A Practical Guide to the New Pcaob Reporting Requirements

Case Study 2: A Practical Guide to the New PCAOB Reporting Requirements

The Sarbanes Oxley Act of 2002 (SOX) changed reporting requirements for Public accounting firms. Not only does any firm that prepares or issues audit reports need to register with the Public Accounting Oversight Board (PCAOB), since December 31, 2009, they must also submit current annual reports. These reporting requirements help reduce the chances of financial fraud and illustrate the responsibilities of an auditing firm to detect fraud during the audit process.

One of the most important aspects of an audit is to detect fraud; however it is more likely that fraud will be discovered by internal auditors than external auditors. The PCOAB now requires preparers and issuers of audit reports to submit annual reports for review. They must also submit special reports whenever any additional disclosure is required. 2) Justify how the reporting requirements of the PCAOB reduce the chance of financial fraud. By requiring auditors to be registers it allows the PCAOB to monitor audit firm ethics and independence. As of April 2008 there were already 1,848 accounting firms registered with the PCAOB and in September 2007 the SEC charged 69 auditors for submitting audit reports without being registered. (Olach) In order to help prevent fraud auditors need to remain independent. In some of the recent instances of financial fraud it was brought to light that some of the external auditors may have been more concerned about losing contingent fees or commissions for non- audit services then they were about actually auditing and or reporting their findings. The non-audit services the firms were performing caused a major conflict of interest and the only way to prevent auditing firms from being tempted and report accurate information was to insure independence. End users depend on auditors to report accurate financial statements information, by having auditors submit annual reports, and the PCAOB can review those reports to insure audit firm independence.

The new reporting by the PCAOB requires the "billing system to track four categories of fees for each issuer audit client. The four categories are audit services, other accounting services, tax services, and nonaudit services". (Berger, 2010) The reporting on these fees is filed annually so that the PCOAB always has the most current information. The reports are filed for a 12 month period starting April 1st of the preceding calendar year through March 31st of the current calendar year. Along with reporting the fees the firms must report the "information about its public issuer-related practice, internal and external resources on which the firm draws in preforming audits, disciplinary history of new personal, certain new relationship and acquisitions, and an affirmation of its statuary obligation to cooperate with the PCAOB." (Berger, 2010) Since the firms are required to report all information on employees that have had disciplinary problems the PCAOB will be able to monitor the firms to insure the individuals are performing ethically, reducing the risk of issuer fraud and insuring end users can rely on the issuer's financial data. The annual reporting requirement will allow the PCAOB to monitor the independence of auditing firm making it very difficult for auditors not to remain independent, proving that the PCAOB is tightening up on ethics rules.

There are several other PCAOB Auditing Standards that help to reduce the chances of financial fraud. Audit Standard No. 5 and Audit Standard No. 8 are auditor opinions on the adequate internal controls over financials and that the financial statements are free from any material misstatements. Standard No. 5 insures that an auditor's opinion is based on the effectiveness of the financial internal controls. If the auditor finds any weakness in the internal controls the controls cannot be considered effective and the auditor needs to offer their opinion that the company may be vulnerable to fraud. These weakness however do not mean that the financial statements are materially misstated or that fraud is occurring, it simply means that the controls need to be improved by management (Auditing Standard No. 5) Standard No. 8 requires and auditor "to form an appropriate basis for expressing an opinion on the financial statements, the auditor must plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement due to error or fraud. Reaefsonable assurance is obtained by reducing audit risk to an appropriately low level through applying due professional care, including obtaining sufficient appropriate audit evidence." (Auditing Standard No. 8) The additional reporting requirements of SOX 102s annual reports and the auditing standards the PCAOB has put in place is helping to reassure the public that it can once again begin to trust the work of external auditing firms.

It is an auditor's responsibility to insure end users that financial statements are free of any material misstatements. 3) Illustrate the responsibilities of an auditing firm to detect fraud during the audit process. Misstatements may be caused by errors or they could be an indication of fraud. PCAOB AU Section 316, sourced by SAS No. 99, insures auditors gather and asses more information to insure any misstatements are not fraud. "SAS no. 99 describes a process in which the auditor (1) gathers information needed to identify risks of material misstatement due to fraud, (2) assesses these risks after taking into account an evaluation of the entity's programs and controls and (3) responds to the results." (Michael, 2003) Some of the important aspects of SAS No. 99 are to approach the audit with professional skepticism and discussion (brainstorming) among engagement personnel. Auditors who conduct an audit with professional skepticism have a questioning mind and a critical assessment of evidence. Discussion among engagement personnel is a brainstorming session where the team discussed the possibility of misstatements due to fraud before and during the information gathering process. It is the audit team's responsibility to identify fraud risk factors, respond to the assessed rick, collect information from a wide range of sources, and document all of their findings.

Although the PCAOB has made significant changes to help reestablish trust in financial statement information some end users feel more can be done. 4) Recommend alternatives to the PCAOB. In October of 2008 the Treasury Advisory committee, made up of leaders in the investment, business, and academic industries submitted alternatives for the PCAOB to consider that would help improving transparency and trust in reported financial data. Some of the recommendations are "improving the transparency of the financial