audit of financial statements as part of an integrated audit or an audit of financial statements only. It describes the components of audit risk and the auditor’s responsibilities for reducing audit risk to an appropriately low level in order to obtain reasonable assurance that the financial statements are free of material misstatement.

AS No. 9 – Audit Planning. This standard establishes requirements regarding planning an audit, including assessing matters that are important to the audit, and establishing an appropriate audit strategy and audit plan.

AS No. 10 – Supervision of the Audit Engagement. This standard sets forth requirements for supervision of the audit engagement, including, in particular, supervising the work of engagement team members. It applies to the engagement partner and to other engagement team members who assist the engagement partner with supervision.

AS No. 11 – Consideration of Materiality in Planning and Performing an Audit. This standard describes the auditor’s responsibilities for consideration of materiality in planning and performing an audit.

AS No. 12 – Identifying and Assessing Risks of Material Misstatement. This standard establishes requirements regarding the process of identifying and assessing risks of material misstatement of the financial statements. The risk assessment process discussed in the standard includes information-gathering procedures to identify risks and an analysis of the identified risks.

AS No. 13 – The Auditor’s Responses to the Risks of Material Misstatement. This standard establishes requirements for responding to the risks of material misstatement in financial statements through the general conduct of the audit and performing audit procedures regarding significant accounts and disclosures.

AS No. 14 – Evaluating Audit Results. This standard establishes requirements regarding the auditor’s evaluation of audit results and determination of whether the auditor has obtained sufficient appropriate audit evidence. The evaluation process set forth in this standard includes, among other things, evaluation of misstatements identified during the audit; the overall presentation of the financial statements, including disclosures; and the potential for management bias in the financial statements.

AS No. 15 – Audit Evidence. This standard explains what constitutes audit evidence and establishes requirements for designing and performing audit procedures to obtain sufficient appropriate audit evidence to support the opinion expressed in the auditor’s report.

Now don’t get me wrong, I love rules and regs as much as the next girl – if not more – but I am of the thought that users of financial statements would be better served not by more rules and regs but by a more comprehensive auditor training program that starts in college. Am I asking too much?

Did we really need clarity on audit evidence? The PCAOB seems to think so and that’s fine, they are well-intentioned in their motive and you can’t fault them for that.

Who Should the Next PCAOB Members Be?

Since the PCAOB is here to stay, the SEC figured it was probably best that they get some people sit on this thing to, ya know, help protect the investors, the public at large, so on and so forth.

The problem, as it appears to us, is that Mary Schapiro and the gang are plumb out of ideas for nominations. Accordingly, they’re out there looking for help from some of the best and beardest, including the Beard, acting PCAOB chair Dan Goelzer, AICPA President and CEO Barry Melancon and a few other noted notables.


However! Just because Mary Schapiro sent these people personal letters begging for some ideas, that doesn’t mean she won’t listen to yours. You can fire any names you have in mind to Board-recommendations@sec.gov. The Commission appreciates the help.

The SEC does point out that the appointees need to be “prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities for and nature of the financial disclosures required of issuers under the securities laws and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures,” but we feel that’s subject to interpretation.

Hopefully the noms will include a few wild cards that could stir things up a bit. Sam Antar comes to mind, although the criminal record could be a bit of a problem. Francine might be up for it? We haven’t asked her yet, just throwing it out there. More suggestions welcome.

Spotlight on PCAOB Nomination Process [SEC]

(UPDATE) The PCAOB’s Statement on the Signing of The Dodd-Frank Act Isn’t Exactly Enthusiastic

~ Includes statement from PCAOB spokesperson

Hey! Did you hear? Dodd-Frank got signed into law yesterday and plenty of people are excited (namely Dodd, Frank, BO) and there are plenty who are not.

The PCAOB, it seems, lands somewhere in the middle. Sure the dopes exempted public companies with market caps under $75 million from complying with 404 but putting things in perspective, the Board is probably just amped that the SCOTUS didn’t kick them off the playground.


To show their gratitude, the PCAOB doesn’t bother mentioning the exemption in their press release from yesterday, instead focusing on…foreign auditor oversight (pretty much a black hole) and authority over auditors of broker-dealers. We understand that playing nice is part of the game but COME ON.

We emailed the nice folks over at the Board to ask them about the 404 exemption but we’re still waiting to hear back from them. Perhaps they’re putting on their smiley faces to address this one since they’ve probably been gritting their teeth for the last 20 or so hours.

A PCAOB spokesperson provided us with the following statement:

The PCAOB believes that the internal control audit report required under SOX Section 404(b) has improved the reliability of financial reporting and audit quality. The Board has taken steps to make sure that the internal control auditing standard is scalable to companies of all sizes and has issued guidance and held educational forums to assist smaller company auditors in understanding how to apply that standard to smaller companies. The internal control audit requirement relates to the content of SEC filings, and SEC Chairman Schapiro opposed the exemption for non-accelerated filers.

