of weighing benefits versus cost, and the right
balance can be a challenge. The accounting
profession, to its credit, has been responsive
to an evolution of the audit approach.”
The PCAOB’s recent push has come on
the heels of a 5-4 Supreme Court ruling that
ended a five-year legal battle challenging the
constitutionality of the board’s make-up. The
protracted imbroglio charged that the meth-
od of appointing members of the account-
ing overseer under the Sarbanes-Oxley Act
of 2002 was unconstitutional, as the mem-
bers were appointed by the Securities and
Exchange Commission, and not directly by
the president. The plaintiffs, led by the Free
Enterprise Fund and Beckstead & Watts, a
Henderson, Nev.-based audit firm that had
received a deficient inspection report, had
lost in two lower court decisions.
The High Court agreed with the plaintiffs
that there were issues with the appointment
of board members, but merely required that
the SEC be able to remove members at will,
and declined a broader injunction against
the continued operation of the PCAOB or
Sarbanes-Oxley.
PCaOb
FROM PAGE ;
busy wiTh sTandards
GOING PUBLIC
Last month, Acting PCAOB Chairman Daniel
Goelzer sent a letter to leaders of the Senate
Banking Committee and the House Financial
Services Committee in an attempt to repeal
the requirement in Sarbanes-Oxley that disciplinary proceedings against auditing firms
remain private and confidential.
Goelzer argued that the secretive process
serves to encourage firms to drag out the proceedings for years and consume unnecessary
staff time, while the investing public is unaware of any audit deficiencies at the firms or
the companies that they have audited. As an
example of that protracted process, he cited
a trio of recent cases that had siphoned some
17,000 hours from the PCAOB staff.
In another example, Goelzer described the
non-public proceedings against one firm,
Gately & Associates, which issued 29 additional audit reports on public company financial statements between the commencement
of the PCAOB’s proceeding and the public
disclosure of the board’s charges, which did
not occur until the SEC affirmed the PCAOB’s
decision to expel Gately from public company auditing. Over two years elapsed between
the filing of the PCAOB’s case and the public disclosure of the sanctions. During that
time, the firm continued to pursue its public
company audit practice while it litigated the
board’s case in private.
Goelzer maintained that the public, such
as investors and audit committees, are de-
Among the PCAOB’s new standards
are:
Auditing Standard 8 (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.
Auditing Standard 9 (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.
Auditing Standard 10 (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.
Auditing Standard 11 (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.
Auditing Standard 12 (AS No.
12) — Identifying and Assessing
Risks of Material Misstatement. This
standard establishes requirements
regarding the process of identifying
and assessing risks of material mis-
statement 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.
nied access to critical information regarding
PCAOB cases. During the course of proceedings, those parties are kept in the dark about
a firm’s alleged misconduct.
Conversely, he said, the SEC makes its enforcement hearings and injunctive actions
public.
STIFFER SANCTIONS, STANDARDS
The PCAOB also unveiled plans to come
down harder — via more sanctions — on
firms and managers that don’t adequately
supervise their staffs.
In a two-part release, the board highlight-
ed a SOX provision authorizing it to levy
sanctions on firms and their supervisory
personnel who fail to reasonably oversee
associates who violate specific laws, rules
and standards. It also discussed possible
rulemaking and standard-setting that would
require audit firms to make and document
clear assignments of the supervision respon-
sibilities that are already required to be part
of any audit practice.
