The Accounting Profession: Appendixes to Major Issues: Progress and
Concerns (Letter Report, 09/24/96, GAO/AIMD-96-98A).
Pursuant to a congressional request, GAO presented the appendices to its
study of the accounting profession's response to recommendations, made
by major study groups over the past two decades, to improve accounting
and auditing standards and the performance of independent audits under
federal securities laws.
GAO presented appendices containing information on: (1) 37 major studies
of the accounting profession conducted between 1972 and 1995; (2) major
recommendations and actions taken since 1972 to improve auditing and
financial reporting, organized by the categories of auditor
independence, audit quality, standard setting, and expanded reporting
and auditor services; (3) various accounting and auditing associations'
statements, releases, and opinions regarding accounting and auditing
standards; (4) experts consulted for the review; and (5) comments from
various accounting and auditing associations and the Securities and
Exchange Commission.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-96-98A
TITLE: The Accounting Profession: Appendixes to Major Issues:
Progress and Concerns
DATE: 09/24/96
SUBJECT: Auditing standards
Accountants
Audit reports
Accounting procedures
Financial records
Standards evaluation
Quality control
Securities regulation
Reporting requirements
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Committee on Commerce, House
of Representatives
September 1996
THE ACCOUNTING PROFESSION -
APPENDIXES TO MAJOR ISSUES:
PROGRESS AND CONCERNS
GAO/AIMD-96-98A
The Accounting Profession
(917645)
Abbreviations
=============================================================== ABBREV
AcSEC - Accounting Standards Executive Committee
ADC - acquisition, development, and construction
AICPA - American Institute of Certified Public Accountants
AIMR - Association for Investment Management and Research
AMEX - American Stock Exchange
APB - Accounting Principles Board
ASB - Auditing Standards Board
ASR - accounting series release
AU - Auditing section of AICPA Professional Standards looseleaf
service
AudSEC - Auditing Standards Executive Committee
BL - Bylaws section of AICPA Professional Standards looseleaf
service
BRT - Business Round Table
CEO - chief executive officer
CON - statement of financial accounting concepts
COSO - Committee of Sponsoring Organizations of the Treadway
Commission
CPA - certified public accountant
CPE - continuing professional education
EDP - electronic data processing
EITF - Emerging Issues Task Force of the FASB
ET - Ethics section of AICPA Professional Standards looseleaf
service
FAF - Financial Accounting Foundation
FASAC - Financial Accounting Standards Advisory Council
FASB - Financial Accounting Standards Board
FDI Act - Federal Deposit Insurance Act
FDICIA - Federal Deposit Insurance Corporation Improvement Act of
1991
FEI - Financial Executives Institute
GAAP - generally accepted accounting principles
GAAS - generally accepted auditing standards
GASB - Governmental Accounting Standards Board
MAS - management advisory services
MD&A - management's discussion and analysis
NAA - National Association of Accountants
NASD - National Association of Securities Dealers
NYSE - New York Stock Exchange
OTC - over-the-counter
PCPS - Private Company Practice Section of the AICPA
PITF - Professional Issues Task Force of the SECPS
POB - Public Oversight Board
QCIC - Quality Control Inquiry Committee
QREC - Quality Review Executive Committee
QR - Quality Review Program Manual
RICO - Racketeer Influenced and Corrupt Organizations Act
S&L - savings and loan
SAS - statement on auditing standards
SEC - Securities and Exchange Commission
SECPS - SEC Practice Section of the AICPA
SFAS - statement of financial accounting standards
SOP - statement of position
SRO - self-regulatory organization
SSAE - statement on standards for attestation engagements
Letter
=============================================================== LETTER
B-258991
September 24, 1996
The Honorable John D. Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives
Dear Mr. Dingell:
These appendixes to our report, The Accounting Profession: Major
Issues: Progress and Concerns, (GAO/AIMD-96-98), contain the
individual recommendations made by the major study groups affecting
the accounting profession from 1972 through 1995 and the actions
taken on those recommendations. We have organized the individual
recommendations by the five major issues that frequently reoccurred
throughout our study period. The American Institute of Certified
Public Accountants (AICPA), the Financial Accounting Standards Board
(FASB), and the Securities and Exchange Commission (SEC) assisted us
in identifying the actions taken in response to the individual
recommendations. These appendixes also include (1) a summary of the
major studies, including the studies' report titles and information
on the membership of the study groups, (2) a list of experts on the
subject of accounting and auditing we consulted with and other
knowledgeable individuals we interviewed in conducting the study, (3)
copies of written comments received from the AICPA, FASB, and the SEC
on a draft of this report, and (4) a list of major GAO contributors
to this study.
Sincerely yours,
Charles A. Bowsher
Comptroller General
of the United States
MAJOR STUDIES OF THE ACCOUNTING
PROFESSION FROM 1972 THROUGH 1995
=========================================================== Appendix I
Study/Date/Members Background
------------------------- -----------------------------------------------------
1. Establishing Financial In March 1971, the AICPA appointed the Wheat
Accounting Standards, Committee to study the establishment of accounting
Report of the Study on principles and make recommendations for improving
Establishment of that process. The Committee was formed in response to
Accounting Principles the wave of criticism on corporate financial
(Wheat Committee), AICPA, reporting during the mid-1960s arising from the rapid
March 1972 expansion of accounting firms, the development of
increasingly complex and innovative business
Francis M. Wheat, practices, and the corporate merger movement. The
Chairman Wheat Committee concluded that there needed to be a
John C. Biegler substantial change in the structure for establishing
Arnold I. Levine financial accounting standards to insure public
Wallace E. Olson confidence in the way financial information is
Thomas C. Pryor reported. The Wheat Committee recommended creating a
Roger B. Smith Financial Accounting Foundation, a Financial
David Solomons Accounting Standards Board, and a Financial
Accounting Standards Advisory Council.
2. Objectives of In April 1971, the AICPA appointed the Trueblood
Financial Statements, Committee to provide a statement of basic objectives
Report of the Study Group that would be responsive and relevant to the needs of
on the Objectives of users. Previously issued objectives, while
Financial Statements appropriate, were stated in relatively abstract
(Trueblood Committee), terms, which offered little practical guidance in the
AICPA, October 1973 preparation of financial statements. The Committee's
conclusions followed a fundamental concept that
Robert M. Trueblood, financial statements should aid economic decision-
Chairman making, and it emphasized the needs of outside users
Richard M. Cyert rather than the operating needs of business managers.
Sidney Davidson The Committee also stated that accounting concepts
James Don Edwards should serve the goals of both private and public
Oscar S. Gellein sectors of the economy. The work of the Trueblood
C. Reed Parker Committee laid the fundamental groundwork for the
Andrew J. Reinhart Financial Accounting Standards Board's (FASB) work
Howard O. Wagner during the 1970s on establishing a conceptual
Frank T. Weston framework for accounting.
3. The Adequacy of In May 1973, the AICPA appointed the Special
Auditing Standards and Committee on Equity Funding to study whether the
Procedures Currently Equity Funding collapse in 1973 suggested a need for
Applied in the changes in generally accepted auditing standards. The
Examination of Financial Committee concluded that, except for certain
Statements, Report of the observations relating to the confirmation of
Special Committee on insurance in force and auditing related party
Equity Funding, AICPA, transactions, generally accepted auditing standards
February 1975 were adequate and there were no changes called for in
the procedures commonly used by auditors.
Martin L. Stone,
Chairman
J.T. Arenberg, Jr.
Leo E. Burger
Robert C. Holsen
A.E. Mackay
4. Federal Regulation and In April 1975, the Moss Subcommittee undertook a
Regulatory Reform, Report comprehensive study of federal regulatory agencies
by the Subcommittee on that included an assessment of the independence,
Oversight and performance, and economic effects of the activities
Investigations of the of regulatory agencies under the Subcommittee's
Committee on Interstate jurisdiction. This study was prompted by attacks on
and Foreign Commerce, federal regulation and the Subcommittee's obligation
U.S. House of to measure the performance of agencies it created.
Representatives (Moss The study attempted to determine the true problems of
Subcommittee), October regulation, their nature and extent, and, if needed,
1976 possible remedies. The study found that all
organizations investigated suffered a critical
John E. Moss, Chairman defect--an insufficient response to the public they
Richard L. Ottinger were created to serve. The Subcommittee's
Robert (Bob) Krueger recommendations related mostly to actions the SEC
James M. Collins could take to improve the corporate governance
Norman F. Lent function. Several recommendations involved corporate
Anthony Toby Moffett boards of directors and/or their audit committees and
Matthew J. Rinaldo the evaluation and reporting on corporate internal
Jim Santini control systems.
W. Henson Moore
W.S.(Bill) Stuckey, Jr.
Samuel L. Devine
James H. Scheuer
Henry A. Waxman
Philip R. Sharp
Andrew Maguire
Harley O. Staggers
5. The Accounting The Metcalf Subcommittee staff began this study in
Establishment, a Staff 1975 to provide the Congress and the public with an
Study prepared by the understanding of the various private organizations
Subcommittee on Reports, and federal agencies involved in establishing and
Accounting, and administering accounting practices which have
Management of the substantial impact on federal policies and programs,
Committee on Government as well as private economic decisions. The study was
Operations, U.S. Senate precipitated by continual revelations of previously
(Metcalf Subcommittee), unreported wrongdoing by major corporations, as well
March 1977 as a series of corporate failures and financial
difficulties which had come to light. The staff
Lee Metcalf, Chairman study's recommendations dealt with the issues of
John L. McClellan setting accounting and auditing standards, auditor
Bill Brock independence, and audit quality.
Edmund S. Muskie
Charles H. Percy
Sam Nunn
Lowell P. Weicker, Jr.
John Glenn
6. The Structure of In 1976, the Board of Trustees of the Financial
Establishing Financial Accounting Foundation (FAF) asked the Structure
Accounting Standards, Committee to perform a comprehensive review of the
Report of the Structure operations of FASB and the Financial Accounting
Committee, the Financial Standards Advisory Council (FASAC) and recommend any
Accounting Foundation, changes needed in their size, composition, and
April 1977 functions. This review was undertaken for a number of
reasons, one of them being the unusually vocal
Russel E. Palmer, criticism of FASB. The Structure Committee concluded
Chairman that the process of setting accounting standards
J.O. Edwards should remain in the private sector, and FASB is the
James Don Edwards right body to discharge that responsibility. The
Walter P. Stern Committee's report contains recommendations
Alva O. Way concerning the structure of FASB's constituency
John C. Whitehead relationships, the organizational structure of FASB
and staff, the process of issuing a statement, and
the structure of FASB's communications.
7. Improving the In 1975, the Metcalf Subcommittee began an inquiry
Accountability of into various accounting practices and
Publicly Owned responsibilities of the federal government. The study
Corporations and Their was initiated because of concerns over the activities
Auditors, Report of the and accountability of publicly owned corporations
Subcommittee on Reports, arising from a series of unexpected corporate
Accounting, and failures and disclosures of widespread questionable
Management of the and illegal acts by management. The report summarizes
Committee on Governmental the Subcommittee's views regarding the way in which
Affairs, U.S. Senate existing accounting and financial reporting practices
(Metcalf Subcommittee), should be improved to benefit the public. The
November 1977 Subcommittee's recommendations included actions
needed to improve/ensure audit quality, auditor
Lee Metcalf, Chairman independence, and the detection and reporting of
Henry M. Jackson illegal acts.
Sam Nunn
John C. Danforth
Charles H. Percy
8. The Commission on In 1974, the AICPA appointed the Cohen Commission to
Auditors' develop conclusions and recommendations on the
Responsibilities: Report, appropriate responsibilities of independent auditors.
Conclusions and The Commission was tasked to consider whether a
Recommendations (Cohen generally perceived gap between what the public
Commission), AICPA, 1978 expects or needs and what auditors can and should
reasonably expect to accomplish actually existed. If
Manuel F. Cohen, such a gap existed, the Commission was to determine
Chairman how the disparity could be resolved. The Cohen
Lee J. Seidler Commission found that a significant gap did exist
Walter S. Holmes, Jr. between the performance of auditors and the
LeRoy Layton expectations of users of financial statements, and
William C. Norby traced the gap to the accounting profession's failure
Kenneth W. Stringer to react and evolve quickly enough to changes in the
John J. van Benten American business. Its conclusions and
recommendations address auditor independence,
education, auditor communications, responsibilities
for the detection of fraud, quality control
mechanisms, and a broader audit function beyond the
financial statements.
9. Report of the Special In June 1977, the AICPA appointed the Oliphant
Committee of the AICPA to Committee to study the structure within the AICPA for
Study the Structure of developing auditing standards to determine what
the Auditing Standards changes, if any, were necessary to improve the
Executive Committee process. The AICPA appointed this Committee in
(Oliphant Committee), response to concerns over the Cohen Commission's
AICPA, May 1978 recommendations relating to setting auditing
standards. The Committee concluded that there were
Walter J. Oliphant, steps that could be taken to improve the
Chairman effectiveness of setting auditing standards.
Ivan O. Bull Accordingly, the Oliphant Committee proposed that the
Philip L. Delliese Auditing Standards Executive Committee (AudSEC) be
Samuel A. Derieux reconstituted within the AICPA as the AICPA Auditing
Louis M. Kessler Standards Board (ASB) and made several
recommendations pertaining to the mission and
structure of this new board.
10. Scope of Services By In July 1978, the Public Oversight Board (POB)
CPA Firms, Report of the reported on its views with respect to the scope of
Public Oversight Board of services for member firms of the SEC practice
the SEC Practice Section, section. The Executive Committee of the SEC Practice
Division for CPA Firms, Section requested the POB's views in response to
AICPA, March 1979 questions concerning whether engaging in management
advisory services (MAS) for audit clients creates a
John J. McCloy, Chairman conflict of interest. In general, the POB concluded
Ray Garrett, Jr. that maintenance of independence should be the only
William L. Cary limitation on scope of services and that independence
John D. Harper be assessed after giving consideration to potential
Arthur M. Wood benefits derived from furnishing various services.
The POB recommended reliance on existing programs and
procedures and suggested that adherence to the
portions of the existing MAS Professional Standards
and the Code of Professional Ethics dealing with
independence be made a condition of membership in the
SEC Practice Section.
11. Interim Review of the In 1979, the Structure Committee of the FAF undertook
FASB and FASAC, Report of an interim review of FASB and FASAC to follow up on
the Structure Committee, progress made by FASB and FASAC in responding to the
Financial Accounting Committee's findings from its 1977 review (see number
Foundation, 6 above). The Committee reported that both FASB and
May 1979 FASAC have initiated desirable changes to the
standard-setting process going beyond the Committee's
J.O. Edwards, Chairman 1977 report recommendations. The Committee's interim
William H. Dougherty, report suggests areas for further improvement
Jr. including increasing public awareness, reaching out
Richard S. Hickok to all major constituents, experimenting with FASAC
Harvey Kapnick committees, improving utilization of task forces, and
Walter P. Stern enhancing the quality of staff.
John C. Whitehead
12. Operating Efficiency In 1982, the Structure Committee of the FAF undertook
of the FASB, Report of a review of the efficiency of FASB. This review was
the Structure Committee, conducted in line with the bylaws of FAF, which
Financial Accounting require a periodic review of the basic structure of
Foundation, August 1982 establishing and improving standards of financial
accounting. The Structure Committee's overall
Charles G. Steele, conclusion was that FASB was operating efficiently
Chairman and effectively, that is, appropriate standard-
Kenneth S. Axelson setting systems were in place and functioning well.
William H. Dougherty, The Committee's recommendations call for improved
Jr. relationships and communications with constituencies,
Paul J. Dunphy increased responses on FASB products, accelerated
Thomas L. Holton progress on certain concepts statements, and timely
Warren J. Robertson guidance for questions concerning implementation of
Hyman Weinberg standards and for emerging issues.
13. Report of the Special In January 1985, the Board of Trustees of the FAF
Review Committee, initiated actions to assess the extent and nature of
Financial Accounting concerns about the standards-setting process and to
Foundation, begin simultaneously a study of the composition of
1985 FASB and criteria for selection of its members. These
actions were taken in response to concerns expressed
R. Leslie Ellis, by certain constituents about the composition and
Chairman operations of FASB. The work of the Special Review
Charles T. Horngren Committee of the FAF concluded that there is strong,
Thomas L. Holton widespread support for FASB and its operations, and
John H. Poelker there is very little evidence of deep dissatisfaction
John F. Ruffle in any segment of the constituency. However, the
Committee found some concerns with the qualifications
of the FASB Chairman and members, the composition of
FASB, the process of selecting members, the lengthy
time frame imposed by FASB's due process, and
inhibitions on free exchange of ideas caused by the
"sunshine rule." The Committee made several
recommendations to address these concerns.
14. Challenge and In 1985, in response to what it termed a "twin crisis
Opportunity for the in credibility and liability" (emanating from a
Accounting Profession: succession of spectacular business failures that were
Strengthening the seen as audit failures), Price Waterhouse developed a
Public's Confidence, the program of action to enhance the credibility and
Price Waterhouse viability of the accounting profession. The principal
Proposals, 1985 components of this program include: expanding
auditing standards to reduce the risk that management
Joseph E. Connor, fraud will go undetected, enhancing self-regulation,
Chairman and seeking equity in civil liability.
