State Board Report

December 2011

Kicking off Baruch College’s Sixth Annual Auditing Conference, co-sponsored by the NASBA Center for the Public Trust, NASBA President David Costello stated: “Behind the numbers is the trust.” Moderator Douglas Carmichael, Baruch College Professor and former Public Company Accounting Oversight Board (PCAOB) Chief Auditor, reminded the audience that December 2, 2011 would mark the tenth anniversary of the Enron bankruptcy filing, and pointed out how fitting this conference was to have a strong regulatory focus on December 1, 2011.

Panelists discussed Senate bill S.1907 (see “PCAOB Bill Introduced” from this month’s sbr), which would give the PCAOB’s investigative proceedings the same transparency as the SEC’s have. Deloitte Deputy General Counsel Howard A. Smith argued that the right basis for the SEC’s action is not the same as for the PCAOB’s because the PCAOB is “more narrowly focused.” In response, Claudius B. Modesti, PCAOB Director of Enforcement and Investigations, said he regularly tells his staff, “We’re here to be fair and just.” He explained that the enforcement divisions of the PCAOB and of the Securities and Exchange Commission coordinate their activities to avoid duplicating efforts. “We share information and the SEC makes its own decision whether or not to take up a parallel case,” Mr. Modesti stated. “Someone is looking out for the investor – either the SEC or the PCAOB.”

The PCAOB’s proposal to have the engagement partner named in the audit report (see sbr 11/11) was also debated by the panelists. Mr. Smith said this would heighten the risk of liability exposure for the individual, but Alison Conn, Assistant Director of the SEC Enforcement Division, said the Commission would, “Always be digging down to see who is responsible.” She stated, “The fact that someone was not named on a document would not change their responsibility for us.”

There has been an uptick in people changing documents before the PCAOB’s firm inspections, Mr. Modesti said. He questioned why anyone would do something like that when they balance receiving a comment of having violated a PCAOB audit standard against having charges brought against them for changing the document. The Enforcement Division has been taking action against these individuals (see sbr 8/11).

Each year the PCAOB conducts approximately 200 firm inspections, reported Helen A. Munter, Director of the PCAOB Division of Registration and Inspections. The most commonly identified deficiencies found during those inspections are: failure to obtain a sufficient understanding of the flow of transactions and selecting controls to test; need to evaluate whether controls selected for testing operated at the level of precision necessary to prevent or detect the risk of material misstatement; and need to evaluate the effects of known control deficiencies. Professor Carmichael asked why the level of deficiencies continues to occur. Ms. Munter said the PCAOB is drafting a report, trying to identify the root causes. She noted that 40 percent of the firms inspected receive clean inspection reports.

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