L IST OF F IGURES
2.1 G ENERAL
2.2.2 The PCAOB Responsibilities The PCAoB has four main responsibilities which include
• Registration of accounting firms (including non-US firms) that audit public companies (including non-US issuers) trading in US securities markets;
• Inspections of registered public accounting firms;
• Establishment of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms; and
• Investigation and discipline of registered public accounting firms and their associated persons for violations of specified laws or pro- fessional standards.
1. Registration of Accounting Firms
Public accounting firms engaged in the preparation or issuance of any audit with respect to an issuer must be registered with the PCAoB. Further the registrant must consent to cooperate with the Board and pay a registration fee as well as annual fees. The registra- tion form shall provide the following information:
(a) The names of all issuers for which the firm prepared or issued audit reports during the immediately preceding calendar year,
2 THE AUDIT PRoFESSIoN: THE US SARBANES-oXLEY ACT 21 and for which the firm expects to prepare or issue audit reports the current calendar year;
(b) The annual fees received by the firm from each issuer for audit services, other accounting services, and non-audit services;
(c) Such other current financial information from the most recently completed fiscal year of the firm as the Board may rea- sonably request;
(d) A statement of the quality control policies of the firm for its accounting and auditing practices;
(e) A list of all accountants associated with the firm who partici- pate in or contribute to the preparation of audit reports, stat- ing the license or certification number of each such person, as well as the State license numbers of the firm itself;
(f) Information relating to criminal, civil, or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm in connection with any audit report;
(g) Copies of any periodic or annual disclosure filed by an issuer with the Commission (SEC) during the immediately preced- ing calendar year which discloses accounting disagreements between such issuer and the firm in connection with an audit report furnished or prepared by the firm for such issuer; and (h) Such other information as the rules of the Board or the
Commission shall specify as necessary or appropriate in the public interest or for the protection of investors.
2. Inspections of Registered Public Accounting Firms
Registered firms are subject to the rules and program inspections by the PCAoB.7 The inspection program extends to every SEC- registered brokers dealer, which must have their financial state- ments certified by the SEC. The inspections shall be conducted:
(a) annually with respect to each registered public accounting firm that regularly provides audit reports for more than 100 issuers; and (b) not less frequently than once every three years with respect to each registered public accounting firm that regularly provides audit
7 The Sarbanes-oxley Act of 2002, Section 104.
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reports for 100 or fewer issuers. In conducting its inspections, the PCAoB shall:
• Inspect and review selected audit and review engagements of the firm;
• Evaluate the sufficiency of the quality control system of the firm;
• Perform such other testing of the audit, supervisory, and quality control procedures of the firm.
At the end of each inspection, a written report of findings is given to the inspected firm. violations may include: civil monetary pen- alties, the revocation of the firm registration, and the barring of an associated person from participating or sharing in the benefits of audits for public companies.
The procedural steps of the PCAoB inspections can be summa- rized as follow:
• Notification
At the start of an inspection, the PCAoB notifies the account- ing firm about the date(s) scheduled to conduct the inspection, and provides a detailed request of information about the firm’s public company engagements, the personnel performing those audits, and the firm’s quality control program.
• Selection of Audit Engagements to be Reviewed
The PCAoB generally takes a risk-based approach in selecting the audit engagements to be reviewed. As a result, inspections do not involve a random or representative sample of a firm’s public company practice. The PCAoB has developed a variety of tools to identify audits that may pose difficult or complex/chal- lenging issues. The PCAoB risk factors include, inter alia, the nature of the company, its market capitalization; the audit issues likely to be encountered; the type and range of its public com- pany engagements, the results of prior PCAoB inspections.
• The Field Inspection
The field inspection aims to assess whether (i) the firm has com- plied with all PCAoB’s auditing standards, and (ii) the firm quality control is effective.
2 THE AUDIT PRoFESSIoN: THE US SARBANES-oXLEY ACT 23 (i) PCAoB Standards
A field inspection does not cover the entire engagement, but rather concentrates on areas that appear to the inspectors to present significant challenges or difficulties. The Registered firm is required to cooperate with the inspection and provide all requested information. The team auditors of the selected engagements must provide the firm work papers thereon.
(ii) Firm Quality Control
A firm quality control review is tailored to the size of the firm and the nature of its practice. The PCAoB’s review focuses on how these systems operate in practice and on how they impact audit engagements. PCAoB inspectors consider issues such as the review of management structure and pro- cesses, review of partner management, review of engagement acceptance and retention, review of the use of audit work performed by foreign affiliates, review of the firm’s processes for monitoring audit performance.