15. Restructuring In October 1983, the AICPA appointed the Anderson
Professional Standards To Committee to study the relevance and effectiveness of
Achieve Professional professional standards in today's environment. The
Excellence in a Changing AICPA initiated the study in response to concerns
Environment, Report of over the profession's ability to serve the public
the Special Committee on interest and retain public confidence in a rapidly
Standards of Professional changing environment. The Committee concluded that
Conduct for Certified some legitimate concerns had been raised about
Public Accountants certified public accountants' behavior and commitment
(Anderson Committee), to quality and reached a strong consensus that the
AICPA, April 1986 accounting profession must make substantial reforms
in the way it achieves adherence to its standards.
George D. Anderson, The Committee's report contains sweeping revisions to
Chairman the AICPA's Code of Professional Ethics and
Robert L. Bunting substantial reforms in the way adherence to
Joseph P. Cummings professional standards is achieved.
James Don Edwards
Robert C. Ellyson
Francis A. Humphries
Richard Kasten
James Kurtz
Bernard Z. Lee
Herman J. Lowe
Archie E. MacKay
William L. Raby
Frank S. Sato
Ralph Saul
John P. Thomas
Kathryn D. Wriston
16. The Future Relevance, In 1986, the heads of seven major accounting firms
Reliability, and submitted recommendations to the AICPA Board of
Credibility of Financial Directors to improve the relevance, reliability, and
Information, credibility of financial information. The firms'
Recommendations to the initiative was prompted by the swift pace and impact
AICPA Board of Directors of changing business and economic conditions and the
by seven major accounting firms' recognition of the accounting profession's
firms (Big 7), April obligation to assure the utility of audited financial
1986 statements. The firms' recommendations addressed the
need for more information on risks and uncertainties
J. Michael Cook, Deloitte in financial reporting, auditor independence, peer
Haskins & Sells review, an enhanced ASB, and other issues.
William L. Gladstone,
Arthur Young
Ray J. Groves, Ernst &
Whinney
Larry D. Homer, Peat,
Marwick, Mitchell & Co.
Edward A. Kangas, Touche
Ross & Co.
Duane R. Kullberg, Arthur
Andersen & Co.
Peter R. Scanlon, Coopers
& Lybrand
17. Financial Reporting In June 1986, GAO participated in a congressional
and the Role of hearing, before the Subcommittee on Oversight and
Independent Auditors, Investigations of the House Committee on Energy and
Statement of Charles A. Commerce, on financial reporting, the role of
Bowsher, Comptroller independent auditors, and the SEC's oversight of the
General of the United accounting profession. The hearing was part of a
States, June 1986 series of hearings prompted by alleged audit
failures. At that hearing, GAO testified that the
public expects improvements in the areas of early
warning disclosures, fraud detection, compliance with
laws and regulations, internal controls, and peer
review. GAO encouraged the accounting profession and
the SEC to take action in these areas.
18. Report of the Task In 1985, the AICPA established the Task Force on
Force on Risks and Risks and Uncertainties to consider ways to improve
Uncertainties, AICPA, disclosure about the risks and uncertainties that
July 1987 faced business enterprises in light of the volatile
business environment of the 1980s. The Task Force
Arthur Siegel, Chairman concluded that a business enterprise should disclose
James P. Colford more information about the risks and uncertainties
John D. Collins facing it as of the date of the financial reports.
Phillip W. Crawford The Task Force's recommendations focused primarily on
Richard Dieter increased disclosures of significant risks and
John E. Ellingsen uncertainties that stem from the necessary use of
Rosemary E. McGovern estimates in the preparation of financial statements
Rudolph W. Schattke and from significant concentrations in aspects of the
Roger W. Trupin entity's operations.
19. Report of the The Treadway Commission, formed in 1985, was a
National Commission on private-sector initiative jointly sponsored by the
Fraudulent Financial AICPA, the American Accounting Association, the
Reporting (Treadway Financial Executives Institute, the Institute of
Commission), October Internal Auditors, and the National Association of
1987 Accountants. The Commission was created to identify
the causal factors that can lead to fraudulent
James C. Treadway, Jr., financial reporting and steps to reduce its
Chairman incidence. The Commission's conclusions highlighted
William M. Batten the need for improvements in areas including
William S. Kanaga corporate reporting on internal controls, the
Hugh L. Marsh, Jr. establishment of independent audit committees,
Thomas I. Storrs auditor detection and reporting of fraud, and steps
Donald H. Trautlein needed to help ensure audit quality. The Treadway
Commission's report contained numerous
recommendations to deter fraudulent financial
reporting which were addressed to the management of
public companies, independent public accountants, the
SEC and other regulatory agencies, and educators.
20. Letter to the GAO's 1988 letter to the Chairman discusses items
Honorable Fernand J. St that GAO believed should be addressed in any
Germain, Chairman, legislation to provide new securities powers to
Committee on Banking, banks. Specifically, GAO felt that two further items
Finance and Urban should be added to the proposed legislation
Affairs, House of (Depository Institutions Act of 1988) to ensure that
Representatives, GAO, safeguards are in place and are functioning properly
(B229444) August 1988 to ensure the safety and soundness of the nation's
banks. The first item addresses the need for a
requirement for independent financial audits of banks
and bank holding companies that have a securities
affiliate including requiring a financial audit of
the securities affiliate. The second item addresses
internal control and compliance reporting by
management and the independent auditor.
21. The Structure for In January 1988, the FAF's Committee to Review
Establishing Financial Structure for Financial Accounting Standards was
Accounting Standards, the appointed to review the structure and operations of
Report of the Financial FASB and FASAC, as required by FAF's bylaws. The
Accounting Foundation's Committee concluded that despite the concerns
Committee to Review expressed by the business community and public
Structure for Financial accounting profession about certain aspects of FASB
Accounting Standards, activities, the makeup, organization, and operations
January 1989 of FASB are basically sound. The Committee's report,
however, does include several recommendations to
Thomas L. Holton, strengthen FASB.
Chairman
R. Leslie Ellis
Robert E. Frazer
Ray J. Groves
Charles T. Horngren
Robert A. Mellin
J. Ronald Morgan
Earle E. Morris, Jr.
John E. Poelker
Edus H. Warren, Jr.
22. CPA Audit Quality: Prompted by the savings and loan (S&L) crisis of the
Failures of CPA Audits To 1980s, the Committee on Banking, Finance and Urban
Identify and Report Affairs, House of Representatives, asked GAO to
Significant Savings and review the quality of audits of S&Ls in the Dallas
Loan Problems, (GAO/ Federal Home Loan Bank District. GAO concluded that,
AFMD-89-45) February 1989 for 6 of 11 failed S&Ls in its review, CPAs did not
adequately audit and/or report the S&L's financial or
internal control problems in accordance with
professional standards. GAO recommended that the
AICPA provide improved guidance for ensuring that S&L
audits are performed in a quality manner by (1)
revising the AICPA industry audit guide for savings
and loan associations and (2) communicating results
presented in this GAO report to all AICPA members.
23. CPA Audit Quality: In 1987, the Chairman, Oversight and Investigations
Status of Actions Taken Subcommittee, House Committee on Energy and Commerce,
To Improve Auditing and asked that GAO review the implementation of the
Financial Reporting of changes to improve auditing and financial reporting
Public Companies, (GAO/ of public companies and that GAO identify related
AFMD-89-38) March 1989 recommendations which would require legislative or
regulatory actions in order to be implemented. This
request was sparked by the well-publicized business
failures which raised questions about the
effectiveness of the independent audit of public
companies and the SEC's oversight of the public
accounting profession. GAO concluded that the public
accounting profession and others have taken positive
actions to address concerns about audit quality and
the accuracy and reliability of financial disclosures
of public companies. However, the report notes that
actions remain to be taken. GAO made recommendations
to the SEC and the AICPA regarding additional steps
needed to improve audit quality and financial
disclosures.
24. Bank Failures: To address concerns about the steadily increasing
Independent Audits Needed number of failures of insured banks, GAO undertook a
to Strengthen Internal review to summarize data on internal weaknesses and
Control and Bank environmental factors which bank examiners cited for
Management, (GAO/AFMD- insured banks which failed in 1987, to determine the
89-25) May 1989 extent to which insider abuse and fraud were present
in 1987 failed banks and to identify potential areas
of concern. GAO found that serious internal control
weaknesses contributed significantly to virtually all
the bank failures in 1987. GAO also found that only
about a third of the banks that failed in 1987 had
audits by independent public accountants. GAO
recommended that each insured bank have an annual
independent audit and provide auditor reports on
internal controls and compliance with laws and
regulations.
25. Thrift Failures: In response to a large number of thrift failures and
Costly Failures Resulted the resulting thrift industry crisis, GAO initiated a
From Regulatory review to provide perspective on factors that
Violations and Unsafe characterized those thrift failures that have caused
Practices, (GAO/AFMD-89- some of the larger losses to the Federal Savings and
62) June 1989 Loan Insurance Corporation, and especially to
determine whether violations of federal laws or
regulations, related unsafe practices, and fraud and
insider abuse were present. GAO found indications of
fraud or insider abuse at all the failed thrifts in
GAO's sample. GAO recommended that the Congress pass
legislation that among other things, would require
management and auditor reporting to the federal
regulator on internal controls and on compliance with
laws and regulations in order to reduce thrifts'
vulnerability to fraud and insider abuse.
26. Prevention, In 1990, the Comptroller General testified before the
Detection, and Reporting Subcommittee on Telecommunications and Finance, House
of Financial Committee on Energy and Commerce, on GAO's support of
Irregularities, Statement proposed amendments to the 1934 act to strengthen
of Charles A. Bowsher, both management and auditor responsibilities for
Comptroller General of detecting and reporting irregularities. GAO made
the United States, (GAO/ recommendations concerning management and auditor
T-AFMD-90-27) August 1990 responsibilities for internal controls and compliance
with laws and regulations, the need to strengthen
audit requirements, methods of responding to audit
discoveries, and the jurisdiction of the SEC. GAO
also made suggestions concerning audit committees,
peer reviews, notification of auditor changes, and
sharing reports and information with independent
public accountants concerning regulators' knowledge
of potential mismanagement, fraud, or abuse by
companies.
27. Failed Banks: GAO analyzed 1988 and 1989 bank failures to identify
Accounting and Auditing the impact of accounting and internal control
Reforms Urgently Needed, weaknesses on those failures and the critical need
(GAO/AFMD-91-43) April for reforms to minimize future losses to the Bank
1991 Insurance Fund and the taxpayer. GAO initiated this
review to address congressional and public concerns
that the external reports prepared by banks, both
annual financial statements and call reports, did not
always alert users to the troubled financial
condition of banks in a timely manner. GAO concluded
that accounting rules for recognizing losses were
seriously flawed, impeding early warning of troubled
banks, and that internal control weaknesses were a
major cause of bank failures. GAO made several
recommendations concerning an early warning system,
the role of the audit committees, the independent
auditor's review of the quarterly financial reports,
and auditor's communications with regulators
regarding internal control weaknesses and
noncompliance with laws and regulations.
28. Letter to the As requested, the Comptroller General provided GAO's
Honorable Ron Wyden, views on how internal controls could be strengthened
House of Representatives, to further protect investors and limit the
GAO, (B-240516) government's exposure to major losses, such as the
May 1, 1991 massive bailout of the savings and loans sector
during the 1980s and its severe economic consequences
for investors and government alike. This request was
made in response to fundamental questions concerning
corporate accountability, the effectiveness of
corporate governance and regulation, and the adequacy
of audit requirements. GAO's letter highlights the
severity of internal control weaknesses and outlines
the type of legislative remedies required, such as
greater reporting on internal controls, stronger
roles for audit committees, and direct reporting of
illegal acts.
29. Audit Committees: This GAO report examines the extent to which audit
Legislation Needed to committees of large banks had the independence,
Strengthen Bank expertise, and information needed to properly carry
Oversight, (GAO/AFMD-92- out their functions and provides further support for
19) October 1991 earlier GAO recommendations. GAO undertook this
review as a result of the record number of failing
banks during the 1980s. The study found that many
audit committees lacked the independence, expertise,
and information necessary to properly oversee bank
operations. The report reiterates recommendations
made by GAO in an April 1991 report on failed banks
(see number 27 above) which calls for legislation
concerning audit committee requirements; internal
control reporting by management; and internal control
reporting, compliance reporting, and reporting on
quarterly data by the independent auditor.
30. Employee Benefits: The Chairmen of the House Subcommittee on Oversight
Improved Plan Reporting and the House Subcommittee on Labor-Management
and CPA Audits Can Relations requested that GAO identify problems in the
Increase Protection Under performance of employee benefit plan audits. This
ERISA, (GAO/AFMD-92-14) request resulted from significant deficiencies in
April 1992 audits of private employee benefit plans as
identified by the Department of Labor's Office of
Inspector General in November 1989. GAO's review of a
sample of plan audits also found serious audit
weaknesses, many of which stemmed from a lack of
auditor knowledge about special considerations
associated with auditing employee benefit plans. GAO
recommended, among other things, that the AICPA
improve its audit guide concerning audits of employee
benefit plans and that the AICPA communicate to its
membership the results of investigations of deficient
plan audits.
31. In the Public The POB issued this report in response to a request
Interest, Issues from representatives of a number of accounting firms
Confronting the that the POB consider whether it could support the
Accounting Profession, a accounting profession's efforts to obtain relief from
special report by the what the profession believed to be an excessive
Public Oversight Board of burden of litigation. The POB concluded that the
the SEC Practice Section, litigation risks confronting the profession pose
AICPA, March 1993 serious dangers to its ability to perform its
assigned role in society. The POB also addressed some
A.A. Sommer, Jr., of the criticisms pertaining to the profession's
Chairman performance. The POB's report contains 25 recommended
Robert K. Mautz, Vice actions to enhance the usefulness and reliability of
Chairman financial statements; strengthen the performance and
Melvin R. Laird professionalism of the public accounting profession,
Paul W. McCracken including the ability of auditors to detect fraud and
Robert F. Froehlke irregularities; and improve self-regulation.
32. Meeting the In June 1993, the Board of Directors of the AICPA
Financial Reporting Needs issued a policy statement which details the steps
of the Future: A Public necessary to improve the value of financial
Commitment From the information and the public's confidence in it. The
Public Accounting policy statement describes how public confidence in
Profession, AICPA Board the financial reporting system has been shaken in
of Directors, June 1993 recent years by highly publicized business failures
and includes actions the Board believes are needed to
solidify the public trust in the financial reporting
system. The statement identifies five principal goals
for reform concerning the prevention and detection of
fraud, the utility of financial reporting, the
independence and objectivity of independent auditors,
unwarranted litigation, and strengthening the
accounting profession's disciplinary system.
33. Financial Reporting AIMR's report sets forth the position of investment
in the 1990s and Beyond, advisors and financial analysts on the universe of
Association for financial reporting as it affects analysis today and
Investment Management and into the next century. The report explains the
Research (AIMR), November function of financial analysis, its sources and uses
1993 of information, and speaks to the trends that are
expected to change practices in both analysis and
Peter H. Knutson accounting during the next decade or more. AIMR's
conclusions and recommendations call for a
substantial expansion in the quality and quantity of
financial information now being reported. AIMR also
recommends increased participation by financial
statement users in the accounting standard-setting
process.
34. Staff Report on This SEC staff report responds to the March 18, 1993,
Auditor Independence, request from Congressman Edward J. Markey, Chairman
report prepared by the of the Subcommittee on Telecommunications and Finance
Office of the Chief of the House Committee on Energy and Commerce, that
Accountant, Securities the SEC study the need for, and any impediments to,
and Exchange Commission, the independence of public accountants in performing
March 1994 their responsibilities under the federal securities
laws. This request was made in consideration of a
proposed bill to make the auditing profession more
accountable to the investing public. The SEC's report
provides background information on the issue of
auditor independence, discusses the Commission's
independence rule and related interpretations and
pronouncements of the AICPA and other nations'
independence requirements, and discusses recent and
certain current proposals regarding independence
issues. The report concluded that the combination of
the extensive systems of independence requirements
issued by the Commission and the AICPA, coupled with
the Commission's active enforcement program, provide
investors reasonable safeguards against loss due to
the conduct of audits by accountants that lack
independence from their audit clients. Therefore, the
SEC concluded that no further legislation or rules or
regulations were necessary at that time with respect
to auditor independence.
35. Financial In response to congressional requests, GAO undertook
Derivatives: Actions a review of derivative products to determine among
Needed To Protect the other things whether existing accounting rules
Financial System, (GAO/ resulted in financial reports that provided market
GGD-94-133) May 1994 participants and investors adequate information about
firms' use of derivatives. This review was sparked by
congressional efforts to better anticipate and
prevent future financial crises. GAO found that
accounting standards for derivatives were incomplete
and inconsistent and have not kept pace with business
practices. GAO made recommendations to FASB and the
SEC concerning the development and issuance of
accounting and disclosure requirements for
derivatives, the adoption of market value accounting
for all financial instruments, and the requirements
for independent audit committees and internal control
reporting for SEC registrants that are major end
users of derivatives.
