Highlights of the 2012 AICPA Conference on Current SEC and PCAOB Developments
By Joseph Quinn, Manager, Assurance Services
This was not the first time accountants have been referred to as gatekeepers, and probably not the last. Former SEC Commissioner, Isaac C. Hunt, Jr., in a speech to the Federation of Schools of Accountancy in October 2001 entitled "Accountants as Gatekeepers – Adding Security and Value to the Financial Reporting System" stressed the challenge facing the SEC and accounting professionals was to maintain high-quality financial reporting and strong capital markets. More than eleven years later, the auditing profession is again reminded that its responsibility as gatekeepers is to perform quality audits to enhance the credibility and reliability of financial statements.
Mr. Aguilar also emphasized the importance of strong internal controls over financial reporting ("ICFR") in producing reliable financial information and thereby promoting capital formation. While it has long been understood that ICFR is vital to reliable financial reporting, Mr. Aguilar added that ICFR also promotes effective auditing.
On the subject of ICFR, Brian T. Croteau, Deputy Chief Accountant, commented on COSO's Framework Update Project noting the intent is to provide more comprehensive and relevant conceptual and practical guidance. He indicated that an updated framework could provide opportunities for management and auditors alike to reconsider areas where the design of internal controls could be improved to better address current and evolving risks to reliable financial reporting.
PCAOB Director of Registration and Inspections, Helen Munter, discussed the problems identified with audits of ICFR. A report that was later issued on December 10, 2012 based on PCAOB inspections of portions of approximately 300 audits describes the most pervasive deficiencies identified in those audits and includes information on the potential root causes of the deficiencies. The report included the results of the 2010 inspections of eight domestic registered firms that have been inspected every year since the PCAOB inspection program began. Mr. Aguilar, in his presentation above, noted that the results of these PCAOB inspections raised "serious issues" about the quality of many audits, and, in his view, "the audit failures revealed by the PCAOB damage investor confidence, discourage investment, and impede the efficient allocation of capital for true capital formation."
Numerous other topics were discussed at the Conference, not the least of which was IFRS. As stated by SEC Acting Chief Accountant, Paul A. Beswick, "The consideration of incorporating IFRS may be the single most important accounting determination for the Commission since the determination to look to the private sector to establish accounting standards in the 1930's." SEC Staff discussed the Final Report for the "Work Plan," issued in July 2012. In their remarks, the SEC Staff emphasized that they were instructed to develop and execute a Work Plan to consider specific areas and factors relevant to a determination as to whether, when and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. It did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically. As discussed in the Final Report, questions remain with respect to a threshold for endorsement, which will require further discussions and analyses before any decision is made. Given the recent resignation of SEC Chairman Mary Schapiro, a decision on IFRS is not expected any time soon.
SEC Staff also reiterated the importance of complete and transparent disclosures from the perspective of an investor. Mr. Beswick noted that the SEC intends to hold a roundtable to conduct dialogue among the SEC's various constituents on the subject of what information should be provided within audited financial statements vs. other parts of the financial reporting packages as a whole.
The PCAOB reminded auditors to maintain professional skepticism when they conduct their audits. In fact, Staff Audit Practice Alert No. 10, "Maintaining and Applying Professional Skepticism in Audits" was issued during the conference. Martin Baumann, PCAOB Chief Auditor discussed the adoption of AS 16, Communications with Audit Committees and then briefly discussed two standard-setting projects - the Auditor's Reporting Model and Going Concern.
Finally, with respect to Audit Firm Rotation, it appears to have little momentum. In response to the numerous obstacles to mandatory audit firm rotation, PCAOB member Jay Hanson stated, "I struggle to see how we would ever do a mandatory rotation standard."
Appendix – Referenced and quoted speeches
SEC Commissioner Luis Aguilar - Speech by SEC Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - Capital Formation from the Investor's Perspective - http://www.sec.gov/news/speech/2012/spch120312laa.htm
Former SEC Commissioner Isaac C. Hunt, Jr. - Speech by SEC Commissioner: 2001 Speech Before the Federation of Schools of Accountancy - Accountants as Gatekeepers – Adding Security and Value to the Financial Reporting System - http://www.sec.gov/news/speech/spch518.htm
Brian T. Croteau, SEC Deputy Chief Accountant - Speech by SEC Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - Audit Policy and Current Auditing and Internal Control Matters - http://www.sec.gov/news/speech/2012/spch120312btc.htm
PCAOB Director of Registration and Inspections, Helen Munter & SEC Acting Chief Accountant, Paul A. Beswick - Remarks by PCAOB Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - http://www.journalofaccountancy.com/News/20126961.htm
Speech by SEC Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - http://www.sec.gov/news/speech/2012/spch120312pab.htm
Martin Baumann, PCAOB Chief Auditor - Speech by PCAOB Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - http://pcaobus.org/News/Speech/Pages/12042012_AICPA.aspx
PCAOB Member Jay Hanson - Remarks by PCAOB Staff: Remarks Before the 2012 AICPA National Conference on Current SEC and PCAOB Developments - http://www.complianceweek.com/auditor-rotation/topic/15113/
Phil Weiner contributed to this article.