So, in other words, the compliance technically falls under the SEC and the PCAOB issues the audit standards but it still has to hit a little close to home.

BPR:

PCAOB STATEMENT UPON SIGNING OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
Washington, D.C. , July 21, 2010

Today’s enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act facilitates the PCAOB’s ability to share information with foreign auditor oversight authorities and closes gaps in the Board’s authority to oversee audits of brokers and dealers.

While the Sarbanes-Oxley Act of 2002 protects the PCAOB’s inspection and investigative processes from public disclosure, it permits the Board, in certain circumstances, to share information with federal and state authorities. However, at the time the Sarbanes-Oxley Act was enacted, very few other countries had audit oversight bodies and, therefore, there was no provision in the Sarbanes-Oxley Act authorizing the PCAOB to share information with foreign authorities. Since that time, many countries have established or are in the process of establishing audit oversight bodies. The Dodd-Frank Act allows the Board, under certain circumstances, to share information with such foreign auditor oversight authorities.

The Dodd-Frank Act also expands the PCAOB’s authority to oversee auditors of brokers and dealers. Under the Sarbanes-Oxley Act, auditors of brokers and dealers were required to register with the Board. The Dodd-Frank Act provides the PCAOB with standard-setting, inspection and disciplinary authority regarding broker-dealer audits.

More information about the PCAOB’s plans to implement this authority and guidance for auditors of brokers and dealers will be forthcoming.

The Latest Proposed Standard from the PCAOB Will Hopefully Keep Future Interns Busy

Yesterday, the PCAOB released a 90 page proposal on confirmations because, presumably, auditors collectively suck at using them.

If you take exception with that notion, so be it, but the Board thought that rolling out a standard was necessary to give the opiners out there some guidance so they can get a little more bang for the buck (and give interns and A1s something to do when there is absolutely nothing going on) from confirmations.


Tammy Whitehouse over at Compliance Week fills us in on some of the details:

PCAOB member Steven Harris said the proposed standard expands the use of the confirmation process by requiring auditors to confirm receivables that arise from credit sales, loans, or other transactions; cash and other relationships with financial institutions; and other accounts or balances that pose a significant risk to the financial statements. Currently, auditors are required only to verify receivables if they arise from the sale of goods or services in the normal course of business.

The standard also would relax the requirements for confirmations written on paper, reflecting advances in electronic communication. The proposal would allow auditors to use electronic media to send confirmation requests and receive confirmation responses, and it would make provisions under certain circumstances for auditors to use direct access to a third party’s records to obtain the audit evidence they need.

Throw in your 2¢ by September 13th and gird your loins for audits after Dec. 15, 2011.

PCAOB Proposes New Auditing Standard on Confirmation [PCAOB]
PCAOB Plans New Requirements for Audit Confirmations [Compliance Week]

PCAOB Report States That There Was a Fair Amount of Failing Going on at Ernst & Young

The PCAOB has issued its annual report on Ernst & Young having given the firm the third degree at its national office and 30 of its 80 U.S. offices. It inspected 58 audits performed by the firm but exactly who is, of course, a big secret (unless you tell us).

There were five “Issuers” that were listed in the report and some form of the word “fail” was used 25 times (that includes the footnotes).

[Issuer A] The Firm failed to adequately test the issuer’s loan loss reserves related to certain loans held for investment. Specifically, the Firm failed to reconcile certain values used in the issuer’s models with industry data, failed to test the recovery rates used in the issuerfailed to test the qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform sufficient procedures to test the issuer’s allowance for loan losses (“ALL”). The issuer determined the general portion of its ALL estimate, which represented a significant portion of the ALL, using certain factors such as loan grades. Data for this calculation were obtained from information technology systems that reside at a third-party service organization. The Firm relied on these systems, but it failed to test the information-technology general controls (“ITGCs”) over certain of these systems, and it failed to test certain of the application controls over these systems. Further, the Firm’s testing of the controls over the assignment and monitoring of loan grades was insufficient, as the Firm failed to assess the competence of the individuals performing the control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test the costing of work-in-process and finished goods inventory. Specifically, the Firm’s tests of controls over the costing of such inventory were limited to verifying that management reviewed and approved the cost allocation factors, without evaluating the review process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is below for your reading pleasure. E&Y’s got its $0.02 in, however it was short and was mostly concerned about the firm’s right to keep its response to Part II (the non-public part)…non-public:

We are enclosing our response letter to the Public Company Accounting Oversight Board regarding Part I of the draft Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the Sarbanes-Oxley Act requires that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.” Based on this statutory provision, we understand that our comments on Part ii will be kept non-public as long as Part ii of the Report itself is non-public.