36. Strengthening the In February 1994, the POB appointed the Kirk Panel to
Professionalism of the (1) assess the working relationship among the SEC,
Independent Auditor, FASB, the auditing profession, and the business
Public Oversight Board community and (2) identify and evaluate steps to
Advisory Panel on Auditor bolster the objectivity, independence, and
Independence (Kirk professionalism of the auditing firms. The Kirk Panel
Panel), September 1994 was appointed in response to a January 11, 1994,
speech, given by Walter Schuetze, the Chief
Donald J. Kirk, Chairman Accountant of the SEC, which questioned the
George D. Anderson independence of auditors. The Panel concluded that at
Ralph S. Saul this time there is no need for additional rules,
regulations, or legislation dealing with auditor
independence. However, the Panel made several
suggestions to strengthen auditor independence, to
bring auditing into the mainstream of corporate
governance, and to restore auditing to its important
role in our society. These suggestions cover issues
such as auditor independence; more involvement of the
boards of directors and audit committees with the
independent auditor; the relationships between the
accounting profession, standard setters, and the SEC;
and litigation reform.
37. Improving Business In 1991, the AICPA Board of Directors formed the
Reporting -A Customer Jenkins Committee to address concerns about the
Focus: Meeting the relevance and usefulness of business reporting. The
Information Needs of Committee's charge was to recommend (1) the nature of
Investors and Creditors, information that should be made available to others
Comprehensive Report of by management and (2) the extent to which auditors
the Special Committee on should report on the various elements of that
Financial Reporting information. The Committee concluded that a lot is
(Jenkins Committee), right with today's business reporting in that it
AICPA, 1994 generally provides users with essential information
that heavily influences their decisions. In
Edmund L. Jenkins, particular, financial statements are viewed as an
Chairman excellent framework for capturing and organizing
Gregory J. Jonas, financial information. However, many users are
Executive Director strongly critical of certain aspects of today's
Michael H. Sutton, Vice reporting. Accordingly, the Committee made
Chairman recommendations to standard setters, the Congress,
Lonnie Arnett regulators, and the accounting profession to improve
Raymond J. Bromark the types of information in business reporting, to
Edmund Coulson improve financial statements and related disclosures,
Robert K. Elliott to improve auditor involvement with business
Larry Grinstead reporting, and to facilitate change in business
William W. Holder reporting.
Robert L. Israeloff
Gaylen N. Larson
Joseph D. Lhotka
James C. Meehan
Harold L. Monk, Jr.
Edward F. Rockman
Barry N. Winograd
--------------------------------------------------------------------------------
MAJOR RECOMMENDATIONS FROM 1972
THROUGH 1995 AND ACTIONS TAKEN TO
IMPROVE AUDITING AND FINANCIAL
REPORTING
========================================================== Appendix II
Table II.1
Auditor Independence
Recommendation Recommendation
Recommendation Action taken made by/date directed to
----------------------- ----------------------- -------------- --------------
1-6. The SEC should Moss
promulgate rules Subcommittee
necessary to assure (1976)
that
1. ...a director of a No action taken. SEC
publicly owned
corporation receives
compensation and
independent staff
sufficient to perform
responsibly his board
duties.
2. ...a majority of the See action taken for SEC
board is independent of recommendations 4 and
senior management and 63.
operating executives
and from any other
conflicts of interest.
3. ...the board reviews No action taken. SEC
and approves the
corporation's code of
business conduct and
system of internal
controls.
4. ...the board's NYSE listing SEC
auditing and nominating requirements mandate
committees are independent audit
comprised of a majority committees. NASD
of independent requires all national
directors. market system companies
to have audit
committees with a
majority of independent
directors, as does the
AMEX. FDICIA requires
independent audit
committees for certain
large banks and
thrifts. The AICPA
believes that SEC
registrants and other
publicly accountable
entities should be
required to have
independent audit
committees whenever
practicable. (See June
1993 policy statement
of the AICPA Board of
Directors.)
5. ...the board's No action taken by the SEC
auditing committee has SEC. FDICIA specifies
available to it certain resources for
independent expert audit committees of
advisors. large banks and
thrifts.
6. ...the board has the Media accounts have SEC
authority to hire and reported situations
fire the independent where boards have
accountant, legal exercised their clear
counsel, the general authority in this
counsel, and senior respect. For example,
operating executives. since 1991, "activist
boards have forced out
more than two dozen
chief executives of
major U.S.
corporations" (The Wall
Street Journal, June
15, 1994).
7. The Congress should No action taken. Since Metcalf Congress
consider methods of this recommendation was Subcommittee
increasing competition issued, the environment Staff Study
among accounting firms in which accounting (1977)
for selection of firms practice has
independent auditors changed substantially.
for major corporations. The abolition of
One alternative is ethical prohibitions
mandatory change after against advertising and
a given period of years solicitation, intense
or after any finding by fee pressure, and
the SEC that the CPA disagreements that
firm failed to exercise damage auditor/client
independent action to relationships lead
protect investors and hundreds of companies
the public. Another to change auditors each
alternative could be to year. See action taken
require more than one for recommendation 29
accounting firm be on for information about
the ballot at annual requirements and
stockholders' meetings. studies related to
auditor rotation.
8. The federal No action taken. Metcalf Federal
government should However, key Subcommittee government
require the 15 largest information about the Staff Study
accounting firms to largest firms is widely (1977)
report basic and reported in the trade
operational data press.
annually.
9. The federal No action taken. Metcalf Federal
government should act Subcommittee government
to relieve excessive Staff Study
concentration in the (1977)
supply of auditing and
accounting services to
major publicly owned
corporations.
10. The Department of The Department of Metcalf Department of
Justice and the Federal Justice and the Federal Subcommittee Justice and
Trade Commission should Trade Commission have Staff Study Federal Trade
determine whether made investigations (1977) Commission
violations of federal that have resulted in
antitrust laws have changes in AICPA's Code
resulted from excessive of Professional
concentration in the Conduct, but not in
supply of auditing and determinations of any
accounting services violations of federal
among all industries or antitrust laws in the
within specific supply of auditing and
industries. accounting services.
11. The Congress should No action taken. Metcalf Congress
consider other methods Subcommittee
of reducing Staff Study
concentration in the (1977)
supply of auditing and
accounting services to
major corporations.
12. The federal No action taken. Metcalf Federal
government should Subcommittee government
retain accounting firms Staff Study
that act as independent (1977)
auditors only to
perform auditing and
accounting services and
not to perform
management advisory
services or other
consulting services.
13. The accounting NYSE listing Metcalf Accounting
profession or the SEC requirements mandate Subcommittee profession or
should immediately independent audit (1977) SEC
require that publicly committees. NASD
owned corporations requires all national
establish independent market system companies
audit committees to have audit
composed of outside committees with a
directors as a majority of independent
condition for being directors, as does
accepted as a client by AMEX. FDICIA requires
an independent auditor. independent audit
committees for large
banks and thrifts. The
AICPA believes that SEC
registrants and other
publicly accountable
entities should be
required to have
independent audit
committees whenever
practicable. (See June
1993 policy statement
of the AICPA Board of
Directors.)
14. Audit committee See action taken for Metcalf Public
members should be free recommendation 13. Subcommittee companies or
of any significant (1977) SEC
involvement with the
management of a
corporation, such as
commercial or
investment banking
relationships, outside
legal counsel,
management consulting,
or major commercial
relationships.
15. Rotating the audit No action taken. Metcalf Public
committee's chairman Subcommittee companies or
could increase its (1977) SEC
independence.
16. Corporate audit The Good Practice Metcalf Public
committees should Guidelines for the Subcommittee companies or
establish sound Audit Committee (1977) SEC
policies to prevent suggested in Appendix I
hidden remuneration of to the Treadway Report
executives through use call for a review of
of corporate assets for the in-house policies
housing, personal and procedures for
loans, club regular review of
memberships, and officers' expenses and
personal travel or perquisites. (Recent
pleasure. media accounts
reporting abuses in
this area that were
detected by audit
committees should have
the positive effect of
focusing other audit
committees on those
guidelines.)
17. Accounting firms The disclosure of Metcalf Accounting
which audit publicly financial data, with Subcommittee profession
owned corporations which some firms (1977)
should be required to experimented, tends to
publicly disclose focus attention on a
financial data and firm's perceived
important operating ability to pay damages
information. in litigation rather
than on its quality
controls. However,
substantive operating
information about,
e.g., personnel, number
of SEC clients, pending
litigation, the
composition of fees,
management advisory
services fees for SEC
clients, and mergers,
is required to be
reported and is in the
SECPS public files.
18. Reports by The SECPS membership Metcalf Accounting
accounting firms should requirements specify Subcommittee profession
include sufficient that the annual reports (1977)
information on client of member firms include
relationships so that statistical information
the accounting about fees and the
organization and the nature of services
SEC can monitor rendered that AICPA
compliance with believes meet the
appropriate standards. information needs of
the SEC.
19. An audit committee Although AICPA believes Metcalf SEC
should have sole audit committees Subcommittee
authority to hire and generally have this (1977)
fire the independent authority, it has not
auditor and set the been mandated.
auditor's fee.
20. The audit committee SECPS membership Metcalf Accounting
should meet privately requirements (SECPS Subcommittee profession or
with the independent Reference Manual (1977) SEC
auditor, receive full �1008.(i)) mandate an
reports from the annual report to the
auditing firm on its audit committee of each
findings, and be SEC client on the total
informed of all fees received from the
services being provided client for management
to the corporation by advisory services
the auditing firm. during the year under
audit and a description
of the types of such
services rendered.
Also, see discussions
of communications
requirements in SAS 53
on errors and
irregularities, SAS 54
on illegal acts by
clients, and SAS 61 on
communication with
audit committees, and
note that "Information
and Communication" is
one of the five
components of internal
control under the COSO.
21. The primary mission The primary purpose of Metcalf Accounting
of the organization of the SECPS is to Subcommittee profession
accounting firms (see maintain and improve (1977)
recommendation 20 in the quality of practice
"Audit Quality" before the Commission.
section), as envisioned The SEC's 1994 Annual
by the subcommittee, Report indicates that
will be to assure that this objective is being
the two essential achieved.
qualities of
independent auditors-- As part of this program
professionalism and of improvement, in
independence--are not March 1980, the SECPS
sacrificed through such issued the Position
practices as Paper of Task Force on
unrealistic cost Certain Aspects of the
cutting and time Auditor's Work
constraints in pursuit Environment. The SECPS
of commercial success. membership requirements
also mandate the
preparation and
dissemination to all
personnel of a
"Statement of Firm
Philosophy." The
illustrative statement
provided by the SECPS
Reference Manual
�1000.42 emphasizes the
need for an overriding
commitment to high-
quality professional
performance.
22. Public advocacy on Public advocacy on Metcalf Accounting
behalf of a client, behalf of a client is Subcommittee profession
receiving gifts and not proscribed, but the (1977)
discounts from clients, AICPA's Professional
and maintaining Ethics Executive
relationships which Committee has issued an
detract from the Interpretation
appearance of arm's- (Interpretation 102-6 -
length dealings with -August 1995) that
clients are not calls attention to
appropriate activities applicable ethical
for independent precepts when members
auditors. advocate a client's
position, and an ethics
ruling (see ET �191.008
of the AICPA
Professional Standards
looseleaf service)
states that acceptance
of a gift of more than
token value may impair
the appearance of
independence. Also, the
Code of Professional
Conduct is constantly
updated to deal with
new situations or
concerns. An important
recent action was the
proscription of most
loans from clients.
Finally, the SEC's
Staff Report on Auditor
Independence states on
page 34 that "the
problem of an
appearance of 'client
advocacy' may not be
susceptible to
correction through
additional, objective
independence
interpretations or
rules."
23. There must be a For the reasons stated Metcalf Accounting
requirement that in its report, Scope of Subcommittee profession
independent auditors of Services by CPA Firms, (1977)
publicly owned the POB rejected the
corporations perform notion of arbitrary and
only services directly sweeping restrictions
related to accounting. on useful services
Nonaccounting provided by CPA firms.
management services, However, the SECPS does
such as executive prohibit member firms
recruitment, marketing from performing the
analysis, plant layout, following services for
product analysis, and SEC audit clients:
actuarial services, are psychological testing,
incompatible with the public opinion polls,
public responsibilities merger and acquisition
of independent auditors assistance for a
and should be finder's fee, and
discontinued. certain executive
Management services recruitment and
relating to accounting actuarial services.
are confined to the
limited area of
providing certain
computer and systems
analyses that are
necessary for improving
internal control
procedures of
corporations.
24. Independent The AICPA believes, Metcalf Accounting
auditors should generally, that such Subcommittee profession
discontinue all employment from time to (1977)
placement of departing time is an inevitable
employees with their consequence of the
corporate clients. training and experience
that the public
accounting profession
provides to its staff;
is beneficial to all
concerned, including
society in general; and
should not be
proscribed. However,
the June 1993 policy
statement of the AICPA
Board of Directors does
call on the SEC and
other regulatory bodies
to prohibit public
companies and other
organizations with
public accountability
from hiring the partner
responsible for their
audit for one year
after the partner
ceases to serve that
client. (ET �191.154
provides guidance to a
firm when an individual
participating in an
engagement is
considering or has
accepted employment
with the client.)
25. Public disclosure The AICPA does not Metcalf Accounting
would be enhanced by believe disclosure Subcommittee profession
stating whether would be enhanced by (1977) and SEC
competitive bidding adoption of this
practices are used in recommendation. Some
contracting for users would assume that
services with auditor selection is
independent auditors. enhanced by a
competitive bidding
process, while others
would fear that process
has led or will lead to
a reduction in the
scope or quality of
services. With no more
facts than this at
their disposal, users
would only be confused.
The AICPA believes the
focus should be on
quality, not fees, and
for that reason agrees
with the POB that the
SEC should require SEC
registrants to disclose
whether their auditors
have had a peer review,
the date of the most
recent review, and its
results.
26. The problems of This was done via ASR Metcalf SEC
appearing to audit 250 and 264, issued in Subcommittee
one's own work and 1978 and 1979, (1977)
unfair competition can respectively. For the
arise even when reasons stated in ASR
independent auditors 296 and 297, the SEC
provide accounting- rescinded these
related management releases in 1981. For
services for audit additional background
clients. Because so and information, see
many parties outside the SEC's Staff Report
the accounting on Auditor
profession are directly Independence, March
interested, the SEC 1994. That report notes
should use public rule- (see p. 34) that there
making to consider has been no dramatic
proposals for increase in the
surmounting such management advisory
problems and to services provided to
implement public policy SEC clients, which
in the area of suggests that "a
management services. fundamental change in
SEC regulations is not
necessary at this
time."
27. Concerned directors As indicated on page 30 Metcalf Public
and audit committees of the SEC's Staff Subcommittee companies or
should carefully review Report on Auditor (1977) SEC
the policies of their Independence, March
corporations to assure 1994, the SEC has found
that the auditor's that "audit committees
independence does not consisting principally
appear to be of nonemployee
compromised. directors actively were
reviewing management
advisory activities and
auditors generally were
not performing those
services believed to
have an impact on their
independence."
28. There must be an The AICPA has removed Metcalf Accounting
immediate end to those proscriptions Subcommittee profession
artificial professional from its Code of (1977)
restrictions against Professional Conduct,
advertising, talking and firms freely
with another firm's advertise and solicit
clients, and talking clients and the
with another firm's employees of other
employees about firms. Such
possible employment proscriptions are still
without first informing maintained by some
that firm. Prohibitions state boards of
by accounting accountancy, but the
organizations in some AICPA has no authority
states against over these independent
competitive bidding regulatory agencies.
should also be removed.
29. Rotation should be SECPS membership Metcalf Accounting
studied more by the requirements require Subcommittee profession
accounting profession that the audit partner- (1977) and SEC
and the SEC in order to in-charge of an SEC
better determine engagement be rotated
potential benefits and after he or she has
problems. At a minimum, served in that capacity
personnel assigned to a for 7 consecutive
specific audit within years. (Recognizing the
an accounting firm problems of smaller
should be rotated. firms, and with the
concurrence of SEC
staff, this requirement
does not apply to such
firms if they audit
less than five SEC
clients.) In addition,
the SECPS has studied
this recommendation
extensively and in 1992
issued a Statement of
Position regarding
mandatory rotation of
audit firms of publicly
held companies, which
explains why that
proposal is neither
necessary nor
appropriate. Finally,
after discussing the
various costs and
benefits of audit firm
rotation, the SEC's
Staff Report on Auditor
Independence advises
against mandatory
rotation by legislation
or rule-making at this
time.
30. Public accounting These services are Cohen Accounting
firms should not engage proscribed by the Commission profession
in employment membership requirements (1978)
recruiting or placement of the SECPS.
of individuals who
would be directly
involved in the
decision to select or
retain independent
auditors.
31. The auditor's A 1979 interpretation Cohen Accounting
standard of care when (AU �9336.04-05) Commission profession
he uses a specialist confirms that when a (1978)
who is an employee of specialist employed by
his firm should be the audit firm provides
extended beyond what is advisory services to a
required under existing client and the auditor
standards on the use of uses that work, the
a specialist to treat guidance in SAS 11
the work of that should be followed. SAS
employee no differently 11 was subsequently
than the work of a superseded by SAS 73,
qualified employee of issued in July 1994,
the client. and that guidance is
embodied in the
revision.
