Posts Tagged ‘PCAOB’

Potty Mouth Carl Levin (Senator and Chair of Senate Permanent Subcommittee on Investigations), famous for his “sh*tty deal” comments to Goldman Sachs executives, has sent a letter (Jan. 3, 2012) to the PCAOB in support of a proposal to require that the lead partner’s name be disclosed (with signature) within the audit opinion attached to annual corporate annual financial statements and listed in an audit firm’s annual report to the PCAOB.

Levin prefaces his support with the following statement,

Poor quality audits of public corporations continue to plague the U.S. investment community, allowing misleading accounting, outright frauds, and substantial losses to occur … These prominent audit failures indicate that more needs to be done to encourage accurate and effective audits of public corporations and increase accountability for poor auditing practices.

Well said, Senator Levin.  It is not only bloggers that note the poor quality of large audit firm audits of large publicly traded corporations, it is also key members of governmental oversight.  The only people who don’t agree are the leaders and partners of the large audit firms that provide the poor quality audits.  They state that audit quality is fine, and nothing should be done that could negatively affect it (such as naming the lead audit partner or mandating auditor rotation).

Levin notes five reasons for supporting that the lead auditor’s name be disclosed:

  1. It would increase audit quality.  Lead auditors would now perceive that they are more accountable for their work, and would strive to avoid generating poor audit opinions.
  2. It would strengthen audit transparency by shedding light on the audit process and key communicators.  It would make it possible for the public to evaluate senior audit officials.
  3. It would strengthen partner and audit firm accountability for audit failures.  This would signal regulatory intent that both firm and partner are to be held accountable.
  4. It would increase auditor independence by making it possible to identify when changes in key personnel are made.
  5. Key corporate officers now must sign public reports and disclosures.  This proposal would increase auditor accountability so that it would be in line with other financial professionals.

Senator Levin, I think you have done an excellent job in reasoning through a controversial issue.

Thanks to Caleb Newquist of Going Concern for the tip.

Debit and credit –  – David Albrecht

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Sarah N. Lynch has a nicely written article up today at Reuters Canadian.  It’s nice to see her by-line again.  She has always written competently about accounting.

PCAOB Chair James Doty

In “SEC to Put U.S. Audit Watchdog Under Microscope,” January 12, 2012, Lynch reports that PCAOB chair James Doty will be presenting the PCAOB budget request of $227 million before the SEC in an opening meeting tomorrow.

She reports that this is the first open meeting on a PCAOB budget since 2008.  She then goes on to identify several related issues before leaving the reader to conclude that this budget review shouldn’t be a big deal.

First, she reports on the context of the budget review.  At this time the PCAOB is working on several high profile and controversial issues:  auditor rotation, audit partner name on auditor opinion, inspection of U.S. firms, and attempted inspection of foreign firms.  Questions on any of these issues might be asked of Doty.  In addition, salaries at the PCAOB are high for government work, with Doty making four times what boss Mary Schapiro receives.

Then, she reports that Doty commands “respect from both sides of the aisle,” and should represent well both himself and the PCAOB.

Then, she reports that the SEC publicly reviewed the PCAOB budget last in 2008, when Republican Commissioners  Cynthia Glassman and Paul Atkin were critical of the Board.  The current hearing has been called at the request of new Republican Commissioner Dan Gallagher.

Due to scheduling issues, I will not be able to watch the meeting.  It should be interesting to see if political interests will use any SEC commissioners to bring pressure on the PCAOB as it considers its controversial issues.

Debit and credit – – David Albrecht

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On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation.  Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”

With two weeks left in the comment period, the only audit firm to submit a comment letter is Ernst & Young.  Expect KPMG, PWC, Deloitte, McGladrey, Grant Thornton and BDO to submit their comments soon.   I’m certain that each letter will be similar in message to that of Ernst & Young.,

Ernst & Young submitted its letter on November 18, about four weeks before the December 14, 2011, deadline.  In general E&Y’s message is that auditors are sufficiently skeptical of management’s assertions that in general, financial reporting is a benefit to investors.  Because the system works at the current time, no changes are needed.  In any case, E&Y does not like the idea of mandatory rotation.

Mandatory audit firm rotation, in our view, is not a necessary or constructive means to promote
auditor skepticism. There is no evidence that we are aware of suggesting that mandatory firm rotation will improve audit quality. Moreover, there are many identifiable and known downsides to such a policy with little to no certain benefit. A mandatory audit firm rotation model would not only give rise to substantial costs and disruptions, but also would, we believe, impair audit quality, undermine sound corporate governance, and detract from the ability to maintain a robust accounting profession —all to the ultimate disadvantage of the interests of investors. We believe the mandatory retendering approach suffers from the same or even greater disadvantages.