In addition, we are requesting confidential treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would prefer that no one know how it managed to tell the PCAOB to fuck right off as nicely as it could.

If you had the pleasure of being on one of these 58 engagements, we’d love to hear about your experience.

2010 Ernst Young LLP US

What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court

A Meaningless Win for Free Enterprise Fund and Beckstead and Watts

“Beckstead and Watts, LLP, and the Free Enterprise won, but there is no prize for them.”

~ Professor David Albrecht (guest posting at JDA), pointing out that despite a victory, the petitioners basically get jack squat.

Supreme Court Ruling Could Expose PCAOB to More Political Pressure

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

We’re not quite as sure as others are that yesterday’s Supreme Court decision regarding SarbOx is so utterly meaningless regarding the future of the Public Company Accounting Oversight Board.

Sure, the court said the law is still fully in effect, blah, blah, blah.

But letting the Securities and Exchange Commission fire PCAOB board members for any reason instead of “for cause” could easily subject the board to significantly more political influence.


While Floyd Norris says the commission is unlikely to fire anyone on the PCAOB, the fact is the has commission has thrown its weight around in similar fashion in the case of the Financial Accounting Standards Board when companies have complained to Washington about FASB’s accounting rule making.

What’s to stop them from complaining to the SEC that the PCAOB is being too hard on its auditors, and the SEC from succumbing to that pressure?

Much depends, of course, on who’s leading the commission. Mary Schapiro might not easily bend to the political winds, but her predecessor, Christopher Cox, clearly did just that in connection with FASB.

After all, when during a conference on accounting I asked Conrad Hewitt, the SEC’s last chief accountant under Cox, about the SEC’s threat to hold up approval of FASB’s budget unless it let the commission vet nominations to the board in advance, Hewitt said the SEC was acting properly in its heightened role as the FASB’s overseer under SarbOx.

Yet a FASB member privately insisted to me afterward that the SEC had no authority to do what it did.

And at another conference a few months later, I asked Hewitt what the White House was telling the SEC to do about exemptions for small companies from SarbOx’s requirements for internal controls, the infamous provision known as Section 404. At that, Hewitt, as somnolent a figure as ever occupied the job, sat up in his chair as if he’d just had a bucket of cold water thrown in his face, and insisted that the SEC was an independent agency.

But given what happened to Cox’s predecessor, William Donaldson, I think Hewitt’s reaction to this question was disingenuous.

And both of his answers help explain why the big argument on the court yesterday over the theory of “the unitary executive” and the ability of the president to fire “independent” agency personnel isn’t quite as irrelevant to the PCAOB’s future as most everyone else seems to think.

PCAOB Marks the Special Day By Telling Ten Accounting Firms How They Can Get Better

Now that FEF v. PCAOB has come and gone, the PCAOB didn’t waste any time getting right back to work, as they posted ten new inspection reports today for firms including some of those pesky international firms that have been so resistant.


That should make bring a smile to everyone’s face who was thrilled with today’s decision.

In slightly related news, Elana Kagan, who argued on behalf of the PCAOB, sat and listened to a bunch of old men talk about her today. ATL has the liveblog coverage.

Firm Inspection Reports [PCAOB]

Sarbanes-Oxley Lives

“The Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised.”

~ Chief Justice John Roberts, in the Supreme Court’s majority opinion.

What Are People Saying About the PCAOB Decision?

In case you’re just joining us on this MOANday, the SCOTUS ruled this morning that “the structure of the accounting board violated constitutional separation-of-powers principles because it was too difficult for the president to remove board members.”

So, pretty wonky legal stuff. The good news is that auditors will get to keep their jobs (mixed feelings, we’re sure) but what’s the reaction at large?


PCAOB – The PCAOB, for one, is just excited that the SCOTUS is still letting them play. Sayeth interm Chairman for life Dan Goelzer, “We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest.”

SEC – Likewise, SEC Chair Mary Schapiro is fine with the decsion too, “I am pleased that the Court has determined that the Board’s operations may continue and the Sarbanes-Oxley Act, with the Board’s tenure restrictions excised, remains fully in effect. The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality. We look forward to continuing to work with the Board in connection with its mission to oversee auditors in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.”

Wall St. Journal – Suzanne Barlyn over at Financial Adviser writes that the small broker dealers won’t get the much coveted relief on their audit fees, “Historic financial regulatory reform legislation, which may be enacted as soon as July 4, would empower the PCAOB to regulate auditors of privately held broker dealers, who would then be subject to the organization’s inspections and possible enforcement actions. The potential change could mean auditing fees as high as $50,000 to $100,000 per year for certain broker dealers, instead of the $5,000 to $10,000 they typically shell out now.”