32. No prohibition of Although the SECPS Cohen Accounting
management services is proscribes certain Commission profession
warranted (other than other services (1978)
the limitation on (psychological testing,
placement and public opinion polls,
recruitment noted in 30 and merger and
above). acquisition assistance
for a finder's fee),
the SECPS and
the profession concur
with this
recommendation. (See
section in the POB
report on Scope of
Services by CPA Firms,
1979.)
33. The board of SECPS membership Cohen Public
directors (or its audit requirements (SECPS Commission companies and
committee) should Reference Manual (1978) accounting
consider all the �1008.(i)) mandate an profession
services provided by annual report to the
the independent audit committee of each
auditor. The SEC client on the total
independent auditor fees received from the
should inform the board client for management
or audit committee of advisory services
all the services during the year under
provided to the audit and a description
company; the of the types of such
relationship of those services rendered.
services, or lack Also, see discussions
thereof, to the audit of communications
function; the fees for requirements in SAS 53,
those services; and the on errors and
fact that information irregularities; SAS 54,
acquired in providing on illegal acts by
the other services must clients; and SAS 61, on
be considered by the communication with
auditor in fulfilling audit committees, and
his audit note that "Information
responsibilities. and Communication" is
one of the five
components of internal
control under the COSO
report.
34. Professional SAS 22 includes as a Cohen Accounting
standards should planning procedure Commission profession
require that public discussing matters that (1978)
accounting firms may affect the audit
establish policies and with firm personnel
procedures to assure responsible for
that knowledge gained nonaudit services to
from other services is the client, and an
made available to the interpretation (AU
partner in charge of �9311.01-.03) addresses
the audit so that he that subject.
can consider its
implications for the
audit function,
including assuring that
consulting personnel
who are not CPAs are
made aware of the
public accounting
firm's professional
responsibility as an
independent auditor.
35. Professional SAS 50 provides Cohen Accounting
standards should be performance and Commission profession
expanded to cover the reporting standards for (1978)
provision of advice on reports on the
accounting principles. application of
They should identify accounting principles.
appropriate The statement requires
considerations in order communication with the
to avoid activities continuing accountant
which do, or appear to, to ascertain relevant
jeopardize facts so as to provide
independence. additional assurance
about the quality of
the advice given.
36. All companies This was done via ASR Cohen Public
should disclose in 250 and 264, issued in Commission companies or
their management 1978 and 1979, (1978) SEC
reports information on respectively. For the
the nature of other reasons stated in ASR
services provided to 296 and 297, the SEC
them by their rescinded these
independent auditors. releases in 1981. For
additional background
and information, see
the SEC's Staff Report
on Auditor
Independence, March
1994.
37. The board of Although AICPA believes Cohen Public
directors, through its audit committees Commission companies or
outside directors or generally have and (1978) SEC
audit committee if such exercise this
exist, should be authority, it has not
responsible for been mandated. As
recommending to indicated on page 30 of
shareholders the the SEC's Staff Report
appointment of on Auditor
independent auditors Independence, March
and for evaluating the 1994, the SEC has found
relationship between that "audit committees
the auditor and consisting principally
management. of nonemployee
directors actively were
reviewing management
advisory activities and
auditors generally were
not performing those
services believed to
have an impact on their
independence."
38. The type of SAS 61 para. 11 Cohen Accounting
disclosure in financial requires all Commission profession
statements required by significant (1978)
the SEC in ASR 194 disagreements to be
concerning discussed with the
disagreements when a audit committee. SAS 7
change of auditors is para. 6-7 requires the
made should be required predecessor auditor to
for all financial "respond promptly and
statements. fully" to certain
inquiries made by the
successor auditor,
including
"disagreements with
management as to
accounting principles,
auditing procedures, or
other similarly
significant matters."
SAS 50 provides
performance standards
and reporting guidance
with respect to written
reports and oral advice
on the application of
accounting principles.
39. Rotation of firms SECPS membership Cohen Accounting
should not be required. requirements require Commission profession
Many of the asserted that the audit partner- (1978)
advantages of rotation in-charge of an SEC
can be achieved if the engagement be rotated
public accounting firm after he or she has
systematically rotates served in that capacity
the personnel assigned for 7 consecutive
to the engagement. years. After discussing
the various costs and
benefits of audit firm
rotation, the SEC's
Staff Report on Auditor
Independence advises
against mandatory
rotation by legislation
or rule-making at this
time.
40. Public accounting In March 1980, the Cohen Accounting
firms should not SECPS issued the Commission profession
abandon time budgets, Position Paper of Task (1978)
but they must improve Force on Certain
current methods, Aspects of the
particularly for the Auditor's Work
evaluation of variances Environment. The SECPS
and their effect on the membership requirements
evaluation of also mandate the
personnel. preparation and
dissemination to all
personnel of a
"Statement of Firm
Philosophy." The
illustrative statement
provided by the SECPS
Reference Manual
(�1000.42) emphasizes
the need for an
overriding commitment
to high-quality
professional
performance.
41. Individual See action taken for Cohen Accounting
accounting firms should recommendation 40. Commission profession
immediately undertake (1978)
to conduct studies to
determine the extent of
excessive time and
budget pressures and
the effects on their
practices.
42. To reduce client No action taken. Cohen SEC
pressures, a brief Commission
statement should be (1978)
required on each page
of the press release or
other dissemination of
early earnings release
that might read as
follows: "The
accompanying results
have been prepared by
management; they may be
subject to significant
revision upon
examination by the
independent auditors."
43. Auditors should See action taken for Cohen Accounting
carefully assess the recommendation 40. Commission profession
effect of time/ (1978)
deadline pressures on
their work and refuse
to accept such
deadlines when they are
imposed in opposition
to their judgment.
44. Accepting an audit Antitrust Cohen Accounting
engagement with the considerations Commission profession
expectation of precluded ethics action (1978)
offsetting early losses on this recommendation.
or lower revenues with However, the SECPS peer
fees to be charged in review standards
future audits address the substance
represents a threat to of the concern by
independence. requiring the selection
Consequently, the of some initial audits
Ethics Division of the in a firm's peer review
AICPA should consider (SECPS Reference Manual
this problem. �2000.70(c)).
45. All firms should This broad area has Cohen Accounting
develop for their been left to firms, Commission profession
staffs carefully drawn although the SECPS (1978)
rules on gifts and membership requirement
discount purchases from for a "Statement of
clients, and the AICPA Firm Philosophy" draws
should provide more the attention of
definitive guidance on personnel to the
what amounts can be special importance of
considered "token." independence. The
professional ethics
division did not find
it necessary to define
"token," believing that
term is clear in
itself.
46. Experimentation The disclosure of Cohen Accounting
with disclosure of financial data, with Commission profession
financial and which some firms (1978)
nonfinancial data by experimented, tends to
firms is encouraged, focus attention on a
but there is no firm's perceived
overriding need for a ability to pay damages
requirement in that in litigation rather
regard. than on its quality
controls, and has not
been required. However,
SECPS member firms are
required to disclose
substantive operating
information about,
e.g., personnel, number
of SEC clients, pending
litigation, the
composition of fees,
management advisory
fees for SEC clients,
and mergers in the
annual reports included
in the SECPS public
files.
47. The auditor should Disclosure of whether Cohen Accounting
be required to be the auditor is expected Commission profession
present and available to be present at the (1978)
to answer questions at shareholders' meeting
the annual meeting of and available to answer
the shareholders. questions is required
in the proxy statement.
48. There are many No broad proscriptions POB Accounting
potential benefits to have been established, (1979) profession
be realized by and none, in the
permitting auditors to AICPA's opinion, are
perform management required.
advisory services for
audit clients that
should not be denied to
such clients without a
strong showing of
actual or potential
detriment. The
profession, therefore,
should be careful not
to impose unnecessarily
broad prophylactic
rules with respect to
management advisory
services and
independence.
49. Mandatory See action taken for POB Accounting
limitations on scope of recommendation 48. (1979) profession
services should be
predicated only on the
determination that
certain services, or
the role of the firm
performing certain
services, will impair a
member's independence
in rendering an opinion
on the fairness of a
client's financial
statements or present a
strong likelihood of
doing so. Recognizing
that independence in an
absolute sense cannot
be achieved, when
evaluating whether
certain services should
be prohibited, it is
necessary to consider
the potential benefits
derived from the
service and balance
them against the
possible to apparent
impairment to the
auditor's objectivity.
50. At this time no See action taken for POB Accounting
rules should be imposed recommendation 48. (1979) profession
to prohibit specific
services on the grounds
that they are or may be
incompatible with the
profession of public
accounting, might
impair the image of the
profession, or do not
involve accounting or
auditing related
skills.
51. The existing See the SECPS POB Accounting
limitations on membership requirement (1979) profession
management advisory in the SECPS Reference
services concerning Manual (�1000.08(h)),
independence contained which specifically
in professional proscribes providing
standards and the Code for SEC audit clients
of Professional Ethics the following types of
embrace several services: psychological
provisions that are testing, public opinion
helpful in ensuring polls, merger and
that independence will acquisition assistance
be maintained. for a finder's fee,
Compliance with those certain executive
applicable provisions recruitment services,
should be made a and certain actuarial
condition of membership services to insurance
in the SECPS, and peer companies.
reviews should be
required to test for
compliance.
52. SECPS members See the SECPS POB Accounting
should be required to membership requirements (1979) profession
include in their annual in the SECPS Reference
disclosure statements Manual (�1000.08(g)(12)
filed with the SECPS and (13)) and the
disclosure of gross additional disclosure
fees both for requirements in the
management advisory SECPS Reference Manual
services and tax (�1000.08(g)(15)).
services performed for
audit clients expressed
as a percentage of
aggregate fees charged
during the reporting
period.
53. An accounting firm See the SECPS POB Accounting
should not provide membership requirement (1979) profession
actuarial services for in the SECPS Reference
an insurance company Manual
audit client unless (�1000.08(h)(5)).
those services are
supplemental to primary
actuarial advice
furnished by another
actuary not associated
with the accounting
firm.
54. The POB accepts the The proscription POB Accounting
recent action of the referenced in this (1979) profession
executive committee recommendation has been
proscribing certain maintained. See SECPS
executive recruiting Reference Manual
services inasmuch as (�1000.08(h)(4)).
the services proscribed
are perceived by others
as having a strong
likelihood of impairing
independence, are
available from other
responsible sources,
and do not otherwise
produce sufficient
countervailing
benefits. In general,
however, the POB is
reluctant to support
prohibitions against
useful services which
are based primarily on
appearance without an
adequate basis in fact.
55. Nonattest services See action taken for Anderson Accounting
should not be limited recommendation 48. Committee profession
by imposition of (1986)
arbitrary restrictions.
Rather, the
acceptability of an
activity must be
determined by AICPA
members in keeping with
the spirit of the Code
of Professional Ethics.
56. To provide further Anderson Accounting
guidance, the Standards Committee profession
of Professional Conduct (1986)
require that members
should: Participation in an
AICPA-approved practice
(a) practice in firms monitoring program,
that have in place which is mandatory,
internal quality- provides reasonable
control procedures to assurance as to a
ensure that services firm's compliance with
are delivered in a the quality control
competent manner and standards of the
are adequately profession in the
supervised; conduct of its
accounting and auditing
practice. This was also
specifically
implemented in Article
VI in ET �57.
(b) determine whether,
in their individual Specifically
judgments, the nature implemented in Article
or magnitude of other VI in ET �57 and Rule
services provided to an 102 and its
audit client over time interpretation.
might create, or appear
to create, conflicts of
interest in the
performance of the
audit function for that Specifically
client; and implemented in Article
VI in ET �57.
(c) assess whether, in
their individual
judgments, an activity
is consistent with
their role as
professionals--for
example, it is a
reasonable extension or
variation of existing
services offered by the
member or others in the
profession.
57. In order to make This recommendation was Anderson Accounting
professional standards implemented in the Committee profession
more relevant and revised Code of (1986)
effective, the Professional Conduct,
structure of the adopted January 12,
Institute's Code of 1988.
Professional Ethics
should be recast into Broad standards cannot
two basic sections: be enforced, per se.
However, they serve as
(a) Standards of guides to the
Professional Conduct, professional ethics
which will be division in evaluating
enforceable, and the significance of
(b) Rules of infractions of specific
Performance and rules.
Behavior.
58. The Standards of Anderson Accounting
Professional Conduct Committee profession
will contain six (1986)
articles. See Preamble to Code of
Professional Conduct
(a) Purpose (ET �51.02).
See Introduction to
(b) Applicability Code of Professional
Conduct, as well as the
Applicability section
(ET �91.02).
(c) Responsibilities
See Article I of the
Code of Professional
(d) Explicit standards Conduct (ET � 52.01).
(dealing with the
public interest, See Articles II, III,
integrity, objectivity IV, V, and VI of the
and independence, due Code of Professional
care, and scope and Conduct (ET �53.04 to
nature of services) 57.03).
(e) Performance
standards Performance standards
are set forth in Rule
201 (ET �201.01-.02).
(f) Compliance
Compliance with
standards is covered by
Rule 202 (ET � 202.01).
59. The Rules of nderson A ccounting
Performance and Committee profession
Behavior should (1986)
include: See Rule 101 and
related A
(a) independence, interpretations and
rulings in ET �100.
(b) general standards, See Rule 202 in ET
�200.
(c) compliance with
standards, See Rule 202 in ET
�200.
(d) accounting
principles, See Rule 203 in ET
�200.
(e) confidential client
information, See Rule 301 in ET
�300.
(f) contingent fees,
See Rule 302 in ET
(g) acts �300.
discreditable,
See Rule 501 in ET
(h) advertising and �500.
other forms of
solicitation, See Rule 502 in ET
�500. This rule and its
interpretations bar
only false, misleading,
(i) commissions, and or deceptive acts in
advertising or
solicitation.
See Rule 503 in ET
�500. This rule bars
commissions only when a
member also performs a
review or examination
of historical or
prospective information
(j) form of practice or performs a
and name. compilation of
financial statements
expected to be used by
third parties and does
not disclose a lack of
independence, all
pursuant to an
agreement with the
Federal Trade
Commission.
See Rule 505 in ET
�500.
60. Current rule 504 in There is no rule on Anderson Accounting
the Code of incompatible Committee profession
Professional Ethics on occupations. (1986)
incompatible
occupations should be
deleted.
61. The accounting The ASB issued SAS 61 Big 7 Accounting
profession should on communication with (1986) profession
enhance the public's audit committees, and
perception of the the POB issued a report
independence and in 1979 on its study of
objectivity of management advisory
auditors. services.
62. Eliminate the The SEC revised its Big 7 Accounting
potential abuse of Form 8-K requirement. (1986) profession,
"opinion shopping" by Moreover, firms that SEC, and other
such steps as the are members of the SEC regulators
following: Practice Section must
notify the chief
(a) The SEC should accountant of the SEC
strengthen the Form 8- within 5 business days
K requirement on when they resign or are
auditor changes as to terminated as auditors
the level of of an SEC registrant.
disclosures and the FDICIA requires large
degree of follow-up banks and thrifts to
when there are reported provide written
differences as to notification to the
accounting or auditing FDIC and other
matters. appropriate federal or
state banking
(b) Regulatory agencies regulatory agencies of
other than the SEC the resignation or
should require dismissal of an auditor
disclosures concerning or the engagement of a
auditor changes similar new auditor, including
to those required by reasons for the change,
the SEC in Form 8-K. within 15 calendar days
of the change. Section
(c) Peer reviewers (g)(5) requires any
should scrutinize all independent public
engagements assumed accountant performing
since the last peer services required by
review where there were FDICIA to notify the
disclosures (in Form 8- FDIC if the accountant
K and similar filings) ceases to perform those
of a significant services.
disagreement or the This requirement is now
former accounting firm a part of the SECPS
resigned. Standards for
Performing and
(d) Auditing standards Reporting on Peer
should require a Reviews. SAS 53
successor auditor to identifies a situation
focus more sharply on where there is not
auditor-change sufficient information
circumstances where available from the
there is no Form 8-K or predecessor auditor as
similar filing. one of the factors that
should be considered in
assessing risk at the
financial statement
level. Also SECPS peer
review standards
contain specific
requirements for
reviewing client
acceptance
documentation on SEC
clients as part of the
process of selecting
engagements for review.
The Private Securities
Litigation Reform Act
of 1995 (�301) requires
a registrant to notify
the SEC when an auditor
reports to the
registrant's board of
directors that it has
become aware of certain
illegal acts of the
registrant that are
material to its
financial statements.
If the registrant fails
to provide that notice,
then the auditor must
send to the SEC a copy
of the report it gave
to the board.
63. The boards of NYSE listing Treadway SEC
directors of all public requirements mandate Commission
companies should be independent audit (1987)
required by SEC rule to committees. Following
establish audit this recommendation,
committees composed the SEC wrote to the
solely of independent other exchanges and the
directors. NASD, encouraging them
to review their audit
committee requirements.