There are five reasons why E&Y “… believe[s] mandatory firm rotation would harm corporate governance and investor interests and the ability to maintain a robust, highly skilled independent accounting profession performing high-quality audits.”

  1. Negative effect on shareholders, corporate governance and audit committees.”  E&Y says this would result from meddling with the duties of the audit committee.
  2. Negative effect on auditor’s knowledge of the company being audited and the effectiveness of audits.”  E&Y argues that long auditor tenures are beneficial, not detrimental.
  3. Negative effect on public companies and the interests of their shareholders.”  E&Y argues that a new auditor’s efforts would be inefficient (and therefore more costly) and less effective (thereby increasing audit failure risk).
  4. Negative effect on the audit profession.” E&Y says that there would be increased costs to auditor and audit team relocation once a five-year engagement ends.  In addition, the firm’s focus would shift away from delivering quality audits to a focus on marketing.
  5. Effect on audit fees.” E&Y thinks audit fees are bound to increase.  Since it foresees no advantages to auditor rotation, it is a negative NPV proposition.

There you have it. E&Y didn’t say anything controversial.

I can’t wait to read what the other firms have to say.

Debit and credit – – David Albrecht

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On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation.  This comment period ends on Wednesday, August 14, 2011, at 5 p.m. ET.

Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”  There are links to a copy of the concept release, comments by each of the five board members, and comment letters received so far.

At the current time, 72 comments have been received.  Two were withdrawn, and one deals with a different concept release.  Consequently, there are 69 comments on the issue at hand.

After reading all 69 comment letters, not only do I have an intense desire to relieve the pain by hitting myself with a hammer several times in the head, but I can comment on general trends.

By my count, 47 comments (68%) oppose mandatory audit firm rotation and argue for maintaining the status quo, 12 favor mandatory auditor rotation (17%), eight (12%) suggest alternative changes, and two (3%) only raise questions instead of taking a position.  Alternatives include letting shareholders vote annually on which audit firm to hire, and having an independent agency assign new auditors.

Because the board assumes that each comment letter is a vote, retaining the status quo currently is winning the election with 68% of the vote.  I disagree with the PCAOB’s interpretation of the comment letters.  Taken as a whole, the entire collection of comment letters provide ideas and reasons for one alternative versus an idea.  Many might identify and agree with views expressed already, and therefore might not be inclined to submit a comment that is redundant to the larger argument.

Based on my analysis of the submitted comments, it appears that investors favor mandatory rotation.  On the other hand, corporations and auditors oppose rotation.

Although only one audit firm (Ernst & Young) has tendered an opinion, several retired audit partners were represented (individually or as part of a corporate audit committee) in opposing rotation.

Time to comment is growing short.  To have your voice heard, send your comment letter to:

Written comments should be sent to the Office of the Secretary, PCAOB, 1666 K Street, N.W., Washington, D.C.  20006-2803.

Comments also may be submitted by e-mail to comments@pcaobus.org or through the Board’s Web site at www.pcaobus.org.

All comments should refer to PCAOB Rulemaking Docket Matter No. 37 in the subject or reference line.

Debit and credit – – David Albrecht

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Miscellany — interesting items that caught my eye during the week.

Jonathan Weil shows why he is one of the premier journalists writing about accounting in, “Goldman Sachs Envy Gains New Meaning at Big Four.”  Weil shows several examples of the revolving door between the large accounting firms and their regulators on the PCAOB.  There are stinky conflicts of interest.

Adam Jones, accountancy correspondent for the Financial Times, writes about new KPMG International chairman Michael Andrew in “KPMG vows to remain a multi-disciplinary firm.”  In this interview, Andrew ridicules all non-Big 4 accounting firms,

He also lashed out at a Commission proposal to force the Big Four to share some audits with smaller rivals. “Can you imagine a second-tier firm auditing a global bank at a time when there is already a lack of confidence in the marketplace?”

He added: “They simply don’t have the skills or the market expertise.”

He also accused some smaller rivals of being “quite lazy” about investing in their businesses.

Mr. Andrew is a jerk.  But Steve Martin was funnier at it.

Jones has another story on the issue, “Auditing has moved into the realms of sitcom.”  It’s worth a read.

Stephanie Sammons, of Social Media Examiner, writes about, “5 Simple Steps for Improving Your LinkedIn Visibility.”  Read it.  Do it.

Tom Selling is terrific when he writes about IFRS adoption issues, as he does in, “Will the SEC Sneak IFRS in Through the Back Door?”  Selling is sounding more pessimistic about how the nefarious SEC might sneak in IFRS, despite all reason and common sense (as well as almost every accountant and investor) being against it.

I have little faith.  The commissioners of the SEC are political appointees, and Mary Schapiro has been a willing accomplice to Obama administration policy.  She has her marching orders to install IFRS, and she is loyal to the hand that feeds her.

Mark Schaefer of {Grow} has another post out on Klout, “Kould Kare Less.”