And Michael Corkery at Deal Journal writes that there is disappointment out there for the über-haters, “Dashed are the hopes of some corporations who believed the Court would use this case to question the broader issues of Sarbanes-Oxley, which critics say has buried publicly traded companies in onerous regulation and paperwork.”

Former SEC Chairman Harvey Pitt – Former Chairman Pitt is less thrilled, telling Bloomberg that the decision was “an unfortunate and serious blow” and that even if Congress could squeeze there regulatory fix into the current reform bill, “in the two thousand pages of the legislation…there’s not a word dealing with the PCAOB That is something that will have to be fixed.”

DealBookPeter Henning of White Collar Watch is fairly unmoved, “[T]he decision in the Free Enterprise Fund case has no real impact on the operations of the Public Company Accounting Oversight Board beyond removing a cloud as to its continued viability. The likelihood one of its members would be removed by the S.E.C. is virtually nonexistent, and its oversight and enforcement powers continue undisturbed. Similarly, the Sarbanes-Oxley Act remains fully in force beyond the narrow constraint on removal of a board member that is no longer operative.”

The EconomistSchumpeter’s Notebook is thankful that the entire law doesn’t have to be rewritten in the current legislative environment, “[I]t is probably a good verdict from business’s point of view. Companies have spent millions on SOX compliance, and had just about got used to the legislation. Moreover, there is no guarantee that a broad reconsideration of SOX, in the current business climate, would produce better legislation. Far from it.”

Ernst & Young – Directly from Jim Turley, “Independent regulation of the profession post-Sarbanes Oxley (SOX) has strengthened audit quality and confidence in financial reporting. We are pleased that the Court’s decision provides that the PCAOB’s independent oversight can continue without interruption. Although today’s ruling found a flaw in a provision within SOX regarding the removal of Board members, the Court held that Sarbanes Oxley remains the law.”

AICPABarry Melancon is as excited as everyone else, “The court’s ruling is a victory for investors and for the accounting profession. The decision effectively fixes the constitutionality of the PCAOB by making board members subject to `at will’ removal by the SEC and therefore the president. It sustains the continued function of both the PCAOB and Sarbanes-Oxley. As such, the court rejected a transparent attempt to undermine the post-Enron reforms that have served our financial markets well.”

Center for Audit Quality – The CAQ filed an amicus brief with court and Executive Director Cindy Fornelli was happy with the result, “The CAQ is pleased that the U.S. Supreme Court’s decision will allow the continued operation of the Public Company Accounting Oversight Board (PCAOB) without any changes or legislative action. This narrow decision clearly severs the PCAOB board member removal process from the rest of the Sarbanes-Oxley Act (SOX) and reaffirms all provisions of the law except for the power to remove the board members. The PCAOB was put in place to achieve the goals Congress embodied in SOX. As we observed in our friend-of-the-court brief, evidence demonstrates that audit quality and investor confidence have improved since the Board’s creation. The decision will prevent any disruption to the key activities of the PCAOB including setting auditing standards and the public company audit oversight process, critical factors in the continued strength and stability of our capital markets.”

Paul Sarbanes and Michael Oxley – The architects, if you will. “The PCAOB provides essential protections to the more than half of American households that invest savings in securities. It ensures the integrity of public company audits and, thereby, the accuracy of financial reporting. The PCAOB enjoys widespread support from investors as well as from the accounting profession. The decision from the Supreme Court adjusts the law in a way that allows the PCAOB to continue to ensure the integrity of public company audits. The Board’s essential protections of American investors will continue.”

The PCAOB Has a Plan B if the Supreme Court Manages to Make a Huge Mistake

“In the event that the PCAOB does not prevail – and the decision requires a legislative change – I would urge Congress to act quickly to fix whatever structural problems the Court identifies.”

~ Interim PCAOB Chairman Dan Goelzer, in testimony today.

Deloitte Manages to Tone Down Its Response to This Year’s PCAOB Inspection Report

The PCAOB has released its 2009 Inspection Report for Deloitte and out of 73 audits inspected, 15 deficiencies were cited in this year’s review.

The Board writes that deficiencies are “failures by the Firm to identify or appropriately address errors in the issuer’s application of GAAP, including, in some cases, erikely to be material to the issuer’s financial statements. In addition, the deficiencies included failures by the Firm to perform, or to perform sufficiently, certain necessary audit procedures.”


Issues cited by the PCAOB in the report included goodwill impairment, deferred tax assets, inventory valuation, a failure to identify a “departure from GAAP,” among others. The Big 4 Blog rightly notes that this is the first time that the PCAOB has provided the sample size of the inspections which allows for some surprising error rates:

The error rate in this situation is quite high, almost one of every five audits has errors. Obviously, Deloitte performs thousands of audit each year and extrapolating from a small sample is quite dangerous, nonetheless, even at half of 20%, the natural conclusion is that one in ten audits has an error, and would have gone unnoticed had not the PCAOB done a good post-audit on the audit.