In response, the NASD
strengthened its
recommendation that all
national market system
companies have audit
committees with a
majority of independent
directors into a
requirement, and the
AMEX adopted a similar
requirement. FDICIA
requires independent
audit committees for
large banks and
thrifts. The AICPA
believes that SEC
registrants and other
publicly accountable
entities should be
required to have
independent audit
committees whenever
practicable. (See June
1993 policy statement
of the AICPA Board of
Directors.)
64. Audit committees The COSO report Treadway Public
should be informed, adequately describes Commission companies or
vigilant, and effective the roles and (1987) SEC
overseers of the responsibilities of
financial reporting audit committees and
process and the the report has been
company's internal widely publicized with
controls. a special effort to
reach corporate
directors. However,
this must be an ongoing
effort because media
reports indicate a need
to continue to enhance
compliance with this
recommendation.
65. All public The AICPA has no Treadway Public
companies should specific information as Commission companies
develop written to implementation of (1987)
charters setting forth this recommendation;
the duties and however, see the action
responsibilities of taken for
their audit committees. recommendation 64.
The boards of directors
should approve the
charters, review them
periodically, and
modify them as
necessary.
66. Audit committees The AICPA has no Treadway Public
should have adequate specific information as Commission companies
resources and authority to implementation of (1987)
to discharge their this recommendation;
responsibilities. however, this notion is
implicit throughout the
COSO report.
67. All public This recommendation has Treadway SEC
companies should be been discussed with the Commission
required by SEC rule to SEC, but no formal (1987)
include in their annual action has been taken
reports to stockholders yet. See the action
letters signed by the taken for
chairmen of the audit recommendation 82.
committees describing
the committees'
responsibilities and
activities during the
year.
68. Management should SAS 61 requires that Treadway Public
advise the audit the auditor, when he or Commission companies
committee when it seeks she is aware that (1987)
a second opinion on a management has
significant account consulted with another
issue. auditor, discuss with
the audit committee
significant matters
that were the subject
of the consultation.
69. Audit committees The AICPA has no Treadway Public
should oversee the specific information as Commission companies
quarterly reporting to implementation of (1987)
process. this recommendation;
however, the roles and
responsibilities of the
audit committee are
discussed in the COSO
report and quarterly
reporting is covered by
that report.
70. The audit committee No specific action has Treadway Public
should review been taken on this Commission companies
management's evaluation recommendation. (1987)
of factors related to However, see the action
the independence of the taken for
company's public recommendation 71.
accountant. Both the Also, there are a
audit committee and number of SECPS
management should membership requirements
assist the public designed to foster
accountant in independence, such as
preserving his peer review, concurring
independence. partner review, audit
partner rotation,
reporting certain
firmwide data on
management advisory
services, proscriptions
of certain services,
and publication of a
statement of firm
philosophy.
71. Before the As indicated on page 30 Treadway Public
beginning of each year, of the SEC's Staff Commission companies
the audit committee Report on Auditor (1987)
should review Independence, the SEC
management's plans for has found that "audit
engaging the company's committees consisting
independent public principally of
accountant to perform nonemployee directors
management advisory actively were reviewing
services during the management advisory
coming year, activities and auditors
considering both the generally were not
types of services that performing those
may be rendered and the services believed to
projected fees. have an impact on their
independence."
72. When a public The SEC revised its Treadway SEC
company changes Form 8-K requirements Commission
independent public to provide for (1987)
accountants, it should increased disclosure
be required by SEC rule and speedier
to disclose the nature notification when there
of any material is a change of
accounting or auditing auditors. Also, SAS 61
issue discussed with requires discussion
both its old and new with the audit
auditor during the 3- committee of
year period preceding significant accounting
the change. policies and any
disagreements with
management. SAS 50
provides tightened
standards on reports on
the application of
accounting principles.
Finally, SECPS
membership requirements
(SECPS Reference Manual
�1000.08(m)) requires
that the SEC be
notified within 5
business days when
there is a change of
auditors. The Private
Securities Litigation
Reform Act of 1995
requires auditors to
report to the SEC
certain uncorrected
illegal acts committed
by registrants.
73. The SEC should The SEC has not changed GAO SEC
reverse its decision to its requirements, but (1989)
not require all public has written to the NASD
companies to establish and to all stock
an audit committee and exchanges (except the
adopt a requirement for NYSE) to urge them to
public companies to upgrade their listing
establish such requirements in this
committees. regard. As a result the
AMEX and the NASD have
strengthened their
audit committee
requirements.
74. The AICPA, or the See the SECPS GAO AICPA, SEC, or
SEC if it concludes it membership requirement (1989) Congress
has the authority, in the SECPS Reference
should require Manual (�1000.08(m)),
accountants to report which requires that the
directly to the SEC SEC be notified within
when they resign or are 5 business days when
terminated. However, if there is a change of
the AICPA or the SEC auditors. The Private
does not adopt such a Securities Litigation
requirement, Reform Act of 1995
legislation would be (�301) requires
necessary to require auditors to report to
direct notification to the SEC certain
the SEC. uncorrected illegal
acts committed by
registrants.
75. The Congress should Securities laws were GAO Congress
amend securities laws not amended; however, (1990)
to require public FDI Act �36(g)(1)
companies and insured addresses audit
depository institutions committee requirements
to have audit for large banks and
committees made up of thrifts (1990).
outside directors who
are totally independent
in fact and appearance
and have no impairment
which would keep them
from acting in the best
interest of
stockholders and the
public.
76. The Congress should No action taken. GAO Congress
amend securities laws (1990)
to require auditors to
promptly inform
appropriate regulatory
authorities when they
resign or are
terminated.
77. The Congress should See FDI Act �36(g)(1). GAO (1991) Congress
enact legislation
requiring that as a
condition for federal
depository insurance,
depository institutions
have truly independent
audit committees made
up solely of outside
directors with duties
that include reviewing
with management and the
independent accountant
the basis for the
reports of management
and the independent
accountant.
78. The Congress should See FDI Act �36(g)(1). GAO Congress
enact legislation that (1991)
requires large
institutions to
maintain audit
committees that (a)
include members with
banking or related
financial management
expertise, (b) include
an attorney member or
have their own outside
counsel, and (c) do not
have members that are
large customers of the
institutions.
79. Organizations FDI Act �36 (g)(1) GAO Congress
should be required to includes audit (1991)
establish totally committee requirements
independent audit for large banks and
committees made up thrifts. Stock
solely of outside exchanges also mandate
directors. These audit committee
committees would review requirements. See
the basis for internal action taken for
control assessments and recommendation 13.
reports of both
management and the
independent auditors.
80. Audit committees No action taken. GAO Congress
should have written (1991)
charters that are
approved and reviewed
periodically by the
organizations' boards
of directors, and have
adequate resources and
authority to discharge
their responsibilities.
81. The Congress should FDI Act �36(g)(5) GAO Congress
enact legislation requires independent (1991)
requiring that accountants of large
independent public banks and thrifts to
accountants acting as notify FDIC if they
auditors of federally cease to be accountants
insured financial for the institutions
institutions be (U.S.C. 1831m(g)(5)).
required to notify the Institutions are
regulators of the required by FDI Act
timing and reasons for �36(h)(2)(B) to notify
changes in their status regulators (see U.S.C.
as auditors of 1831m(h)(2)(B)).
federally insured
financial institutions.
82. The SEC should This recommendation was POB SEC
require each registrant discussed in a meeting (1993)
to include in a between AICPA
document containing the representatives and the
annual financial Chairman of the SEC on
statements a statement December 15, 1993.
by the audit committee Under SEC rules,
(or by the board if companies making proxy
there is no audit solicitations must
committee) that describe the functions
describes its performed by the audit
responsibilities and committee. Also, when a
tells how they were company changes
discharged. This auditors, certain
disclosure should state disclosures are
whether the audit required regarding
committee members (or whether the audit
board members) (a) have committee recommended
reviewed the annual or approved the change
financial statements, and whether it
(b) have conferred with consulted with the
management and the former accountant
independent auditor concerning
about them, (c) have disagreements with
received from the management and certain
independent auditor all other matters. No
information that the further action was
auditor is required to taken.
communicate under
auditing standards,
(d) believe that the
financial statements
are complete and
consistent with
information known to
them, and (e) believe
that the financial
statements reflect
appropriate accounting
principles.
83. Audit committees This recommendation was POB Public
(or the boards if there discussed in a meeting (1993) companies
are no audit between AICPA
committees) should representatives and the
assume the following Chairman of the SEC on
responsibilities December 15, 1993. No
relating to an SEC further action was
registrant's taken.
preparation of annual
financial statements:
(a) review the annual
financial statements,
(b) confer with
management and the
independent auditor
about them, (c) receive
from the independent
auditor all information
that the auditor is
required to communicate
under auditing
standards, (d) assess
whether the financial
statements are complete
and consistent with
information known to
them, and (e) assess
whether the financial
statements reflect
appropriate accounting
principles.
84. The AICPA should The professional ethics POB Accounting
undertake a project to division issued (1993) profession
sharpen further the Interpretation 102-6 in
distinction between August 1995 that
client advocacy and sharpens that
client service and distinction, and the
incorporate that POB believes it is
distinction into the responsive to its
profession's Code of recommendation.
Professional Conduct.
Individual accounting
firms should constantly
review their programs
regarding client
advocacy and client
service to strengthen
the desire of each
audit partner to
protect the firms'
independence.
85. Accounting firms Representatives of the POB Accounting
should take special SECPS and the POB have (1993) profession
care to ensure that met with the chairmen
their participation in of FASB, the ASB, and
the standard-setting AcSEC to discuss this
process is subject. The chairmen
characterized by of the ASB and AcSEC
objectivity and have reminded their
professionalism. members of the need to
Standard setters and insure that objectivity
leaders of the is maintained in the
profession should standard-setting
discuss and address the process. Also, see
issues related to action taken for
client advocacy in the recommendation 84.
standard-setting
process and establish
ways of identifying and
correcting aberrant
behavior when it
occurs.
86. Accounting firms' Following a meeting POB Accounting
consultation policies with the SEC chief (1993) profession
and procedures should accountant and his
ensure that client staff in January 1994,
accounting issues are the POB decided to
not discussed with SEC withdraw this
staff without the recommendation because
benefit of consultation it appears such
at the appropriate consultation is taking
level within the firms. place before firms
discuss issues with SEC
staff.
87. The concurring The SECPS adopted an POB Accounting
partner, whose amendment to its (1993) profession
participation in an concurring partner
audit is a membership review membership
requirement of the requirements in April
SECPS, should be 1994 in response to
responsible for this recommendation.
assuring that those When such consultation
consulted on accounting occurs, the concurring
matters are aware of reviewer must be
all of the relevant satisfied that the
facts and conclusions reached are
circumstances, appropriate in light of
including an all the relevant facts
understanding of the and circumstances. See
financial statements in SECPS Reference Manual
whose context the (�1000.39(b)).
accounting policy is
being considered. The
concurring and
consulting partners
should know enough
about the client to
ensure that all of the
relevant facts and
circumstances are
marshalled, and also
possess the increased
detachment that comes
from not having to face
the client on an
ongoing basis.
88. The audit committee See action taken for POB Public
or the board of recommendation 83. (1993) companies
directors should be
satisfied that the
audit fee negotiated by
it or management for
the entity's audit is
sufficient to assure
the entity will receive
a comprehensive and
complete audit.
89. SEC registrants and This recommendation was AICPA Board of SEC
other publicly discussed at a meeting Directors
accountable entities between the AICPA's (1993)
should be required to leadership and the
have audit committees Chairman of the SEC at
composed entirely of a meeting on December
independent directors 15, 1993. See action
whenever practicable. taken for
recommendation 63.
90. The SEC should See action taken for AICPA Board of SEC
require audit recommendation 83. Directors
committees to include Under SEC rules, (1993)
statements in annual companies making proxy
reports describing solicitations must
their responsibilities describe the functions
and how these performed by the audit
responsibilities were committee.
discharged.
91. The audit committee See action taken for AICPA Board of Public
members should be recommendation 83. Directors companies
charged with specific (1993)
responsibilities,
including overseeing
the financial reporting
process and
recommending
appointment of the
entity's auditors.
92. Public companies This recommendation was AICPA Board of Public
and other organizations discussed at a meeting Directors companies
with public between the AICPA's (1993)
accountability should leadership and the
be prohibited from Chairman of the SEC at
hiring the partner a meeting on December
responsible for their 15, 1993. No further
audit for 1 year after action was taken.
the partner ceases to
serve that client.
93. Financial Regulators do not GAO Financial
regulators should believe it is (1994) regulators
establish specific appropriate to mandate
requirements for the composition of
independent, audit committees.
knowledgeable audit
committees.
94. The SEC should The SEC does not GAO SEC
ensure that SEC believe it is (1994)
registrants that are appropriate to adopt a
major end users of federally imposed
complex derivative mandate governing the
products establish and composition of audit
implement corporate committees for all
requirements for public companies.
independent,
knowledgeable audit
committees.
95. The POB, the SEC, The AICPA supports this Kirk Panel POB, SEC, and
and others should recommendation. See (1994) public
support proposals to action taken for companies
enhance the recommendation 63.
independence of boards
of directors and their
accountability to
shareholders. Stronger,
more accountable
corporate boards of
directors will
strengthen the
professionalism of the
outside auditor,
enhance the value of
the independent audit,
and serve as the
investigating public.
96. Independent The AICPA has appointed Kirk Panel Accounting
auditing firms, a Special Committee on (1994) profession
regulators, and Assurance Services
overseers of the public (Elliott Committee) in
accounting profession recognition of the
need to focus on how special significance of
the audit function can the CPA's
be enhanced and not responsibility and
submerged in large ability to provide
multiline public independent assurance
accounting/management and the need to
consulting firms. consider how to improve
that function in a
rapidly changing
environment.
97. To increase the The SECPS Response to Kirk Panel Public
value of the the POB Advisory Panel (1994) companies
independent audit, on Auditor Independence
corporate boards of was published in August
directors and their 1995. It endorses this
audit committees must recommendation.
hear from independent
auditors their views as
professional advisors
on the appropriateness
of the accounting
principles used or
proposed to be adopted
by the company, the
clarity of its
financial disclosures,
and the degree of
aggressiveness or
conservatism of the
company's accounting
principles and
underlying estimates.
98. The accounting The SECPS Response to Kirk Panel Accounting
profession should look the POB Advisory Panel (1994) profession
to the representatives on Auditor Independence
of the shareholders-- was published in August
the board of directors- 1995. It recognizes the
-as the client, not important stewardship
corporate management. responsibilities of
Boards and auditors boards of directors and
are, or should be, notes that to be
natural allies in effective,
protecting the communications on
shareholder interest. accounting matters must
involve the board and
its audit committee,
management, and the
independent auditor.
99. Auditors must The SECPS Response to Kirk Panel Accounting
assume the obligation the POB Advisory Panel (1994) profession
to communicate on Auditor Independence
qualitative judgements was published in August
about accounting 1995. It endorses this
principles, recommendation.
disclosures, and
estimates. By doing so,
independent auditors
can add to the
effectiveness of boards
of directors in
monitoring corporate
performance on behalf
of shareholders and in
assuring that
shareholders receive
relevant and reliable
financial information
about company
performance and
financial condition.
100. Because they share The AICPA and FASB are Kirk Panel Accounting
the objective of committed to working in (1994) profession,
providing the public a cooperative way with AICPA, FASB,
with relevant and the SEC. Although from and SEC
reliable financial time to time
information, the public relationships have been
accounting profession, strained, the process
the standard setters, of resolving conflict
and the SEC must have is a positive one. In
more cooperative, less that connection, the
adversarial POB report itself is a
relationships. CPA response to criticisms
firms should be careful voiced by the former
in how they communicate chief accountant of the
their views to FASB, SEC and the stock
the SEC, their clients, compensation issues
and the public at have been addressed by
large. The SEC should FASB. Also, the new
help identify AICPA Financial
accounting practice Reporting Coordinating
problems and look to Committee, formed to
the private sector follow up on the
standard setters to recommendations of the
solve them--only being Jenkins Committee, has
a standard setter of already met with the
"last resort" and only SEC to exchange ideas
after appropriate due and views on key
process. issues.
--------------------------------------------------------------------------------
Table II.2
Audit Quality
Recommendation Recommendation
Recommendation Action taken made by/date directed to
----------------------- ----------------------- -------------- --------------
1. The AICPA's Auditing SAS 53 para. 5, which AICPA Special Accounting
Standards Executive superseded the earlier Committee on profession
Committee should SAS 16, makes it clear Equity
consider restating that the auditor has a Funding
those sections of SAS 1 responsibility to (1975)
which relate to the "design the audit to
auditor's provide reasonable
responsibility for assurance of detecting
detection of fraud. The errors and
auditing profession irregularities that are
should, on an ongoing material to the
basis, continue to financial statements."
improve the efficiency Moreover, the June 1993
of customary audit policy statement of the
procedures to the end AICPA Board of
that probability of Directors is
discovery of material unequivocal in
frauds continues to articulating the
increase within the profession's position:
limits of "The public looks to
practicality. the independent auditor
to detect fraud, and it
is the auditor's
responsibility to do
so." In May 1996, the
ASB exposed for comment
a proposed standard
that would amend SAS 53
to provide better
guidance to auditors in
detecting fraud.
