Public Company Accounting Oversight Board (PCAOB) Updates

PCAOB Issues Staff Guidance on Auditing Internal Control in Smaller Public Companies

On October 17, 2007, the PCAOB published for public comment, staff guidance on auditing internal control over financial reporting in smaller public companies. The guidance explains how auditors can apply the Board’s internal control auditing standard, AS5, “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, to audits of smaller, less complex public companies. AS5 was adopted by the board during May, 2007.

This guidance demonstrates how auditors can apply the principles described in the standard and provides examples of approaches to particular auditing issues that might arise in audits of smaller, less complex companies. Topics discussed in the staff guidance include: entity-level controls, risk of management override, segregation of duties and alternative controls, information technology controls, financial reporting competencies, and testing controls with less formal documentation.

IMA senior management issued a letter (Click here for the IMA letter to SEC/PCAOB SOX 404 guidance) during February, 2007 that expressed concerns that proposals issued by the Securities and Exchange Commission and the PCAOB for additional SOX 404 implementation was not practical for small and medium sized companies. It was also expressed in the letter that an auditing standard should not be the leading guidance for such implementation for management accountants.

The preliminary views document entitled, “An Audit of Internal Control That Is Integrated with An Audit of Financial Statements: Guidance for Auditors of Smaller Public Companies”, is available for public comment until December 17, 2007. See a copy of a press release about issuance of the Preliminary Staff Views Document below under IMA Comment Letters and Related Documents (a copy of the press release can be found at www.pcaobus.org under news and events. The link is entitled “PCAOB Issues Staff Guidance On Auditing Internal Control in Smaller Public Companies”).

SEC Approval of PCAOB’s AS5 Standard
On July 25, 2007, the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting That is Integrated with An Audit of Financial Statements, was approved by the Securities and Exchange Commission (SEC). It replaces the PCAOB’s previous internal control auditing standard, AS2. Registered audit firms will be required to use the new standard for all audits of internal control no later than the fiscal years ending on or after November 15, 2007. Senior management of IMA has expressed concerns to the SEC and PCAOB about AS5 being the “de facto” guidance for management accountants to be in compliance with Section 404 of the Sarbanes-Oxley Act. IMA will continue to be an advocate for providing guidance that is considered scalable for small businesses. See a copy of the AS5 below under IMA Comment Letters and Related Documents

The Securities and Exchange Commission (SEC) conducted an open commission meeting on May 23, 2007, to propose issuance of final interpretative guidance for management to provide its assessment and report on internal control over financial reporting under Sarbanes-Oxley (SOX) 404. A unanimous vote was made by the Commissioners to issue the guidance. As indicated in an open meeting on April 4, 2007, the final guidance was revised from the initial proposal to be in alignment with the Public Company Oversight Board’s (PCAOB) revised AS2 standard. The related final rulemaking includes removing the second audit opinion on management’s assessment, and retaining just one audit opinion under 404 directly on internal control. Further a rule will state that management assessment conducted in accordance with SEC’s interpretative guidance will satisfy the SEC’s rule that required management report under SOX 404. Additionally, a new rule will include the definition of material weakness directly in SEC rules rather than by reference to auditing literature. SEC staff indicated that their definition of material weakness is in line with the PCAOB’s proposed final guidance. SEC’s final guidance on SOX 404 implementation is expected to be released shortly within a few days. See a copy of the press release announcing issuance of SEC’s final guidance below under IMA Comment Letters and Related Documents. A unanimous vote was made among PCAOB members during an open meeting on May 24 to submit the final revised standard to the SEC for approval. See a copy of the final standard issued by PCAOB under IMA Comment Letters and Related Documents. Click here to read more and view a copy of the press release.

SEC SOX 404 Open Meeting
The Securities and Exchange Commission (SEC) had an open commission meeting on April 4, 2007. The Commission’s proposal for additional guidance for Sarbanes-Oxley 404 was discussed during the course of the meeting. Click here to read more and view a copy of IMA's press release.

PCAOB Dec. 19 meeting – Revised Auditing Standard – Internal Controls over Financial Reporting
The Public Company Accounting Oversight Board (PCAOB) conducted an open commission meeting on December 19, 2006. During the meeting, a proposal was presented from the PCAOB’s Office of the Chief Auditor to issue an exposure draft for a revised version of AS2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements”. Based on details shared during the meeting, it appears in general that the revised standard will complement The Securities and Exchange Commission’s (SEC’s) anticipated interpretive management guidance that was approved for release during their open meeting on December 13, 2006. Specifically, auditors will be encouraged to conduct audits of internal control over financial reporting in conjunction with audits of financial statements using a “top – down, risked based approach”, which appears consistent with IMA’s research and public positions over the past 18 months of how such audits should be conducted. The revised standard will also provide guidance to smaller companies that will allow for them to conduct audits where there is more of a direct correlation between company size and scope of the audit. Such a correlation will allow for a reduction of costs without compromising the value of performing audits of internal control over financial reporting. The revised standard will also provide more clarity on guidelines that auditors should use when relying on the work of others where their judgment on such reliance should be based on competency and objectivity.

The comment period for the exposure draft ends on February 26, 2007. See a copy of the exposure draft that includes the revised standard and related proposals below under related documents. A copy of IMA’s comment letter submitted to the Securities and Exchange Commission (SEC) and the PCAOB can be found under related documents under Professional Advocacy/SEC.

PCAOB June 21 meeting – Forum on Auditing in Small Business
Kayla Gillan, PCAOB member, gave a speech at the PCAOB Forum on Auditing in Small Business June 21, 2006. In addition to reviewing the PCAOB agenda (nothing new other than mentioning the need for PCAOB to address risk assessment) she also commented on the FASB FV and FASB Pensions/OPEB projects - excerpts copied below:

Fair Value & Estimates
In my opinion, the only thing certain about the use of fair value measurement and estimates is that the disclosed values will be 100% wrong, probably 100% of the time. That is not necessarily a bad thing. The devil, as they say, is in the details. To me, the two most critical details concern, first, the ability of the auditor to evaluate and reach an opinion on the fairness of the value and related disclosures, and second, the transparency of both the company's and the auditor's processes around the fair value so that investors can effectively assess risk and reliability. I am very concerned that neither of these details has been given sufficient attention to date, and that they must be before FASB's much discussed rules become effective. See the Advocacy section of the IMA website under FASB updates to read more information about the FASB's Fair Value Measurements Project.

Enhanced Disclosure of Pension and Other Post-Employment Benefit Liability
And finally, if new FASB rules go into effect as anticipated, most companies will be required to put the funded status of their pension plans and other post-retirement employee benefits (OPEB) on their balance sheets by the end of this year. According to a June 1, 2006, Moody's report, companies such as Goodyear, Lucent, GM and Ford would see their shareholders' equity more than wiped out. A recent study by Watson Wyatt indicates that the aggregated shareholders' equity in the Fortune 1000 would fall by 10%, with even greater changes in some industries (such as manufacturing). Clearly, with this much at stake, there will be great pressure within some companies to manipulate the numbers. See the Advocacy section of the IMA website under FASB updates to read more information about the FASB's Postretirement Benefits Project.

IMA Comment Letters and Related Documents

AS 5

Revised AS 2 and Related Proposals