You could really make a fuss about what auditors did and did not do but the fact remains, audits are never perfect. Some are just more unperfect than others. What’s especially interesting is how Deloitte’s attitude has changed with regards to the PCAOB’s findings as compared to last year.

In last year’s inspection report, the Board cited seven audit deficiencies which resulted in a three page letter from Deloitte that, in no uncertain terms, told the PCAOB to get bent and keep their Monday Morning QBing to themselves. This was about as an aggressive of a response from an accounting firm as we had seen so it was definitely a surprise to see a firm lose their cool.

This year, despite the fact that Deloitte was cited for over twice as many deficiencies, the firm is considerably less defensive (read: boring) and put together a concise one page response to the Board’s findings that included the following:

“We have evaluated the matters identified by the Board’s inspection team for each of the Issuer audits described in Part I of the Draft Report and have taken actions as appropriate in accordance with D&T’s policies and PCAOB standards.”

It’s nice to see the firm playing nice with their regulator this year but we’re curious as to how the change in attitude came about. We hope that at least one of the remaining Big 4 will include a little more color in their response.

PCAOB_2010_Deloitte_Touche_LLP
PCAOB Inspection of Deloitte Audit – 20% Error Rate?? [Big 4 Blog]
Audit Deficiencies at Deloitte [WSJ]

Are Accounting Firms Getting Cheated by the PCAOB?

You may have forgotten, but last year the PCAOB established some new rules that require its members to file annual reports on Forms 2, 3, and 4 with the Board. These annual reports aren’t the glossy paged marketing tools filled with smiling faces that you may be thinking of, nor do they contain an financial information. They mostly consist of information that the PCAOB wants to know in case a firm changes its address, whether your firm hires shady characters, or finds itself in some serious legal trouble (take note Big 4).


Because all this reporting is a pain in the ass for the Board, a modest charge has been established to “recover the costs of processing and reviewing applications and annual reports,” according to a statement released by the PCAOB.

Now before you get all huffy about it, this is allowed by Michael Oxley’s favorite piece of legislation and now that the Board is getting around to requiring firms to submit the annual reports (inaugurals are due June 30), a fee only seemed appropriate and necessary.

Starting this year, registered firms will be charged the following:

Firms with more than 500 issuer audit clients and more than 10,000 personnel – $100,000

Other firms with more than 200 issuer audit clients and more than 1,000 personnel – $25,000

All other firms – $500

PLUS! The minimum registration fee is being increased to $500 because “The Board believes it is appropriate at this time to raise that fee to $500 to align it more closely with the minimum annual fee.”

In the grand scheme of things, the new annual fee and the increased registration fee aren’t really worth getting too worked up over but does make you wonder if accounting firms are getting the most bang for their buck vis-à-vis the PCAOB.

Oh sure, the annual inspections are a hoot and they’ll nail a shiesty accountant here and there but what about the guidance the Board has been issuing lately?

If the best the Board can do is churn out a reminders about bizarro transactions that belittles auditors (but don’t bother giving any examples) and proposals on how auditors should carry on a conversation, some people might start demanding a little more substance out of their watchdog.

PCAOB Release No. 2010-002 [PCAOB]

Three Examples of “Significant Unusual Transactions” that Should Get Auditors’ Attention

The PCAOB issued a friendly reminder yesterday to auditors that sometimes unusual transactions can be cause for alarm and should send the risk red flags flying. Unfortunately, the friendly reminder did not actually mention anything about what “unusual transactions” are but regardless, you better be on the lookout for them.

“The PCAOB’s message to auditors, in this challenging economic environment, has consistently emphasized attention to audit risk and adherence to existing audit requirements,” said Martin F. Baumann, Chief Auditor and Director of Professional Standards.

Since Practice Alert No. 5 (makes it sound kind of hot, don’t it?) warns of the risk of material misstatement inherent to unusual transactions without mentioning what those transactions could be, we came up with three unusual transactions to which the PCAOB could possibly be referring. It isn’t called guidance for nothing, you’re on your own when it comes to determining what qualifies as unusual, little auditors. Hopefully this helps.

• Large and frequent A/P entries to an entity known only as “Candy” (substitute “Bubbles”, “Kitty”, or “Roxy” as appropriate) This is why you have professional judgment so use it, we’re pretty sure even if you haven’t been to a strip club you know what strippers look like on the books and records.

• If you find yourself in a warehouse on December 31st counting an inventory full of dirty bombs, AK-47s, plutonium rods, chances are your entity is engaged in “unusual transactions.” Bonus points for extra unusual if you’re counting that crap and your entity is a church. Red flag, dear auditor, red flag!