His Klout score is high, but he doesn’t care.  Mine isn’t, and I don’t care either.  Yet, many do.

Debit and credit – – David Albrecht

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On October 11, 2011, the PCAOB unanimously approved a proposal for changes to certain disclosures in the audit report.  The proposal is identified as PCAOB Release No. 2011-007, “Improving the Transparency of Audits:  Proposed Amendments to PCAOB Auditing Standards and Form 2.”

The proposed amendments are summarized in Release 2011-007 as:

The Public Company Accounting Oversight Board (“PCAOB” or “Board”) is soliciting public comment on amendments to its standards that would improve the transparency of public company audits. The proposed amendments would:

  1. require registered public accounting firms to disclose the name of the engagement partner in the audit report, 
  2. amend the Board’s Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and 
  3. require disclosure in the audit report of other independent public accounting firms and other persons that took part in the audit.

This proposal would not require the engagement partner to separately sign the audit opinion.  It merely would require that the partner’s name be disclosed on the opinion.

Is this proposal a big deal?  No.  I tend to agree with Jim Peterson, “The PCAOB Wants to Name Audit Engagement Partners: Would Its “Red A” Really Matter? when he says that this is not a substantive matter.  This additional piece of information will not cause the scales to fall away from the eyes of investors.

However, it does signal the possibility a small defeat for the entrenched large audit firms.  Large audit firms are not accustomed to losing any battles, however inconsequential.  And how long has this battle lasted?  The underlying concept release (“Concept Release on Requiring the Engagement Partner to Sign the Audit Report,” PCAOB Release No. 2009-005) was approved on July 28, 2009.  Approval of this proposal won’t take place until early 2012, if at all.

The PCAOB has had three years on this and this is all it came up with?

Debit and credit — David Albrecht

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Today the PCAOB is hosting a roundtable discussion on the form of the auditor opinion.  32 experts and a full eight hour day.  I will not be live blogging it.

The use of social media is crucial to any professional.  It is important as a source of news.  It is an important form and style of communication.  It is also a means of branding for those with something to say.  If you don’t have something to say, shame on you.  See yesterday’s post for examples some whose use social media turned them into thought leaders.

Update to the SEC document destruction story.  Last week, Broc Romanek (theCorporateCousel.net) reported that the SEC is suspending its policy of shredding MUIs (matters under investigation).  Yesterday, Jessica Holzer of the Wall Street Journal reports, “SEC’s Khuzami: Current Probes Not Hurt by Records Destruction.” I’ve written before that this is a non-issue.

Mark Schaefer is a marketing professor who has a terrific blog on social media marketing.  I subscribe to {grow}, and highly recommend you do so also.  I know of no blogger who writes as much daily and valuable content as does he.  Today’s guest post, “The Death of Internet Marketing and the Rise of Social SEO,” touches on my recurring theme–social media use is more than a marketing ploy or a mindset, it is a transformative and transcendent experience.

If you hope someday to become a blogger, you should read taxgirl by Kelly Phillips Erb, a Philadelphia lawyer.  I would emulate her if I could, but I don’t think accountingboy would have the same ring.  Her post today on the tax treatment of employer provided cell phones is an enjoyable read.  Are there any employers out there who want to provide me with a smart phone?

Debit and credit – – David Albrecht

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Is the PCAOB charging at windmills?

In 1605, Miguel de Cervantes Saavedra published part one of The Ingenious Gentleman Don Quixote of La Mancha.  In 1615, he published part two.  In various ages, the novel’s theme has been thought to be a comedy, a philosophical defense of the individual in a crazy world, and a social commentary.

The novel’s protagonist is a retired country gentleman who became obsessed with the ideal of a knight as one who does good by righting wrongs.   The gentleman renamed himself Don Quixote, donned an old suit of armor, and set off seeking knightly adventure while guided by the principles of honor, generosity and courtesy.  Don Quixote regularly deceived himself, deluded into interjecting himself as a solution to imaginary problems.  He fared poorly, because the people and things of the world correctly viewed him as irrelevant.  They ridiculed and beat him.  His typical retreat is brilliantly portrayed in one scene when Don Quixote gets bested by a windmill.

Four hundred years later, the PCAOB is embarking on a Quixotic quest to improve the state of auditing in the United States.  I’m sure the PCAOB would describe its quest as knightly.  However, when you charge at a windmill, your quest is Quixotic.  As surely as Don Quixote got beat by a windmill, the PCAOB is about to get beat down by auditor rotation.


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Charles D. Niemeier, a member of the PCAOB until a few months ago, has taken a position as partner with Williams & Connolly LLP.  He will practice in the areas of securities, accounting and financial services.   Niemeier was at Williams & Connolly prior to joining the SEC in 2000.

Niemeier is widely respected and admired.  I have fond memories of lunching with him in San Francisco, last summer.