• Dialogue between the PCAoB and Audit Firm
A dialogue follows between the Inspector(s) and the team audi- tor(s) concerning the firm compliance with the PCAoB audit standards and the firm quality control. For any aspect of the audit that the inspector believes to be in departure from the PCAoB standard the team auditor would have to respond and provide explanation. The firm has the opportunity to present its views on any aspects of the audit that the inspectors needed fur- ther explanations.
• The Issuance of the Report of Inspection
At the conclusion of the inspection fieldwork and the review of the firm’ explanations the PCAoB will send a final inspection report to the firm. The PCAoB report has two-components or parts. Part I addresses findings related to compliance with the Board auditing standards, and Part II treats firm quality control findings. At that juncture, the firm can either address within a requested time or seek for the SEC review.
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• The Remediation
A firm is given a time to remediate all audit deficiencies and quality control identified in the report. Most the time, the firm would respond and comply with the Board finding before even the issuance of the report. As to quality control findings, the firm has 12 months to satisfactorily remediate the issues.
The PCAoB remains in contact with the firm within these 12 months to respond to any query that the firm may have.
After 12 months, if the PCAoB is not satisfied with a firm’s remediation, it will publish on its website the portion of the inspection report that discusses the quality control criticism that has not been satisfactorily remediated. Again, the firm can reach out to the SEC to reconsider the Board determination.
3. Establishment of Auditing Standards
The Sarbanes-oxley Act has vested in the PCoB the right to set up specific auditing standards. The PCAoB has adopted, so far, 14 principles which have been approved by the Securities and Exchange Commission.8
AS No. 1 References in Auditors’ Reports to the Standards of the Public Company Accounting oversight Board AS No. 3 Audit Documentation
AS No. 4 Reporting on Whether a Previously Reported Material Weakness Continues to Exist
AS No. 5 An Audit of Internal Control over Financial Reporting that is Integrated with An Audit of Financial Statements
AS No. 6 Evaluating Consistency of Financial Statements AS No. 7 Engagement Quality Review
AS No. 8 Audit Risk AS No. 9 Audit Planning
AS No. 10 Supervision of the Audit Engagement
AS No. 11 Consideration of Materiality in Planning and Performing an Audit
8 PCAoB (2012).
2 THE AUDIT PRoFESSIoN: THE US SARBANES-oXLEY ACT 25 AS No. 12 Identifying and Assessing Risks of Material
Misstatement
AS No. 13 The Auditor’s Responses to the Risks of Material Misstatement
AS No. 14 Evaluating Audit Results AS No. 15 Audit Evidence
4. Investigation and Discipline of Registered Public Accounting The PCAoB conducts in-depth selected reviews of individual audit engagements performed by registered public account firms to determine compliance with the GAAS, the GAAP, the SEC, and other mandatory rules. The procedures and conduct of these reviews are covered under Section 105 of the SoX Act. Under sec- tion 105 (b)(2), the board may:
(a) Require the testimony of the firm or of any person associated with a registered public accounting firm, with respect to any matter that the Board considers relevant or material to an investigation;
(b) Require the production of audit work papers and any other document or information in the possession of a registered public accounting firm or any associated person thereof, wher- ever domiciled… and the board may inspect the books and records of such firm or associated person to verify the accuracy of any documents or information supplied;
(c) Request the testimony of, and production of any document in the possession of, any other person, including any client of a registered public accounting firm that the Board considers rele- vant or material to an investigation, subject to a proper notice;
(d) Provide for procedures to seek issuance by the SEC, in a manner established by the SEC, of a subpoena to require the testimony of, and production of any document in the posses- sion of, any person, including any client of a registered public accounting firm that the Board considers relevant or material to an investigation.
It is worthy to note that the investigation exercise is flawed in a sense that when the PCAoB publishes the conclusions of its
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findings, the opinion certifying the financial statements is already published and both the Markets and the investors relied upon to make their decisions. Big public accounting firms are not even impressed by the PCAoB reviews for several reasons:
(i) the reviews will covered a miniscule portion of their auditing engagements;
(ii) the PCAoB finding are not automatically made available to the public, therefore they can play the commitment game to comply;
(iii) the PCAoB is understaffed with only 300 full-time inspectors;
(iv) public accounting firms provide non-auditing services that have come to bring more revenue than the core auditing services, and the PCAoB inspectors do not possess polyva- lent skills to link the tax considerations to the underpinning accounting. Failure to cooperate with the Board investiga- tion entails sanctions such as suspension or revocation of the license and other sanction that the Board consider appropriate.