• Recurring transactions for “crack” are definitely unusual. You don’t need us to tell you that’s a giant red flag, unless you are auditing under the influence yourself and concerned mostly with where the entity’s CFO hides his stash. Remember also that crack is pretty cheap on the street so repeated transactions will likely fall outside the scope of materiality though a raging crack habit will be material in the aggregate. Adjust scope accordingly.

PCAOB Issues Staff Audit Practice Alert on Auditor Considerations of Significant Unusual Transactions [PCAOB]

The PCAOB Proposes Ideas on How Auditors Can Better Communicate with Other Human Beings

Last week the PCAOB announced that it was getting serious about audit committee communication after it was revealed that Ernst & Young kinda sorta didn’t think the Repo 105 sitch was worth brining up to the Lehman Brothers audit committee. Granted, Dick Fuld is pretty scary dude and has probably eaten plenty of Big 4 partners for breakfast in his day but avoiding the awkward convo this time around almost resulted in everyone fighting over stale hot dog buns in the street.


Oh sure, the PCAOB has been kicking this around for awhile but something needed to happen to get their motors going and it appears that the LEH/E&Y fallout has done the trick. We might be completely wrong on this but it’s becoming increasingly obvious that the PCAOB has lost faith in auditors to do their jobs and will continue to inundate them with rules until they get an “Uncle.”

How about that statement? It’s the typical press release whathaveyou including quotes from the bigshots:

“The proposed standard on audit committee communications is intended to enhance the relevance and effectiveness of the communications between an auditor and audit committee throughout the course of an engagement,” said PCAOB Acting Chairman Daniel L. Goelzer.

“The proposed standard contains appropriate requirements to achieve effective, two-way communication between the auditor and the audit committee, which we believe would improve audit quality,” said Chief Auditor, Martin F. Baumann.

So if we take Goelzer and Baumann at their word, audit committee communication has been pretty ineffective up to this point? That’s good to know.

And here’s the gist of the required communication:

• Communication of an overview of the audit strategy, including a discussion of significant risks, the use of the internal audit function; and the roles, responsibilities, and location of firms participating in the audit;

• Communication regarding critical accounting polices, practices, and estimates;

• Communication regarding the auditor’s evaluation of a company’s ability to continue as a going concern; and,

• Evaluation by the auditor of the adequacy of the two-way communications.

So there’s your checklist people. Sorry to ask but were these items not being discussed previously? One could assume that since these items are on the list, they weren’t always being discussed in practice. Does standard audit committee communication revolve around Gossip Girl? Tiger Woods’ mistresses?

This really appears to be an example of the PCAOB taking away auditors’ “professional judgment” and making them “professional inquisitors.” Further, as Jim Peterson has pointed out, checking off required communication will do nothing to protect auditors from liability in the future, “there is no legal defense or ‘safe harbor’ in American law based on proof of compliance with professional standards – box ticked or otherwise.”

In other words, make all the professional requirements you want, auditors are still going to get sued and claiming “But we checked the box!” will not work as a defense. So the rationale must have been checklists are fun and easy to follow? Sigh. You’ve got until May 27th to get your thoughts in on this thing before it gets rubber stamped. Get on it.

Press Release [PCAOB]

After Constant Lehman/Ernst & Young Press Coverage, the PCAOB Is Ready to Get Serious About Audit Committee Communication

So maybe you heard about Ernst & Young and how they kinda, sorta didn’t bring up the shady accounting going on over at Lehman Brothers to the audit committee until a Matthew Lee, your fired whistleblower du jour, brought it up. Some people have suggested that if E&Y had made a single peep about this prior to, say, 2008, maybe we wouldn’t be having this discussion (okay, we’d probably still be having it).


The controversy over this incommunicado has now jolted the PCAOB into action as the they have announced an open meeting for Monday at 9:30 am sharp. Basically, they want to feel everyone out on a standard for required communication for auditors with the audit committees.

As Emily Chasan of Reuters notes, “The PCAOB has considered issuing rules on this issue for the past several years to formalize ways that auditors are expected to communicate with the audit committee of the company they are auditing,” but in classic reactionary fashion, nothing has been done up to this point. Now that we’ve had bankruptcy reports, recycled stories in the press, E&Y hating back the haters, and everything else in this shitstorm, the PCAOB is ready to talk about this.

So, if you’ve got no plans on Monday morning and happen to be in DC, head over to hear the discussion and throw in your $0.02. In the meantime, we’d love to hear some of your suggestions for mandatory talking points from the serious (e.g. accounting treatment that makes the partner even slightly queasy) to the über-ridiculous (e.g. biggest whore on the audit team).

The PCAOB’s Date at the Supreme Court Has Finally Arrived

Thumbnail image for pcaob.jpgFor those of you that don’t religiously follow the happenings over at the SCOTUS, we’ll remind you that oral arguments are being heard today in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board.
The issue before the court, according to SCOTUS Wiki:

Whether the Sarbanes-Oxley Act is ��������������������ration-of-powers principles – as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President – or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.


