“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.
Category: PCAOB
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.”
DealBook – Peter 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 Economist – Schumpeter’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.”
AICPA – Barry 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, er ikely 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.
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
For 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 PCAOB Chairman Is in It for the Money
How’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
Let’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?
Because 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]