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PCAOB
Chair Talks Internal Controls By
Jay Dismukes Speaking at an April 28 luncheon hosted by the Japan Society in Manhattan, McDonough indicated that the PCAOB is sensitive to the increased complexity, workload and associated costs that many auditing firms and publicly traded clients trace to compliance with the standard and Section 404 of the Sarbanes-Oxley Act; and the PCAOB is working to address those concerns. “What we are seeking to do is to make it as clear as we can that the internal controls that are required of an issuer…are a matter of judgment,” McDonough said of the forthcoming guidance, which should more aptly describe how an auditor’s assessment of risk affects the amount of work that must be done to comply with the standard. “In the case of the auditors, we will try to make it as clear as possible to use judgment, to use the work of others as much as you can. At the end of the day, the auditor still has to say, ‘I know enough to be able to say I can attest.’” Section 404 of Sarbanes-Oxley requires public companies to annually provide the investing public with an assessment of the company’s internal control over financial reporting. Standard No. 2 requires the company’s auditor to attest to, and report on, management’s assessment. For accelerated filers, the deadline for compliance with Section 404 was Nov. 15, 2004, while the deadline for nonaccelerated filers—companies with less than $75 million in public equity—is July 15, 2006, extended one year by the Securities and Exchange Commission. Referring to the guidance the PCAOB has issued thus far on the standard, McDonough encouraged auditors to move away from a check-the-box mentality that focuses on minutiae. “Our guidance emphasizes that the focus should be on what is material to the financial statements, and not on the trivial,” he said. Though it is still up to the auditor to provide the principal evidence for its evaluation of the internal controls, McDonough reminded the audience that Standard No. 2 permits auditors “flexibility” to rely on the work of others, including internal auditors, to complete more-detailed tasks. “Another area of concern for us is the misconception that companies may no longer look to their auditors for advice on difficult accounting issues,” McDonough said. “Audit Standard No. 2 does not preclude that kind of advice or discussion. We are working to help auditors understand our views on this matter so that they will have the confidence that we won’t second-guess their reasonable judgments in this area.” On the company side of the internal controls issue and to help keep audit fees at bay, McDonough said the inspection process of registered accounting firms should help, as inspectors will be able to determine whether auditors are implementing new standards appropriately and effectively. He added that auditors also need to find ways to reduce costs while remaining independent. And for smaller, less complex public companies that have felt the sting of Section 404 compliance, as well as for their auditors, the Committee of Sponsoring Organizations of the Treadway Commission will be issuing an internal control framework for companies of that size, said McDonough, who does not think such a report is necessary, but noted that it reflects a perceived need. Quick Notes During his speech, McDonough touched on the provision of tax services by auditors to their audit clients, which he does not feel warrant a complete ban. “I believe the investing public distinguishes aggressive tax-shelter work for corporate clients and senior executives…from traditional tax-compliance work that firms, large and small, have provided public-company clients for decades.” A proposed ethics rule by the PCAOB prohibits accounting firms from marketing or becoming involved in aggressive tax-shelter products, or facilitating transactions that lack insufficient support from U.S. tax laws. It reflects the position that proposed tax services and compensation arrangements should be discussed between the auditor and the audit committee. When asked, McDonough said he has not seen much evidence of many foreign companies that want to delist from the U.S. capital markets because of the increased regulatory atmosphere in this country. For firms that audit Canadian companies that issue securities in the U.S., McDonough said the PCAOB has been conducting joint inspections with Canadian regulators. Similar arrangements are nearing completion with the French and the British, and the PCAOB has held a number of discussions with Japanese regulators on this issue. Approximately 1,500 firms are registered with the PCAOB. Of those, 574 are based outside the U.S., in 77 countries. Nine of them are Japanese firms. |
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