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State Board Report

November 2013

Describing the addition of critical audit matters (CAM) to the auditor’s report as “a drastic change to a very standard report that has been unchanged for about 70 years,” Public Company Accounting Oversight Board Member Jeanette M. Franzel, CPA, called the Annual Meeting audience’s attention to the provisions of the PCAOB’s August 13, 2013 exposure draft. The proposed reporting standard is intended to increase the informational value of the auditor’s report to promote the usefulness of the audit. The comment period will end on December 11, 2013 and the proposal is being reviewed by the NASBA Regulatory Response Committee. The CAM would be those matters that pose the most difficult, subjective or complex auditor judgments and would be documented in the material given to the audit committee. Results of informal field testing of the proposed audit standard are being accepted until the end of the comment period; consequently, Ms. Franzel believes this issue will be re-opened by the PCAOB.

The PCAOB’s Concept Release on Auditor Independence and Audit Firm Rotation, released in August 2011, did not find sufficient justification for a blanket audit firm rotation requirement, Ms. Franzel reported, so that requirement was dropped. However, it remains the responsibility of the audit committee to consider when audit firm rotation is appropriate, Ms. Franzel reported.

Each State Board receives correspondence from the PCAOB when it discovers violations of professional standards by registered public accounting firms or their associated persons. Common types of PCAOB investigations include: independence violations, failure to cooperate with an inspection or investigation and violations of professional standards either through audit failures or failure of the firm’s quality control procedure to operate effectively. As of the Annual Meeting, the PCAOB had settled or completed adjudication of over 40 disciplinary orders, Ms. Franzel stated.

Audit quality is one of the PCAOB’s big projects, she noted when she told the State Board members: “We all have mutual goals to maintain a trusted, valuable CPA profession. It points to the need to work across the organizations for a strong profession.”

Comparing the results of the PCAOB’s firm inspections in 2007 and in 2010, Ms. Franzel pointed out that significant audit performance deficiencies were found in 61 percent of the domestic small firms in 2007, but that went down to 44 percent in 2010. For the Big Four Firms, the percentage of firms inspected and found to have Part I deficiencies went from 36 percent in 2011 to 37 percent in 2012. “The approach is to remediate,” Ms. Franzel commented. “It does not take many large-scale risky failures for the markets to react.”

The PCAOB’s near-term priorities include:

  • Improving the timeliness, content and readability of inspection reports:
  • Improving the timeliness of remediation determinations and providing additional information about the PCAOB’s remediation process;
  • Initiating a project to identify audit quality measures, tracking such measures , and reporting collective measures over time;
  • Enhancing the PCAOB’s outreach to and interaction with audit committees.

NASBA Enforcement Resource Committee Chair Harry O. Parsons (NV) asked Ms. Franzel: “As a regulator, you talk about serious audit deficiencies and fraud. If we found that in smaller firms, the State Boards would discipline them. Is there some way we can connect more?”

Ms. Franzel responded: “I share the same concern.” She explained that the PCAOB sends the State Boards notification of its enforcement actions, but the timing and extent of information sent depends on whether or not the state has signed a confidentiality agreement with the PCAOB. Some states only want to deal with a case once the findings become public. “If a State Board doesn’t take on our case, the CPA can go on and audit private companies. I would encourage the Boards to take them on, don’t just bar them from SEC practice,” she stated.

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