Many might recall the stir made by Niemeier’s speech to the NYSSCPA in September, 2008.  In this speech, Niemeier mounted a spirited defense of U.S. GAAP, and argued against the U.S. moving to IFRS.  Although this position is popular among rank and file accountants in the U.S., as well as many accounting professors, it is squarely against U.S. government policy.  I admire him for having the courage to stand up.

Here is the announcement from Williams & Connolly LLP:

Williams & Connolly is pleased to announce the return of Charles D. Niemeier as a partner practicing in the securities, accounting and financial services areas.

From 2000 to 2002, Mr. Niemeier served as Co-Chair of the Financial Fraud Task Force of the Securities and Exchange Commission and concurrently as the Chief Accountant for the Division of Enforcement. In 2003, he became a member of the Board of the Public Company Accounting Oversight Board, serving as Acting Chairman for the initial six months, and continued to serve on the Board until 2011. He is a graduate of Georgetown Law School and a Certified Public Accountant.

“We are thrilled to welcome Charles back into the Williams & Connolly family,” said senior partner and Executive Committee member Robert B. Barnett. “His extensive government experience in the financial and accounting realms will be an immediate asset to the firm’s clients and to our future clients. We welcome him home.”

Charley, I’m sure I speak for countless accountants and investors as I wish you well in your new endeavor.

Debit and credit – – David Albrecht

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Daniel L. Goelzer

Daniel L. Goelzer has been a member of the Public Company Accounting Oversight Board (PCAOB) since its inception in 2002.  His term is expiring in October, 2011, and the SEC is initiating a process that will eventually result in his replacement.

In a letter sent to key regulators and other officials, SEC Chairman Mary Schapiro said:

According to the [Sarbanes-Oxley Act of 2002], two members of the Board must be or have been a CPA.  One of the members that the Commission recently appointed is a CPA.  The term of the other CPA member expires in October, 2011 …

The Act requires that the Board members be “appointed from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities for and nature of the financial disclosures required of issuers under the securities laws and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures.”

In addition to the requirements of the Act, we consider other desirable experience and related criteria of candidates, including experience that demonstrates a strong understanding of the role of auditors in the Commission’s financial reporting and disclosure system, the ability to be a fair regulator from the viewpoint of all participants in the financial markets, a demonstrated record of independence and the ability to make unpopular decisions when necessary, and the ability and willingness to serve the full term to which appointed.

Names and qualifications should be submitted for consideration by June 17 via email to: Board-recommendations@sec.gov or via mail to: U.S. Securities and Exchange Commission, Office of the Chief Accountant, 100 F Street, NE, Washington, DC 20549, Attn: PCAOB Suggestions.

The official announcement is posted here.  The SEC’s procedures for PCAOB member or chair selection is posted here.

Debit and credit – – David Albrecht

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Junior Deputy Accountant is vacationing, and I offered to write a guest post.  Since the news of the day is the SCOTUS (Supreme Court of the United States) decision on SOX (Sarbanes-Oxley Act of 2002), that’s what I wrote about.  Please check out my commentary, “SCOTUS to PCAOB: Do Not Go to Jail; Do Pass Go and Go, Go, Go,” over at Junior’s most excellent web site.

JDA appears all over the net, at JrDeputyAccountant, fan favorite Going Concern, and many other sites.

Some of you love all things SOX. Oops, that’s Sarbanes-Oxley instead of White or Red. Some of you hate all things SOX (especially if you are a Yankee fan and are thinking about Boston). Those that hate Sarbanes-Oxley are trying either to maim it, or kill it.

Maiming is a fait accompli, given that a provision was added to the Dodd-Frank Wall Street Reform and Consumer Protection Act exempting companies with market caps of less than $75 million from 404-b requirements (auditors must opine on internal controls).

Homicide has always been the back-up …

Continue reading at:  “SCOTUS to PCAOB: Do Not Go to Jail; Do Pass Go and Go, Go, Go

Debit and credit – – David Albrecht

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The Public Company Accounting Oversight Board (PCAOB) has released (May 4, 2010) its 2009 inspection report for Deloitte & Touche, LLP, and Deloitte’s response.  The PCAOB is charged, under the Sarbanes-Oxley Act of 2002, with inspecting each of the largest audit firms each year, as well as smaller audit firms (with public company clients) once every three years (see Note A).

As a basis for this report, the PCAOB inspected aspects of 73 Deloitte audits, and finds 15 significant deficiences, for an apparent error rate of 21% (later on I’ll show that this is not a true error rate).  In sharp contrast to its reaction to previous inspection reports, Deloitte says only, “We have evaluated the matters identified by the Board’s inspection team for each of the Issuer audits described in Part I of the Draft Report and have taken actions as appropriate in accordance with D&T’s policies and PCAOB standards.”


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