2. The AICPA's Auditing The AICPA industry AICPA Special Accounting
Standards Executive audit guide on stock Committee on profession
Committee should life insurance Equity
consider whether the companies identifies Funding
Life Insurance Audit the circumstances in (1975)
Guide requires which the auditor
clarification with should ordinarily
regard to the confirm insurance
confirmation of policies in force with
policies with policyholders.
policyholders.
3. Circumstances such AU �334 of the AICPA AICPA Special Accounting
as those which were Professional Standards Committee on profession
present...highlight the was last modified in Equity
fact that transactions 1983. Interpretation 6 Funding
between related parties (AU �9334.16), issued (1975)
pose serious problems. in 1986, provides
The committee did not additional guidance on
attempt to reach any the nature and extent
conclusions regarding of auditing procedures
the problems inherent for examining related-
in auditing such party transactions.
transactions since the Also, audit risk alerts
auditing standards and industry audit and
executive committee of accounting guides
the AICPA is currently frequently focus on
studying the need for audit problems with
additional auditing respect to related
procedures in parties and related-
connection with party transactions.
related-party
transactions.
4. A CPA who falsifies This is the Moss SEC
or contributes to the responsibility of the Subcommittee
falsification of books SEC Division of (1976)
and records should be Enforcement, and both
suspended from individuals and firms
practicing before the have been suspended
SEC. from practice before
the SEC as a result of
the Division's
activities.
5. The SEC should Although the SEC has Moss SEC
prescribe by rule not issued a rule in Subcommittee
standards of conduct this respect, the (1976)
for independent objectives of this
accountants and recommendation are
auditors and for being achieved because
accounting firms the SEC does speak on
practicing before the independence matters
SEC and should take and enforces compliance
disciplinary action as with the technical
may be necessary to standards of the
assure adherence to profession and audit-
such standards. related SECPS
membership requirements
in disciplinary
hearings involving
CPAs.
6. Legislation amending See action taken for Moss Congress
section 10(b) of the recommendation 39. Subcommittee
Securities and Exchange (1976)
Act of 1934 is needed
to protect the public
against negligence by
accountants and others,
regardless of intent to
deceive or defraud.
7. To inform the public No action taken. Moss SEC
of the nature and However, SAS 54 Subcommittee
extent of illegal and provides guidance on (1976)
questionable activities the auditor's
in which corporations consideration of the
may be engaged, more financial statement
detailed public effect of illegal
disclosure in act(s) and on the
communications to the adequacy of disclosure
shareholders and the in the financial
media is necessary of statements. In
all companies, addition, the SAS
including detailed states that the auditor
descriptions of the should consider the
nature and purpose of implications of an
the payments and the illegal act on other
basis of their aspects of the audit,
illegality and how much particularly the
corporate employees and reliability of
management knew about representations by
the payments. management.
8. The SEC should refer The SEC consults with Moss SEC
to the Justice the Justice Department Subcommittee
Department cases where when appropriate. (1976)
the senior management
or the corporation's
independent auditors
had knowledge of, or
participated in,
illegal payments that
were not truthfully
disclosed in the
corporate books or
records.
9. The Congress should The Private Securities Metcalf Congress
amend federal Litigation Reform Act Subcommittee
securities laws to of 1995 (�201) allows Staff Study
restore the right of damaged individuals to (1977)
damaged individuals to sue auditors jointly
sue independent and severally if the
auditors for negligence auditor knowingly
under the fraud committed a violation
provisions of the of the securities laws
securities laws. and proportionately if
the auditor was found
negligent.
10. The federal The SEC oversees the Metcalf Federal
government itself AICPA's SECPS peer Subcommittee government
should periodically review program. See Staff Study
inspect the work of action taken for (1977)
independent auditors recommendation 31.
for publicly owned
corporations. This
could be done by GAO,
the SEC, or by a
special audit
inspection agency.
11. The federal The SEC monitors Metcalf Federal
government should auditor compliance with Subcommittee government
promulgate and enforce professional standards Staff Study
strict standards of through its oversight (1977)
conduct for auditors of the AICPA's SECPS
who verify the accuracy activities and the
of corporate financial actions of the SEC
statements under the Enforcement Division.
federal securities
laws. The SEC is the
appropriate agency to
promulgate and enforce
the standards of
conduct.
12. The SEC should The AICPA believes the Metcalf SEC
treat all independent SEC treats all Subcommittee
auditors equally in independent auditors Staff Study
disciplinary and equally in disciplinary (1977)
enforcement proceedings and enforcement
under the federal proceedings.
securities laws. Large The SEC, through the
firms should receive POB and its own
the same sanctions as oversight of the SECPS
small firms. The SEC peer review program,
and other federal has not considered it
agencies should conduct necessary to undertake
compliance reviews its own compliance
themselves rather than reviews.
rely on private parties
and organizations to
conduct the reviews.
13. The independent The auditor's standard Metcalf Accounting
auditor's report report was revised by Subcommittee profession
accompanying corporate SAS 58 (superseded by (1977)
financial statements SAS 79) to include a
should be more positively worded
descriptive of the description of the
auditor's work. auditor's procedures.
However, an expanded The new report refers
description of the to "reasonable
functions and assurance" and "in all
limitations in the material respects," but
audit process must not it does not include
become a list of language intended to
disclaimers which disclaim
substitute for the responsibility.
auditor's overall
professional opinion
that the financial
statements fairly
represent business
activities and that
appropriate standards
have been consistently
applied.
14. Any illegal SAS 54 requires the Metcalf Accounting
activities discovered auditor to know whether Subcommittee profession
by an independent the audit committee is (1977)
auditor must be adequately informed
reported immediately to about possible illegal
a corporation's audit acts and advises the
committee and the auditor that a duty to
appropriate government notify parties outside
authorities. the client may exist.
Withdrawal from the
audit engagement is a
possible action under
SAS 54, and SECPS
membership requirements
(SECPS Reference Manual
�1000.08(m)) specify
that the auditor report
that fact to the SEC
within 5 business days.
Also, under �301 of the
Private Securities
Litigation Reform Act
of 1995, auditors are
required to report the
illegal act to the SEC
if the company does not
take appropriate
action.
15. Questionable See action taken for Metcalf Accounting
activities must be recommendation 14. Subcommittee profession
reported immediately to (1977)
the audit committee and
should be closely
followed by the
independent auditor to
determine if public
disclosure and
notification of
government authorities
are required.
16. The standard of Paragraphs 13-15 of SAS Metcalf Accounting
materiality which 54 provide guidance to Subcommittee profession
governs public the auditor on (1977)
disclosure of specific evaluating the
corporate activities materiality of illegal
must be reviewed to acts, noting that the
assure that it is auditor should consider
properly serving the both the quantitative
public. and qualitative
materiality of the act.
Paragraphs 16-17
discuss implications
for the audit and
required communication
with audit committees
of all but
inconsequential acts.
17. Auditors should Through the Foreign Metcalf Accounting
apply high professional Corrupt Practices Act Subcommittee profession
standards in forming an of 1977, SAS 54 (which (1977)
opinion on questionable discusses the
acts and should not implications of illegal
rely solely on a strict acts on the audit,
list of rules to particularly on the
determine whether an reliance that can be
act is right or wrong. placed on management
representations), and
the AICPA's annual
audit risk alerts,
auditors have been
sensitized to the
significance of
questionable acts.
18. Research into This is an ongoing Metcalf Accounting
improved auditing and effort. Major AICPA Subcommittee profession
detection of management activities include the (1977)
fraud should be work of the SECPS QCIC,
increased. summarized in each
SECPS annual report;
the information
provided in the annual
general and industry-
specific audit risk
alerts; the new series
of practice alerts
being issued by the
SECPS; and articles in
the Journal of
Accountancy, including
two titled "Lessons
Auditors Ignore at
Their Own Risk" by the
chairman and staff of
the QCIC. The June 1993
policy statement of the
Board of Directors
describes the AICPA's
commitment to continued
efforts in this area.
19. Independent The independent auditor Metcalf Accounting
auditors should monitor would be guided by Subcommittee profession
compliance with various SASs, (1977)
policies established by especially SASs 8, 53,
corporate audit 54, and 55. However,
committees to prevent unless aggregate
hidden remuneration of management compensation
executives through use was material to the
of corporate assets for financial statements,
housing, personal specific work in this
loans, club area would normally
memberships, and have to be dealt with
personal travel or in the engagement
pleasure, and should arrangements.
assure that amounts and
types of all management
compensation are
reported to
shareholders and the
public.
20. A program The AICPA established Metcalf Accounting
realistically designed the SECPS of the Subcommittee profession
to meet public concerns AICPA's Division for (1977)
should start with an CPA Firms in 1977 for
organization of that purpose.
accounting firms that
serve or want to serve
as independent auditors
for publicly owned
corporations.
21. Every facet of the All SECPS activities Metcalf Accounting
organization of are under the oversight Subcommittee profession
accounting firms (see of the independent POB, (1977)
recommendation 20) only one of whose five
activities should be members has an
governed by an accounting background.
executive board
comprised of persons
from a broad spectrum
of interests and
backgrounds, including
those outside the
accounting profession.
22. The organization of The SECPS Executive Metcalf Accounting
accounting firms (see Committee has the Subcommittee profession
recommendation 20) must authority to establish (1977)
have the capability to enforceable membership
establish and enforce requirements that can
minimum standards of and do deal with
auditor performance and professional practice
behavior which will matters.
satisfy the need for
independent assurance
that corporate
financial reports
fairly reflect
corporate activities.
23. The organization of AICPA members may Metcalf Accounting
accounting firms (see engage in the practice Subcommittee profession
recommendation 20) must of public accounting (1977)
include all accounting with a firm that audits
firms that audit one or more SEC clients
publicly owned only if that firm is a
corporations. member of the SECPS.
Over 1,260 firms are
now SECPS members; they
audit the financial
statements of about
16,000 SEC clients,
representing the vast
majority of publicly
traded SEC registrants.
There are approximately
200 CPA firms not
associated with the
SECPS or the AICPA that
serve as auditors for
about 300 generally
small or inactive SEC
clients.
24. The organization of The SECPS has been Metcalf Accounting
accounting firms (see effective in achieving Subcommittee profession
recommendation 20) must compliance with its (1977)
have the power to membership requirements
impose sanctions on and, although sanctions
errant members that have been imposed on
directly affect their firms, has generally
continued ability to found the threat of
audit such sanctions sufficient to
corporations. obtain compliance by
member firms. However,
the SECPS does not have
the power to suspend or
terminate a member
firm's right to
practice before the
SEC.
25. No accounting firm A corrective action Metcalf Accounting
should be able to audit available to the SECPS Subcommittee profession
publicly owned and one that has been (1977)
corporations without used 58 times as of
meeting the June 30, 1994, the date
organization of of the most recent
accounting firms' (see SECPS annual report, is
recommendation 20) a requirement to employ
performance and an outside consultant
behavior standards. acceptable to the SECPS
peer review committee
to perform preissuance
reviews of all or
selected financial
statements or other
specified procedures,
to provide substantive
assurance that the firm
will perform quality
audits for its SEC
clients. However, there
are approximately 200
CPA firms not
associated with the
SECPS or the AICPA that
serve as auditors for
about 300 generally
small or inactive SEC
clients.
26. The SEC should be The SEC's 1994 Annual Metcalf SEC
responsible for Report to Congress Subcommittee
oversight of the states that the SEC (1977)
organization of continued its oversight
accounting firms (see of the SECPS and
recommendation 20) to comments favorably on
protect the public the peer review and
interest. QCIC activities of the
SECPS.
27. The SEC should The SEC issues an Metcalf SEC
periodically inform the annual report to the Subcommittee
Congress of the Congress which briefly (1977)
organization of mentions SECPS peer
accounting firms' (see review and QCIC
recommendation 20) activities. Also, the
activities. SECPS and the POB issue
separate annual
reports.
28. The organization of According to the Metcalf Accounting
accounting firms (see SECPS's annual report Subcommittee profession
recommendation 20) for the year ended June (1977)
should establish a 30, 1994, the SECPS had
program of external conducted and accepted
quality review for 2,911 peer reviews of
member firms to be member firms. Eleven
performed every 3 years percent of the reports
or as shown to be were qualified or
necessary. adverse. As a result of
those reviews, 414
firms, or 14 percent of
the firms reviewed,
were required to take
additional corrective
measures to provide
added assurances that
quality control
deficiencies have been
or are being remedied.
29. The quality review As of January 1990, Metcalf Accounting
program for independent AICPA members may Subcommittee profession
auditors of publicly engage in the practice (1977)
owned corporations of public accounting
should be mandatory. with a firm that audits
one or more SEC clients
only if that firm is a
member of the SECPS and
complies with the peer
review membership
requirements. Over
1,260 firms are now
SECPS members; they
audit the financial
statements of about
16,000 SEC clients,
representing the vast
majority of publicly
traded SEC registrants.
There are approximately
200 CPA firms not
associated with the
SECPS or the AICPA that
serve as auditors for
about 300 generally
small or inactive SEC
clients.
30. Quality reviews Peer reviews are Metcalf Accounting
should be conducted by conducted by teams Subcommittee profession
broad-based teams appointed by the SECPS (1977)
appointed by the or by firms that meet
executive board of the SECPS criteria in the
organization of circumstances. All
accounting firms (see reviews are subject to
recommendation 20), and POB oversight,
should include members including visits during
from outside the the course of the
accounting organization review. The POB reports
and some who are not annually on the results
accountants. of its oversight
activities.
31. The reports of the Peer review reports are Metcalf Accounting
quality review teams maintained in a public Subcommittee profession
(see recommendation 30) file at AICPA (1977)
should be submitted to headquarters in New
the SEC and made York and can be
available to the obtained upon written
public. or telephone request.
All reports of firms
with SEC clients are
sent to the SEC for
review. The SEC staff
randomly inspects peer
review reports and
working papers and the
POB's oversight files.
32. The primary mission A primary objective of Metcalf Accounting
of the organization of the SECPS is to Subcommittee profession
accounting firms (see maintain and improve (1977)
recommendation 20) will the quality of practice
be to assure that the before the SEC. The
two essential qualities SEC's 1994 Annual
of independent Report indicates this
auditors-- objective is being
professionalism and achieved. As part of
independence--are not this program of
sacrificed through such improvement, in March
practices as 1980, the SECPS issued
unrealistic cost the Position Paper of
cutting and time Task Force on Certain
constraints in pursuit Aspects of the
of commercial success. Auditor's Work
Environment. The SECPS
membership requirements
also mandate the
preparation and
dissemination to all
personnel of a
"Statement of Firm
Philosophy." The
illustrative statement
provided by the SECPS
Reference Manual
(�1000.42) emphasizes
the need for an
overriding commitment
to high-quality
professional
performance.
33. Disciplinary The committees and Metcalf Accounting
actions should be staff of the Subcommittee profession
expedited and should be professional ethics (1977)
based on failure to division have been
follow high increased to deal with
professional standards cases, especially cases
rather than violation referred by
of legal standards. governmental entities,
in a more expeditious
way. In May 1993, the
AICPA Council
authorized the division
to resolve ethics
complaints by
settlement in addition
to its existing
authority to refer
matters to the Joint
Trial Board. Further,
in June 1994, the
Professional Ethics
Executive Committee
agreed to amend its
operating policies,
with respect to cases
in litigation, to
require firms to
provide on a timely
basis the name of the
partner(s) involved and
evidence that
litigation exists that
could be unfairly
prejudiced by an ethics
investigation.
34. The identities of The names of Metcalf Accounting
offenders must be individuals whose Subcommittee profession
disclosed to the membership in the AICPA (1977)
public. is suspended or
terminated by the Joint
Trial Board or pursuant
to a settlement
agreement are published
in The CPA Letter. The
SEC also publishes the
results of its
enforcement
proceedings.
35. Independent The auditor has no Metcalf Accounting
auditors should have contractual arrangement Subcommittee profession
access to significant with third parties in (1977)
financial data connection with an
concerning the audit that would
corporation being require them to provide
audited, even though information. However,
held by other if, in the auditor's
corporations and professional judgment,
individuals, when it is information is required
shown to be necessary. that is not made
available, professional
standards require the
auditor to treat that
as a scope limitation
and to consider whether
an unqualified report
can be issued, thus
effectively achieving
the objective of the
recommendation.
36. Under certain See action taken for Metcalf Accounting
conditions, direct recommendation 35. In Subcommittee profession
communication among addition, SAS 70 (1977)
auditors should be provides guidance on
facilitated and the factors an auditor
responses to audit should consider when
confirmation requests auditing the financial
should be required. statements of an entity
that uses a service
organization to process
certain transactions.
37. The professionalism The Cohen Commission Metcalf Accounting
of auditors would be considered and rejected Subcommittee profession
enhanced considerably this recommendation. (1977)
by requiring the The fact is that in
individuals in charge today's environment,
of the audit for each the auditor's report
corporate client to more than ever is a
sign their names report by a firm, given
personally on the concurring review
auditor's report to the partners, consulting
public, along with the partners, etc., and all
name of the accounting the partners of a firm
firm they represent. are held liable for the
statements in that
report.
