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State Board Report

December 2016

The Public Company Accounting Oversight Boards’ inspections have found continuing failure in professional skepticism, Christine Gunia, the PCAOB’s Associate Director of Inspections told Baruch College’s Eleventh Annual Auditing Conference: Ensuring Integrity, held in New York City on November 29 and cosponsored by the NASBA Center for the Public Trust. There usually are contributing causes that inspectors find are collectively associated with the lack of professional skepticism. The PCAOB inspectors work with standards that call for the auditor to have “a critical mind,” which has to be applied throughout the audit and demonstrated in various degrees, Ms. Gunia said. “The PCAOB does not have a secret checklist. Once we identify a deficiency we will analyze data about the firm and we will re-review that information. We think firms are in a better position to figure out why the deficiency occurred.”

EY Partner David Simko and KPMG Director Susan Jones described how their firms are working to build professional skepticism into their training programs. Mr. Simko explained EY has identified their five top audit focus areas, including a “questioning mindset,” which the firm works to strengthen through having enablers work with auditors on questions that should be posed. Ms. Jones said her firm is stressing required documentation: “We believe a lot of our auditors are skeptical, but they have not documented that.” In addition, Ms. Jones reported that the AICPA has its Professional Ethics Executive Committee, Auditing Standards Board and Education Committee working together to develop research on applying professional skepticism A research paper from this tri-party group is expected in early 2017.

“Experience tells us that the PCAOB’s role is essential and our standards and oversight programs are making a real difference on behalf of investors and companies,” PCAOB Chairman James R. Doty stated. He reiterated several of the points he made at the NASBA Annual Meeting in October (see sbr 11/16) including that through its standard setting, inspection and analysis, the PCAOB is maintaining audit quality. He also underscored: “Beginning in the first quarter of 2017, audit firms will report the names of the engagement partner and the other firms involved in the preparation of a company’s audit report.” This will be on the new PCAOB Form AP and can be in the auditor’s report. Chairman Doty announced that the PCAOB had just entered into a cooperative agreement with the Italian audit oversight regulator Commissione Nazionale per Società e la Borsa (CONSOB) for joint inspections. Approximately 900 audit firms currently registered with the PCAOB are located outside the United States, and 14 are located in Italy.

The reorganization of the PCAOB Auditing Standards goes into effect on December 31, 2016, Jennifer A. Rand, PCAOB Deputy Director – Office of the Chief Accountant, reminded the conference. The standards have been reorganized using a topical structure and a single, integrated numbering system. She also noted that the information the PCAOB collects on its new AP form will be available on in a searchable database. This information will include for each SEC registered company: the name of the engagement partner; the name, location and extent of participation of each accounting firm participating in the audit whose work constituted at least 5 percent of the total audit hours; and the number and aggregate extent of participation of all other accounting firms participating in the audit whose individual participation was less than 5 percent of total audit hours.

In the first quarter of 2017, the PCAOB expects to be releasing proposals on “Auditing Accounting Estimates, Including Fair Value Measurements” and “The Auditor’s Use of the Work of Specialists,” Ms. Rand said. She assured the audience that the PCAOB is “trying not to be different just to be different,” and they are meeting with the IAASB to coordinate standards.

Auditing Standards Board (ASB) Chair Mike Santay reported the ASB is nearing exposure of two projects with strong public protection elements: (1) auditor reporting on employee benefit plans and (2) non-registered securities filings. He noted that the IAASB has a new auditor reporting model effective this year and the ASB is considering it. The ASB will try to align with the IAASB standards but might not have all the same provisions.

NASBA Outside Legal Counsel Noel Allen said NASBA is continuing to work to have more State Board involvement in the development of professional standards. The State Boards have an enforcement, interpretation and implementation role in standards, he reminded the professionals, professors and students at the conference.

Michael Young, partner of Wilkie Farr & Gallagher, observed that generally the litigation environment for the CPA profession is “not so bad” this year. While there is enforcement and regulatory action taking place, there has been less overall litigation than in other years.

The NASBA Center for the Public Trust is glad to be partnering with Baruch College of the City University of New York, CPT President Alfonzo Alexander told the audience.

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