An op-ed in today’s Wall St. Journal ignores the “legal hairsplitting” of the case and instead focuses primarily on the cost that companies have taken on implementing Section 404:

In 2003 the SEC estimated that the average company could do much of its internal controls work for $91,000 per year. In 2007, the commission acknowledged costs had gotten out of hand, particularly for smaller companies, and told the PCAOB to make the internal controls audits more cost-effective.
In 2008, the SEC’s Office of Economic Analysis launched a survey of public companies to judge the results, and it recently posted the findings on the SEC Web site, after collecting data from thousands of corporations.
Section 404 is still consuming more than $2.3 million each year in direct compliance costs at the average company. The SEC’s survey shows the long-term burden on small companies is more than seven times that imposed on large firms relative to their assets. Are the internal controls audits helpful? Among companies of all sizes, only 19% say that the benefits of Section 404 outweigh the costs. More respondents say that it has reduced the efficiency of their operations than say it has improved them. More say that Section 404 has negatively affected the timeliness of their financial reporting than say it has enhanced it.

Not surprisingly, The Journal (specifically James Freeman) is pulling for the Plaintiffs in this case without presenting any of the positive contributions of SOx. Ultimately, the nine justices will determine the fate of the PCAOB, which if found unconstitutional, could have wide repercussions on all the auditors out there. We just spent the better part of a decade getting this SOx stuff down, and now it’s possible that it could’ve been a giant waste of time. Makes you feel good, doesn’t it?
For those of you interested in this case further, you can hear the oral presentations via podcast, over at SCOTUS Blog.
We invite our legal friends with perspective on this case to share their insights and predictions on this case. Hell, even if you’re not a legal scholar, share your thoughts. And just for fun, take a stab on what you think the outcome of the case will be by voting in the poll below.


The Supreme Case Against Sarbanes-Oxley [WSJ]

The PCAOB Chairman Is in It for the Money

Thumbnail image for pcaob.jpgHow’s this for awkward: Mary Schapiro makes $162,000 as the big chief at the SEC. The Chairman of the PCAOB makes $672,676 a year and board members get $546,891. And just so you know, B to the H to the O makes $400k.
The Berg says that, “Salaries for PCAOB members exceed the pay for most public officials to make the jobs competitive with the private sector,” which probably explains it but cripes. That’s good scratch for sitting in meetings all day and continually telling auditors how much they suck at their jobs.


The whole subject came up in the article because Schape and Co. are trying to find a permanent chairman to replace interim chair Dan Goelzer and two retiring board members.
The lead horse is Kurt Schact, the managing director of the CFA Institute’s Centre for Financial Market Integrity. Mr. Schact has a JD and BS in chemistry from the University of Wisconsin. Candidates for the two soon-to-be vacated board seats include one CPA, Helen Munter (Deloitte) and two former SEC attorneys, Linda Griggs and John Sturc.
Does anyone see a problem here? Does anyone think for one minute, that the PCAOB will be better off with fewer auditors guiding the ship? There must not be a single qualified auditor in the entire universe that could possibly want to chair the PCAOB. Thankless job to be sure but at least the money is decent.
Anyway, the good news is that arguments for Free Enterprise Fund v. PCAOB will be heard at the SCOTUS next week. Maybe we’ll all get lucky and this appointment crap will become meaningless.
SEC Said to Consider CFA’s Schacht to Lead U.S. Auditor Board [Bloomberg]
See also: CFA Institute’s Schacht May Chair PCAOB [Web CPA]

The PCAOB Might be Caving on Auditor Signatures

Thumbnail image for Thumbnail image for lawn chair.jpgLet’s not jump to the conclusion that the PCAOB will scrap the whole auditor sign-off proposal just yet. They’ve been doing a hell of a job making auditors’ lives difficult lately ly wants to feel like it’s an important part of the bureaucracy. Especially since their lives are potentially at stake.
But the belly-aching on this one by the usual suspects is reaching fever pitch. They are saying enough is enough and that their partners’ names should not be written in blood for all to see.
It shouldn’t surprise anyone that the firms hate this idea since the owners of the firms are being given explicit instructions to put their names — and asses — on the line.


The PCAOB received a grant total of 23 comments on the concept release and all but two were negative. Not surprisingly, the two that weren’t negative came from “investor representatives”.
Francine McKenna gave you the lowdown on the firms responses in her GC post from September 30 and it sounds like it’s working.
Here’s a quote from PCAOB Deputy Chief Auditor Greg Scates:

“The board is going to discuss this and make some decisions in this fourth quarter on what to do and whether to move forward in this area. This is not uncommon in Europe. Partners do sign the report in other countries. In our country, of course, this is not the way we’ve been doing business, so it is a new concept. We’ll see what the board wants to do as they look through the comment letters and make a decision on what to do.”