38. The preparatory The AICPA has worked Metcalf Accounting
education of diligently to improve Subcommittee profession
individuals who enter the quality of (1977)
the profession of accounting education.
independently auditing Numerous graduate
publicly owned professional schools
corporations should be and programs of
strengthened through accounting now exist.
such means as the Those applying for
establishment of AICPA membership who
professional schools of first become eligible
accounting. after the year 2000 to
take the CPA
examination will be
required to have
obtained 150 semester
hours of education,
including a bachelor's
degree or its
equivalent.
39. Independent The Private Securities Metcalf Congress and
auditors of publicly Litigation Reform Act Subcommittee SEC
owned corporations of 1995 holds auditors (1977)
should be liable for proportionately liable
their negligence to for negligently
private parties who violating the
suffered damages as a securities laws.
result.
40. Access to the The securities laws, Metcalf Congress and
judicial process for including the Private Subcommittee SEC
parties claiming Securities Litigation (1977)
damages must be Reform Act of 1995 do
allowed. not interfere with this
right for cases having
merit. It is entirely
appropriate to "screen
out" frivolous cases.
41. Auditors found See action taken for Metcalf Congress
negligent should not recommendation 39. Subcommittee
have their liability (1977)
artificially limited by
law.
42. The organization of SECPS peer review Metcalf Accounting
accounting firms standards (SECPS Subcommittee profession and
envisioned by the Reference Manual (1977) SEC
subcommittee (see �2000.137) state that
recommendation 20) and "(t)he review should be
the SEC should focus concerned with the
attention on both accounting and auditing
domestic and engagements performed
international by the U.S. offices of
operations of the reviewed firm
independent auditors selected for review and
when formulating with the supervision
appropriate standards and control, in
and a responsive accordance with U.S.
quality review program. professional standards,
on work of segments of
such engagements
performed by foreign
offices...." The SECPS
made significant
efforts to obtain
agreement by other
countries to an
extension of peer
review to the work
performed in those
countries, but was
unable to overcome the
legal and other
barriers to access by a
U.S. organization to
the foreign
accountant's
confidential work
product.
43. In performing its The AICPA believes the Metcalf SEC
enforcement functions, SEC applies sanctions Subcommittee
the SEC should apply in a consistent manner. (1977)
equal sanctions for
similar offenses to all
independent auditors
without regard to size
of accounting firms.
44. The SEC must play The SEC works closely Metcalf SEC
an important role in with the ASB. The SEC Subcommittee
improving the highlights areas that (1977)
performance of need improvement in its
independent auditors Accounting and Auditing
for publicly owned Enforcement Releases.
corporations.
45. The SEC must The SEC has reported to Metcalf SEC
enforce the federal the Congress annually Subcommittee
securities laws and on the exercise of its (1977)
exercise close responsibilities.
oversight of the
accounting organization
(see recommendation 20)
to assure that the
public policy goals in
this report are
implemented.
46. The auditor's The auditor's standard Cohen Accounting
standard report should report, as revised by Commission profession
be revised and should SAS 58 and since (1978)
also clearly describe superseded by SAS 79,
the work of the auditor is responsive to this
and his findings and recommendation.
avoid unclear
terminology concerning
details.
47-49. An auditor's Cohen
report should state its Commission
messages explicitly. (1978)
Specifically, it should
state that
47. ...financial See AU �508.8(c). Accounting
statements are the profession
representation of
management.
48. ....accounting AU �508.8(f)(2) Accounting
principles appropriate requires the auditor to profession
in the circumstances state in the auditor's
were used. report that "an audit
includes... assessing
the accounting
principles used and
significant estimates
made by management."
49. ...the auditor used See AU �508.8(g). Accounting
judgment in auditing. profession
50-54. The acceptance Cohen
and discharge of added Commission
responsibilities should (1978)
be communicated by the
auditor to users of his
work. The additional
messages, for example,
should cover
50. ...other See action taken for Accounting
information in recommendation 72 for profession
documents accompanying the auditor's
the audited financial responsibilities. The
statements. auditor's report was
not modified to report
on the execution of
those responsibilities.
To do so in today's
environment would
unduly expose the
auditor to additional
liability. However, SAS
61 requires the auditor
to explain his or her
responsibility for
other information
accompanying the
financial statements to
the audit committee.
51. ...association with Interim information Accounting
interim information. accompanying audited profession
financial statements of
public companies is
marked as "unaudited"
but is required to be
reviewed under SAS 71.
However, the auditor's
report is not modified
unless the information
is omitted or the
auditor has not made
such a review. These
requirements are
believed to be
acceptable to the SEC.
52. ...internal As noted in responses Accounting
accounting controls. to numerous profession
recommendations above,
neither management nor
the auditor of an
entity, with the
exception of certain
federally insured
depository
institutions, is
required to issue a
public report on an
entity's internal
controls. (SAS 60 does
mandate a report,
generally to the audit
committee, on
reportable conditions
noted during an audit
of financial
statements.) The AICPA
has recommended that
such a requirement be
enacted by the SEC.
53. ...corporate codes There is no requirement Accounting
of conduct. for the auditor to profession
review the company's
code of conduct. SAS
78, which amended SAS
55 to conform to the
COSO report, Internal
Control--Integrated
Framework, requires the
auditor to obtain an
understanding of all of
the elements of the
internal control
structure. COSO's
report (issued in 1992
and amended in 1994)
has drawn the attention
of preparers, auditors,
and regulators to the
significance of
internal controls. That
document points out
that the codes of
conduct are widely used
and may be part of the
control environment,
but properly warns that
"existence of a written
code of conduct, and
even documentation that
employees received and
understand it, does not
ensure that it is being
followed. Compliance
with ethical
standards...is best
ensured by top
management's actions
and examples..." Full
implementation of this
recommendation is
therefore contingent on
a requirement for
written codes of
conduct which, for that
reason, may not be
necessary for all
companies, and on
implementation of the
recommendation in the
June 1993 policy
statement of the AICPA
Board of Directors for
management and auditor
reports on the system
of internal control
over financial
reporting.
54. ...meetings with The auditor is required Accounting
the audit committee. under SAS 61 to profession
communicate certain
matters to the audit
committee, but those
communications are not
mentioned in the
auditor's report.
55. The auditor's The auditor's standard Cohen Accounting
report should omit report no longer Commission profession
reference to includes a reference to (1978)
consistency. consistency. However,
SAS 58 para. 11
(superseded by SAS 79)
requires an explanatory
paragraph (not a
qualification of the
auditor's opinion),
pursuant to SEC wishes,
when there has been a
material change in
accounting principles
or in the method of
their application.
56. The present method SAS 1 �543 was reviewed Cohen Accounting
of referring to other but not revised in this Commission profession
auditors should be regard. In part, there (1978)
eliminated. Either one was concern by smaller
of two methods would firms that a change
provide users with would unfairly cause
sufficient information their displacement.
on the responsibilities
taken:
(a) the auditor can do
enough additional work
so that he does not
need to refer to the
other auditor or
(b) management could
present (or in some
cases list) the reports
of the other auditors.
57. The auditor should Disclosure of whether Cohen Accounting
be required to be the auditor is expected Commission profession
present and available to be present at the (1978)
to answer questions at shareholders' meeting
the annual meeting of and available to answer
the shareholders. questions is required
in the proxy statement.
58. The phrase "present The SEC objected to Cohen Accounting
fairly" should be this proposal and the Commission profession
deleted from the phrase is retained in (1978)
auditor's report. the auditor's standard
report. However, SAS 69
clarifies the meaning
of the phrase,
discusses the
considerations
pertinent to a decision
as to whether financial
statements "present
fairly," and
establishes a hierarchy
of GAAP to assist the
auditor in reaching
conclusions in that
regard.
59. An audit should be Specifically Cohen Accounting
designed to provide implemented in SAS 53 Commission profession
reasonable assurance para. 5. (1978)
that the financial
statements are not
affected by material
fraud.
60. Since an auditor SAS 53 para. 8 Cohen Accounting
cannot be expected to establishes the Commission profession
detect all frauds, a standard of due care, (1978)
standard of and para. 9-25 provide
professional skill and guidance on the
care is needed to considerations
evaluate the applicable and
performance of procedures appropriate
auditors. to meet that standard.
61-68. The standard of Cohen
skill and care Commission
(referred to in (1978)
recommendation 60)
would call upon the
auditor to
61. ...establish an Required by Statement Accounting
effective client on Quality Control profession
investigation program. Standards No. 1, System
of Quality Control for
a CPA Firm,
communicated in, for
example, the AICPA's
1993 General Audit Risk
Alert para. 123-124.
62. ...take immediate See SAS 53 para. 26-29 Accounting
steps if evidence for a discussion of profession
indicates that circumstances in which
management is withdrawal from an
untrustworthy, existing engagement is
including, if required or might be
necessary, resigning appropriate. The
from the engagement. Private Securities
Litigation Reform Act
of 1995 also requires
notification
responsibilities.
63. ...observe Although efforts to Accounting
conditions suggesting improve guidance on profession
predispositions to fraud detection are and
management fraud. must be ongoing, this
matter has been fully
addressed. See, for
example, SAS 53 para.
12; the AICPA's 1993
General Audit Risk
Alert para. 90-92; and
The CPA Letter, January
1994, "The Auditor's
Responsibility to
Detect Fraud."
64. ...maintain an See SAS 53 para. 10; Accounting
understanding of a SAS 22, as amended (AU profession
client's business and �311.06-.10); and the
industry. AICPA's General Audit
Risk Alert.
65. ...extend the study The objectives of this Accounting
and evaluation of recommendation have profession
internal controls to been achieved to a
all controls that have large degree by the
a significant bearing clear statement of the
on the prevention and auditor's
detection of fraud. responsibility in SAS
53 (para. 11-12), which
also discusses internal
control problems in the
context of the
assessment of audit
risk. In addition, SAS
78 requires the auditor
to obtain an
understanding of the
internal control
structure, including
the accounting system
and control procedures,
and identifies certain
types of procedures
designed to prevent
fraud. Finally,
implementation of the
recommendation in the
June 1993 policy
statement of the AICPA
Board of Directors for
management and auditor
reports on the system
of internal control
would result in full
implementation of this
recommendation.
66. ...seek, through a The work of the QCIC Accounting
formal procedure and the PITF, as well profession
developed by the as the efforts to
profession, information revise SAS 53 (in May
on methods of 1996, the ASB exposed
perpetrating, for comment a standard
concealing, and that would revise SAS
detecting fraud. 53), is responsive to
this recommendation. In
addition to information
in the SECPS's annual
report, the QCIC has
published two articles
titled "Lessons
Auditors Ignore at
Their Own Risk" and the
PITF is issuing a
series of practice
alerts. Other AICPA
publications on this
subject, in addition to
the new series of audit
risk alerts, include:
(a) "Red Flags" (1979),
(b) EDP-Related Fraud
in the Banking and
Insurance Industries
(1984), and (c)
Repurchase Transactions
(1985).
67. ...be aware of Auditing standards are Accounting
possible deficiencies continually being profession
in audit techniques and updated (see, e.g., SAS
steps. 67 on the confirmation
process, which is
directly responsive to
the specific problem
identified by the Cohen
Commission). Also, the
AICPA General Audit
Risk Alert (1993)
focuses on the risk
that the auditor may
fail to detect problems
and emphasizes the need
for professional
skepticism.
68. ...understand the See SAS 53 para. 32. Accounting
limitations of profession
incomplete audits.
69. The auditor should The auditor's Cohen Accounting
be expected to detect responsibilities for Commission profession
those illegal or the detection of (1978)
questionable acts that errors, irregularities,
the exercise of and illegal acts are
professional skill and described in SAS 53 and
care would normally SAS 54 in a manner
uncover. In that consistent with this
connection, it is noted recommendation.
that the auditor will
not always be able to
detect material fraud,
and illegal or
questionable payments
present even greater
problems because the
amounts are typically
small in relation to
financial statement
amounts and collusion
is common.
70. Detection of Paragraphs 13-15 of SAS Cohen Accounting
illegal or questionable 54 provide guidance to Commission profession
acts should be the auditor on (1978)
considered by the evaluating the
auditor without regard materiality of illegal
to traditional acts, noting that the
standards of auditor should consider
materiality. The both the quantitative
auditor should consider and qualitative
each illegal or materiality of the act.
questionable act in Paragraphs 16-17
light of the discuss implications
circumstances. for the audit and
required communication
This involves three with audit committees
steps: of all but
inconsequential acts.
(a) determination of Paragraphs 15 and 23
the extent to which the discuss disclosure to
item might affect the outside parties,
financial statements, through the financial
statements and
(b) comparison of the otherwise. SAS 19 para.
act with the standards 5 makes it clear that
of corporate conduct limitations based on
established by the materiality are not
board of directors, and applicable to certain
management
(c) consideration of representations,
the need for public specifically, those
disclosure. related to
irregularities. SAS 54
para. 11(c) identifies
additional auditing
procedures that should
be considered when the
auditor encounters
possible illegal acts;
determining whether an
act was properly
authorized is one.
Paragraph 22 says that
withdrawal from the
engagement may be
necessary when the
client does not take
appropriate remedial
action. The combination
of these two provisions
gives the auditor a
basis for considering
the standards of
conduct prevalent in
practice within the
entity.
71. The auditor has SAS 12 has not been Cohen Accounting
only limited ability to changed. The Cohen Commission profession
evaluate the quality Commission indicated (1978)
and completeness of that the structure and
disclosure of legal division of
matters. Thus, the responsibilities in
information now this area are not
provided by management, efficient or effective.
substantiated by the However, the AICPA is
assurances given by not aware of instances
counsel to the auditor, of misleading
should be presented disclosures that would
directly to users of have been prevented if
financial information. this recommendation had
been implemented.
72. The auditor should SAS 8 was not modified Cohen Accounting
read all of the other for this Commission profession
information recommendation. The SAS (1978)
accompanying audited requires the auditor to
financial statements read the other
and compare it to the information and if it
information in the is materially
financial statements inconsistent with the
and his audit financial statements
workpapers to assure and not corrected, to
himself that it is not include an explanatory
inconsistent with paragraph in the audit
anything he knows as a report, withhold the
result of his audit. use of the report, or
His report should withdraw from the
include a description engagement. The auditor
of the work performed is advised to consult
and his conclusions. with legal counsel with
respect to material
misstatements that are
not inconsistent with
the financial
statements. Also, SAS
61 requires the auditor
to explain his or her
responsibility for the
other information to
the audit committee.
73. Professional SAS 71 addresses this Cohen Accounting
standards should matter in the context Commission profession
require that if of interim financial (1978)
information acquired in information.
performing other Professional standards
services indicates a do not explicitly
material deficiency in address misstatements
unaudited financial of other types of
information issued by unaudited financial
an audit client, the disclosures discovered
independent auditor in the course of
should persuade the performing other
client to correct the services.
information or, failing
that, assure that the
necessary disclosure is
made.
74. The guidance in SAS FASB statements, Cohen Accounting
5 for evaluation of interpretations, and Commission profession
financial statements technical bulletins; (1978)
should be expanded when EITF consensuses; and
no established AcSEC statements of
accounting principle is position and practice
prescribed for a alerts have
specific significantly reduced
transaction or event. the number of
situations in which
there is no established
accounting principle
for a specific
transaction or event.
75. The guidance in SAS The hierarchy of GAAP Cohen Accounting
5 for evaluation of set forth in SAS 69 Commission profession
financial statements elevates most forms of (1978)
should be expanded when published guidance,
two or more alternative including AICPA
principles are industry audit guides
generally accepted and and statements of
criteria for selecting position and EITF
among them are consensuses over
insufficient. industry practices,
thus narrowing further
the range of acceptable
alternatives. Paragraph
6 reminds auditors to
"consider whether the
substance of
transactions or events
differs materially from
their form." In
addition, an auditing
interpretation (see AU
�9411.11-15) was issued
in March 1995 that
provides guidance when
management adopts
accounting principles
for new transactions or
events.
76. The guidance in SAS This recommendation is Cohen Accounting
5 for evaluation of addressed in Commission profession
financial statements authoritative (1978)
should be expanded when literature (see AU
the auditor makes an �312.27-32) and in
evaluation of the nonauthoritative
cumulative effect of guidance (Practice
the appropriateness of Alert 94-1 on dealing
accounting principles with audit
selected and estimates differences).
made by management.
77. Appropriate The Private Securities Cohen Congress
legislation should be Litigation Reform Act Commission
enacted to empower, but of 1995 provides that a (1978)
not require, courts to court may assess
assess costs when, by plaintiffs with the
objective standards, costs of defending
the complaint was against litigation in
frivolous or had little very limited
chance of success at circumstances.
trial.
78. Some form of The Private Securities Cohen Congress
statutory limitation of Litigation Reform Act Commission
monetary damages is of 1995 provides for (1978)
essential to the proportionate liability
continued healthy when the CPA firm has
existence of the public not knowingly committed
accounting profession a violation of the
in the private sector. securities laws.
