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State Board Report

January 2016

Technology is offering ways to improve audit quality, whether it is through risk assessment or carrying out audit procedures with massive data, Roger O’Donnell, KPMG senior audit partner told the 10th Annual Auditing Conference sponsored by the NASBA Center for the Public Trust and Baruch College of the City University of New York on December 3. "Our customers have the drive to do more and innovate more — and we need to do the same," he said. "If you look at the software that is out there, it is remarkable how precise you can become." Addressing the students in the audience, he said: "The way we will audit will be very similar, but the information that will be available will be better."

Jim Burton, Grant Thornton Partner-in-Charge of the Audit Methodology and Standards Group, explained: "We relied on physical samples. Now you can look at all the transactions." Panelists agreed that they are analyzing two populations, lower risk and higher risk populations, and auditors will have to determine the needed testing for each. Mary Grace Davenport, PWC partner, observed, auditing standards talk about the whole population, not different populations. "This is a game changer: It will change how we pursue our day-to-day activities," Ms. Davenport noted. "It is a tremendously exciting time for joining this profession." Clients have invested in data analytics and she maintains the audit profession can’t be different from the rest of the players in the capital markets.

Looking back at the accounting profession over recent years, retired Wall Street Journal reporter Floyd Norris said he believes the reforms passed after the Enron scandal have worked. "The PCAOB inspections have made auditors realize there is a second set of eyes looking at their audits," Mr. Norris observed. He supports the recommendation to require the lead engagement partner’s name be published with the audit report. "Routine naming would provide incentive for a partner to stand up to a client," he explained. Investors could then immediately see who was the audit partner when an audit failed to show a company was in trouble, and could ask for the partner who did not find the problem to be replaced. "Audit reports are never worth reading," Mr. Norris commented and questioned why they don’t say more.

PCAOB exposure drafts on the auditor’s reporting model and on the supervision of other auditors should be expected in the first half of 2016, PCAOB Chief Auditor and Director of Professional Standards Martin Baumann reported. More research is being done on the auditor’s responsibility for reviewing other information, so it will not be part of the 2016 exposure draft but the study will continue, he said. The PCAOB has added six full-time economists to its staff as it continues to evaluate the costs and benefits of adding critical audit matters to the auditor’s reporting model. He reported the emerging issues identified by the PCAOB’s Standing Advisory Group were: whistleblower activity, economic developments, uses of data/data auditing; non-GAAP measures; the impact of the FASB’s materiality proposal; revenue recognition; and cyber security.

Defining an "annual report" is not easy, Mike Sanjay, incoming chair of the Auditing Standards Board stated. He pointed out that investors feel if there is a disclaimer there must be an issue, and the ASB is considering that. They are trying to converge their work with the work of both the PCAOB and the IAASB. Currently the ASB’s reporting project is focused on standards or guidance to enhance auditor reporting for benefit plans.

"The litigation environment for the accounting profession now is the best I have seen it in more than 30 years," proclaimed Michael Young, litigation partner at Wilkie Farr & Gallagher. He believes this is in part because audit documentation has gotten better, increasing sophistication of the judicial system to financial information, and the timing of the last financial crisis was after the audit reports had come out. However he warned that the SEC has been talking about going after "gatekeepers," including accountants and audit committees. Mr. Young also warned that the plaintiff’s bar is paying attention to e-mails and voice mails; consequently, if something is mentioned by staff in e-mail or recorded in voice mail, there should be follow through and the action reported in the work papers.

The role of the State Boards in enforcement was underscored by Noel Allen, NASBA legal counsel. He reminded all that if CPAs are under investigation, they are required to report that to their State Board of Accountancy. In some states, failure to so report in a renewal form can subject the CPA to perjury charges.

The 11th Annual Auditing Conference is scheduled for December 1, 2016 at Baruch College.

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