A whopping 21 negative comments and the PCAOB is getting cold feet? Get better at spreading the word to people that will take your side, PCAOB. Were you just testing the waters with this or did you really want to make auditors accountable?
But maybe the firms got the Board members’ personal side:

Even more disturbing than the potential liability exposure is the specter of individual auditors coming under public attack by disgruntled investors and a “lynch mob” media mentality. “Engagement partners and their families could be subject to unwarranted and unwelcome communications from shareholders who are unhappy with a particular company’s performance in matters that are wholly unrelated to the completeness and accuracy of the financial statements,” Grant Thornton warned.

There are a lot of irrational people out there we’ll give you that, but a media circus outside an auditor’s house? Sort of like a bean counter paparazzi? That could be kind of fun, couldn’t it?
Oh, but what about the websites that would get put up?:

Groveland, Mass.-based CPA Frank Gorrell, for one, warned that identifying engagement partners by name could prompt irate investors to set up Internet sites to “vent their frustrations” by criticizing individual accountants and even publishing their home addresses online.

Sweet Jesus. Apparently accountants want to be invisible. No criticism for me, thankyouvermuch. And venting frustrations? On a website? Who ever heard of such a thing?
AUDIT FIRM REGULATION: No Autographs [Web CPA]
PCAOB May Scrap Auditor Sign-off Proposal [Web CPA]

Auditors, You’re Just Going to Have Start Finding Fraud, Okay?

overwhelmed.jpgBecause that’s your job, right? The PCAOB is giving consideration to new auditing standards that would presume that certain related party transactions would constitute a fraud risk.
This just serves as another example of auditors’ responsibility for discovering fraud reaching a ridiculously unrealistic level.


According to Web CPA, “Although such standards have been in the talking stage at the PCAOB for at least five years, there is fresh interest in this area now because related-party fraud has been a factor in a number of recent corporate financial scandals.”
Classic reactive measures being employed by the Board here. No sense in developing any kind of standard until after something happens. The Board hasn’t really been doing a bang-up job on much of anything but no matter, the effectiveness of a government regulator is not the issue here.
Auditors, you’re being duped. That’s unacceptable and according to some, the procedures you currently perform over related party transactions just won’t do any more:

But some officials at the PCAOB as well as members of the accounting profession have suggested that these standards may not be sufficient. At least part of the problem involves what some have described as widespread related-party transaction fraud slipping under the radar screen of auditors.

As we’ve mentioned in the past, the PCAOB simply is not satisfied with your ability to follow the current rules, auditors. Accordingly, the PCAOB will make more rules for you to follow until they are proven inadequate and then more rules will be written and on and on. You get the idea. It’ll be routine before you know it, if it isn’t already.
PCAOB Mulls New Related-Party Standards [Web CPA]
Also see: Fair Value, Audit Committes, Related Parties Highlights Of Day 2, PCAOB SAG Meeting [FEI Financial Reporting Blog]

PCAOB: We’re Not Saying Perfect Audits, Just Pretty Perfect Audits

Thumbnail image for epic-failure.thumbnail.jpgThe public understanding of what auditors actually do is, to put it mildly, frustrating. If you were ask the average dude on the street what auditors’ responsibilities were, “Find fraud” would probably be the first thing that you would hear.
With all the public outrage against everything remotely related to finance or accounting, politicians feel like they have to do something. This usually amounts to putting pressure on bureaucrats, who in turn make rules to appease said politicians who can then point to accomplishments.


The PCAOB is no exception, and regardless of its potential extinction, has a go-getter attitude that includes potentially making the public’s perception more of a reality.
FEI Financial Reporting Blog:

Although not part of the PCAOB’s formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or ‘foundational’ standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as ‘foundational’ standards.

You probably know where this is going:

In response to questions, Silvers said, “We should not expect that every audit is a forensic audit… that’s absolutely not what I’m saying.” However, he added, “I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud.”
“This was subject to some extensive discussion in the Treasury committee (Treasury’s Advisory Committee on the Auditing Profession or ACAP],” said Silvers, adding, “some people, Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don’t find fraud, it’s the auditors fault; but it’s also not my view that looking for fraud is not related to the audit, that doesn’t parse with the public’s [perception] of the audit profession.”

Our emphasis. So not every audit will be a forensic audit, so, just most of them? That’s a relief.
So not only do you need to get way better at auditing fair value, now the brain trust at the PCAOB is considering putting more auditor flesh on the hook when it comes to finding fraud. So not absolute assurance but it’s getting there.
PCAOB Announces Ambitious Agenda; May Be Time to ‘Dial Up’ on Fraud, Silvers Says [FEI Financial Reporting Blog]