Auditing Standards Environment in Flux

Auditing Standards Environment in Flux

By George I. Victor

There was a time when an auditor needed to look to only one source as an authority for guidance on professional standards for audit engagements. That authority was the Auditing Standards Board (ASB) of the American Institute of CPAs (AICPA). After passage of the Sarbanes-Oxley Act of 2002, however, that changed significantly.

One of the provisions of the act was to establish the Public Company Accounting Oversight Board (PCAOB), whose primary function is to oversee the accounting profession and set audit standards for audits of public companies. Prior to the act and the formation of the PCAOB, the accounting profession enjoyed a tradition of self-regulation, with the AICPA functioning as the general oversight body for the profession. In this capacity, the AICPA established professional standards for audits, ethics and independence, as well as a peer review function. Following the corporate accounting scandals and the accounting profession’s failure to detect and report them, the AICPA lost that power for audit and review engagements of public companies.

In December of last year, the PCAOB approved Auditing Standard No. 1, “Reference in Auditor’s Report to the Standards of the PCAOB,” which requires accounting firms registered with the PCAOB to state in their audit report on financial statements of issuers (public companies) that the audit was conducted in accordance with the standards of the PCAOB.

Although the reference to the PCAOB in audit reports on issuers was anticipated, accompanying this anticipation was the concern of having a dual set of audit standards, also known as “Big GAAS/Little GAAS.” The dual standards would result from having one set of audit standards for audits of public companies and another set of standards for audits of private companies.

In June of this year, the PCAOB issued a staff Q&A titled “Audits of Financial Statements of Non-Issuers Performed Pursuant to the Standards of the PCAOB.” In this Q&A, it is clear that a public accounting firm that is not registered with the PCAOB can perform an audit of a non-public company in accordance with PCAOB standards. This was permitted, according to the Q&A, in order to cover audits of financial statements of non-issuers in situations where the auditor may be legally required, or may agree voluntarily, to perform an audit in accordance with PCAOB standards.

As a result of these dual standards, there could be potential confusion among auditors of private companies and questions as to whether audit reports on private companies should refer to the PCAOB.

The AICPA recently issued Auditing Interpretation No. 17 of SAS No. 58 titled “Reference to the PCAOB Standards in an Audit Report of a Non-Issuer.” In this interpretation, the AICPA provides guidance on the appropriate referencing of the PCAOB’s standards in audit reports for auditors who choose to follow the PCAOB standards when auditing financial statements of non-public companies.

The AICPA communicated this recent interpretation in a letter to members of the Center for Public Company Audit Firms in an effort to inform its membership. This letter clarifies that an audit of a non-issuer must be performed in accordance with GAAS and provides guidance on how the auditor should report if engaged to perform an audit of a non-issuer in accordance with both ASB and PCAOB auditing standards.

To learn more about today’s evolving auditing environment, consider attending the “Current Developments Under the Sarbanes-Oxley Act Conference,” sponsored by the Foundation for Accounting Education. To be held on Tuesday, Sept. 14, the conference will feature panel discussions and an impressive lineup of speakers from the Securities and Exchange Commission and the PCAOB.

George I. Victor is the director of quality control at Reminick, Aarons & Company, LLP, in Manhattan. He is the chairman of the Society’s SEC Practice Committee and a member of its Auditing Standards & Procedures Committee.