79. The use of court No action taken. Cohen Congress
appointed masters to Commission
make impartial (1978)
expertise available to
the court should be
increased.
80. There should be no In response to this Cohen Accounting
differences in the recommendation, the Commission profession
standards that apply to AICPA mounted a (1978)
the performance of research effort that
audits, whether the resulted in the
audits are of public or publication of an audit
private entities. research monograph.
However, present This was followed by a
guidance on the major task force effort
application of auditing that resulted in SAS
standards to audits of amendments and
different size entities interpretations as well
is inadequate. Both as an audit procedures
users and clients would study on audits of
be better served by small businesses. Also,
more guidance on SAS 61 is applicable
accounting and related only to SEC clients and
services and on the clients that have audit
application of auditing committees, and other
standards to audits of standards, such as
smaller entities. those on the internal
control structure and
audit sampling,
implicitly or
explicitly recognize
that the procedures
followed to comply with
GAAS may differ
depending on the size
and related
characteristics of an
entity. In addition,
the AICPA has issued a
series of Statements on
Standards for
Accounting and Review
Services that address
the special needs of
private companies for
nonaudit financial
statement services.
81. Many auditing After substantial Cohen Accounting
pronouncements could study, no action was Commission profession
usefully provide more taken with respect to (1978)
specific guidance. the recommendation.
However, SAS 65
provides more detailed
guidance on using the
work of an internal
auditor. Also, many
recent auditing
standards go into
significant detail in
explaining their
application.
82. Many, if not most, Firms are willing to Cohen Accounting
of the technological share experiences so as Commission profession
and methodological to improve the quality (1978)
advances in auditing of professional
have been developed by guidance, but still
accounting firms. Such view product
innovations should be development as
quickly and widely proprietary and useful
disseminated. in distinguishing their
services from those
provided by other
firms.
83. The standards for Rule 201 of the Code of Cohen Accounting
the audit function Professional Conduct Commission profession
should have broader establishes general (1978)
scope than the present standards of
standards. They should professional
be applicable whenever competence, due
a CPA undertakes an professional care,
audit engagement. The planning and
restructuring should supervision, and
include a statement of sufficient relevant
the independent data that are
auditor's role. applicable to all
services provided by
all AICPA members. The
ASB initiated a new
series of attest
standards to govern
services that do not
involve financial
statements. Also, the
ASB has dealt with and
will continue to deal
with matters, such as
compliance auditing and
special reports, that
go beyond the
boundaries of the
financial statements.
84. The requirement to SAS 58, issued in 1988, Cohen Accounting
express a "subject to" provided for an Commission profession
qualification for explanatory paragraph (1978)
significant in the auditor's report
uncertainties should be when, for example,
eliminated. there are material
uncertainties or
substantial doubt about
the entity's ability to
continue as a going
concern. SAS 79, issued
in December 1995 and
which supersedes SAS
58, eliminated the
extra paragraph for
uncertainties.
85. It is important to The AICPA has worked Cohen Accounting
develop some high- diligently to improve Commission profession
quality graduate the quality of (1978)
professional schools of accounting education.
accounting. The timing Numerous graduate
and length of the professional schools
program will be and programs of
determined by the accounting now exist.
educational Those applying for
institutions involved. AICPA membership who
It may be a 2-or 3- first become eligible
year program after after the year 2000 to
obtaining a bachelor's take the CPA
degree, a 2-or 3-year examination will be
program after 3 years required to have
of general education obtained 150 semester
for business, or some hours of education,
other variation. including a bachelor's
However, the option of degree or its
a 4-year liberal arts equivalent.
undergraduate program
and a quality graduate
professional program,
similar to that of the
law, is necessary to
permit accounting to
compete on an equal
footing for students
who make their career
decisions near or after
college graduation.
86. The AICPA and state All AICPA programs Cohen Accounting
CPA societies should directed to accounting Commission profession
develop a form of educators include those (1978)
membership, such as who are not CPAs. They
associate membership, are invited to
that will permit participate in
accounting educators conferences and
who are not CPAs to workshops on accounting
take part in state education, efforts to
society and Institute recruit quality
activities. Appropriate students, and committee
criteria should be activities, and are
developed that should eligible for the
include passage of the AICPA's Outstanding
uniform CPA Educator Award.
examination, membership
on the faculty of an
accredited institution,
and an advanced degree
in accounting.
87. Public accounting In March 1980, the Cohen Accounting
firms should not SECPS issued the Commission profession
abandon time budgets, Position Paper of Task (1978)
but they must improve Force on Certain
current methods, Aspects of the
particularly for the Auditor's Work
evaluation of variances Environment. The SECPS
and their effect on the membership requirements
evaluation of also mandate the
personnel. preparation and
dissemination to all
personnel of a
"Statement of Firm
Philosophy." The
illustrative statement
provided by the SECPS
Reference Manual
(�1000.42) emphasizes
the need for an
overriding commitment
to high-quality
professional
performance.
88. Individual See action taken for Cohen Accounting
accounting firms should recommendation 87. Commission profession
immediately undertake (1978)
to conduct studies to
determine the extent of
excessive time and
budget pressures and
the effects on their
practices.
89. Auditors should See action taken for Cohen Accounting
carefully assess the recommendation 87. Commission profession
effect of time/ (1978)
deadline pressures on
their work and refuse
to accept such
deadlines when they are
imposed in opposition
to their judgment.
90. The profession must This has been Cohen Accounting
continually monitor implemented through Commission profession
performance, deal mandatory peer and (1978)
quickly with quality review, the
substandard activities of the QCIC,
performance, and accelerated ethics
attempt to anticipate division efforts, and
future problems. the institution of a
new procedure for
settlement agreements.
91. A voluntary program The AICPA now has a Cohen Accounting
consisting of the mandatory practice Commission profession
following three monitoring requirement. (1978)
elements would provide To comply with that
effective professional requirement, firms that
oversight: audit SEC clients are
required to be members
(a) independent peer of the SECPS and have a
reviews of accounting peer review every 3
firms, years as well as comply
with a number of other
(b) detailed reports of membership
the results of peer requirements. The
review (a "long form report and letter of
report") made available comments on the peer
to concerned parties, review, the firm's
and response, and other
specified documents are
(c) appointment by available for public
individual accounting inspection. All of the
firms of independent activities of the
oversight groups, SECPS, including its
analogous to corporate peer review program,
audit committees, come under the active
concerned with oversight of the
oversight including the independent POB. For
peer review process. several years, the SEC
has reported in its
annual report to the
Congress that "the peer
review process
contributes
significantly to
maintaining the quality
control systems of
member firms and,
therefore, enhances the
consistency and quality
of practice before the
SEC."
92. Uniformity [of This is an ongoing Cohen Accounting
state board regulation] effort. The AICPA, in Commission profession
is needed to prevent cooperation with the (1978)
harmful interference National Association of
with firms that operate State Boards of
on a national basis Accountancy, advocates
with national clients. uniformity in state
regulation and
publishes a uniform
accountancy act.
Nevertheless, there are
still substantial
variations in state
statutes, and rules and
problems involving
interstate and
international
reciprocity have still
not been resolved.
93. Once a duly The results of ethics Cohen Accounting
constituted investigations are Commission profession
disciplinary body still subject to (1978)
begins its work, those confidentiality
who initiate ethics requirements and
actions should be properly so because a
informed of the status CPA's most valued asset
of the complaint. The is his or her
practitioner should professional
also be informed of the reputation. Therefore,
source of the complainants are
complaint. After the advised that the matter
disciplinary body will be considered and
completes its work, all investigated if
resulting penalties necessary. Of course,
should be well- the names of
publicized, along with individuals found
the practitioner's guilty by the Joint
name. Unless the Trial Board are
practitioner requests, published when the
his name should not be discipline is
published upon an suspension or
acquittal. However, the termination of
initiator of an ethics membership or when a
action should be settlement agreement
informed of the includes such
acquittal. suspension or
termination.
Practitioners are not
advised of the source
of the complaint
because that would have
a chilling effect on
those who have
legitimate complaints.
94. The profession's The Professional Ethics Cohen Accounting
disciplinary mechanism Executive Committee Commission profession
should be restrained agreed at its May 1994 (1978)
only when the member meeting that firms that
demonstrates that seek deferral of a
pending litigation is disciplinary proceeding
directly related to the because of pending
misconduct charges and litigation should be
there is some required to provide the
likelihood that names of the member(s)
litigation will be involved and evidence
unduly influenced by that there is
disciplinary action. litigation that could
The burden of be prejudiced by a
demonstrating the need concurrent ethics
for restraint should investigation.
fall on the member. The
disciplinary mechanism
should not be
restrained during
appeals in litigated
cases unless the member
can demonstrate that
the appeal proceeding
could result in the
introduction of new
evidence and would be
affected by
disciplinary action.
95. Punishing a firm is This concept is Cohen Accounting
appropriate only when a embodied in the SECPS's Commission profession
firm fails to provide Statement of Policy on (1978)
or enforce acceptable the Imposition of
professional standards. Sanctions (SECPS
Reference Manual
�1000.36).
96. The AICPA, with the The work of the SECPS's Cohen Accounting
cooperation of QCIC is responsive to Commission profession
accounting firms and this recommendation. In (1978)
through the use of addition to information
court and SEC in the SECPS annual
documents, should report, the QCIC has
establish a mechanism published one article
for timely and titled "Lessons
continuing analyses of Auditors Ignore at
individual cases as Their Own Risk," and
they move through the the PITF is issuing a
judicial or regulatory series of practice
system. alerts. Other AICPA
publications on this
subject include:
(a) "Red Flags" (1979),
(b) EDP-Related Fraud
in the Banking and
Insurance Industries
(1984), and (c)
Repurchase Transactions
(1985).
97-98. The accounting SAS 53 superseded SAS Price Accounting
profession should 16 to clarify the Waterhouse profession
affirmatively auditor's (1985)
acknowledge that the responsibility to
auditor has the detect fraud. Moreover,
responsibility to the AICPA Board of
search for management Director's June 1993
fraud that is material Policy Statement
to the financial reaffirmed that
statements through the auditors have a
application of responsibility to
professional auditing detect fraud, and in
standards designed to May 1996, the ASB
reduce the risk that exposed for comment
such fraud will go revisions to SAS 53.
undetected;
accordingly,
97. ...existing This recommendation has Accounting
accounting standards not been adopted in profession
should be expanded to this form. However, SAS
include a requirement 78 (supersedes SAS 55),
that the auditor review concerning
and evaluate the consideration of
company's system of internal controls in a
management controls, financial statement
including conducting an audit, and SAS 59
audit process to more concerning the
adequately address the auditor's consideration
company's financial of an entity's ability
condition as well as to continue as a going
its financial position. concern, focus the
auditor's attention on
the control environment
and require the auditor
to consider whether
there is substantial
doubt about the
entity's ability to
continue as a going
concern. Also see SAS
64 and 77, which
supersede SAS 59.
98. ...existing SAS 53 and SAS 78 Accounting
accounting standards (which supersedes SAS profession
should be expanded to 55) address this
include a requirement recommendation.
that the auditor
identify symptoms
within the company's
business environment
that would indicate a
higher risk of
management fraud and
consider performing
certain substantive
tests if such symptoms
are present.
99. The public must be The AICPA does not Price Accounting
provided with increased endorse the Waterhouse profession
assurance as to the recommendation for a (1985)
effectiveness of the statutory self-
quality control and regulatory organization
peer review process (SRO). It has
through which the established an
profession assesses effective self-
levels of performance, regulatory system with
independence, and independent oversight
adherence to audit of the reviews of firms
standards. that audit SEC
registrants and
believes that a
statutorily mandated
SRO is not necessary or
desirable.
100. The profession The Private Securities Price Accounting
should develop a plan Litigation Reform Act Waterhouse profession
of priority options to of 1995 was passed to (1985)
provide liability among other things,
relief, with the provide a more
objective of effecting equitable approach to
a more equitable the determination of
approach to the liability.
determination of
liability.
101. In order to make This recommendation was Anderson Accounting
professional standards implemented in the Committee profession
more relevant and revised Code of (1986)
effective, the Professional Conduct,
structure of the adopted January 12,
Institute's Code of 1988.
Professional Ethics
should be recast into Broad standards cannot
two basic sections: be enforced, per se.
(a) Standards of However, they serve as
Professional Conduct, guides to the
which will be professional ethics
enforceable, and division in evaluating
(b) Rules of the significance of
Performance and infractions of specific
Behavior. rules.
102. The Standards of Anderson Accounting
Professional Conduct Committee profession
will contain six (1986)
articles. See Preamble to Code of
Professional Conduct
(a) Purpose (ET �51.02).
See Introduction to
(b) Applicability Code of Professional
Conduct as well as the
Applicability section
(ET �91.02).
(c) Responsibilities
See Article I of the
Code of Professional
Conduct (ET �52.01).
(d) Explicit standards
(dealing with the
public interest, See Articles II, III,
integrity, objectivity IV, V, and VI of the
and independence, due Code of Professional
care, and scope and Conduct (ET �53.04 to
nature of services) 57.03).
(e) Performance
standards Performance standards
are set forth in Rule
201 (ET �201.01-.02).
(f) Compliance
Compliance with
standards is covered by
Rule 202 (ET �202.01).
103. The Rules of Anderson Accounting
Performance and Committee profession
Behavior should (1986)
include See Rule 101 and
related interpretations
(a) independence, and rulings in ET
�100.
(b) general standards, See Rule 202 in ET
�200.
(c) compliance with
standards, See Rule 202 in ET
�200.
(d) accounting
principles, See Rule 203 in ET
�200.
(e) confidential client
information, See Rule 301 in ET
�300.
(f) contingent fees,
See Rule 302 in ET
�300.
(g) acts
discreditable,
See Rule 501 in ET
�500.
(h) advertising and
other forms of
solicitation, See Rule 502 in ET
�500. This rule and its
interpretations bar
only false, misleading,
(i) commissions, and or deceptive acts in
advertising or
solicitation.
See Rule 503 in ET
�500. This rule bars
commissions only when a
member also performs a
review or examination
of historical or
prospective financial
(j) form of practice information or performs
and name. a compilation of
financial statements
expected to be used by
third parties and does
not disclose a lack of
independence, all
pursuant to an
agreement with the
Federal Trade
Commission.
See Rule 505 in ET
�500.
104. The AICPA should Participation in an Anderson Accounting
establish a quality AICPA-approved practice Committee profession
review program and make monitoring program was (1986)
participation in that made a condition of
program or in the peer membership in January
review programs of the 1988. (See BL �220.01.)
division for CPA firms
a membership
requirement for members
in the public practice.
105. The AICPA should This requirement was Anderson Accounting
adopt a requirement for adopted in January Committee profession
AICPA members who 1990. (See BL �230.01.) (1986)
practice in firms that
audit one or more SEC
registrants that would
require those firms to
be members of the
SECPS.
106-114. The AICPA Anderson
should establish more Committee
effective procedures (1986)
for handling complaints
and assuring compliance
with performance
standards by all
members. Specifically,
the committee
recommends a
restructuring that will
106. ...assign to the This recommendation was Accounting
appropriate quality not implemented, profession
review or peer review largely because it
committees would be seen as
responsibility for evidence of a
investigating reluctance to take
complaints against disciplinary measures
firms and members in against members who
public practice that violate technical or
involve compliance with ethical standards, and
technical performance because it would change
standards. the perceived focus of
quality review from
educational,
corrective, and
remedial actions to
disciplinary measures.
107. ...assign The QREC has this Accounting
responsibility to the authority. (See QR profession
Institute's Quality �3000.75.)
Review Executive
Committee (QREC) for
taking disciplinary
action against enrolled
firms when they fail to
cooperate or commit an
egregious act that
could lead to dismissal
from the Quality Review
program or to other
forms of punitive
sanctions.
108. ...modify the The Joint Ethics Accounting
authority of the Enforcement Program profession
Professional Ethics manual is consistent
Executive Committee and with the
the professional ethics responsibilities of the
division in a manner professional ethics
consistent with the division, and the
restructured Code and division, rather than
assign the Professional state CPA societies,
Ethics Executive investigates complaints
Committee the that involve "national
responsibility for interests" (including
dealing with complaints referrals from
against members that government agencies)
involve national and multijurisdictional
interests and issues.
multijurisdictional
issues and for
oversight of complaints
disposed of by state
society ethics
committees.
109. ...encourage state State CPA society Accounting
society ethics ethics enforcement profession
committees to take a procedures have
more active role in improved, but it is the
dealing with complaints view of the
against members in professional ethics
their jurisdictions division that such
that do not involve procedures are more
national interest or effectively applied at
multijurisdictional the national level.
issues and to interface Accordingly, the AICPA
with the Quality Review has offered to
program in the same way investigate all cases
as the Institute's received by state
Professional Ethics societies, and over 20
Executive Committee. states accepted that
offer. One state
society, California,
refers all complaints
it receives directly to
the state board of
accountancy.
110. ...establish See action taken for Accounting
procedures for recommendation 106. profession
coordinating the
handling of complaints
in the professional
ethics division and in
the programs for
monitoring practice.
111. ...reconstitute See BL �360.01 for the Accounting
the National Review composition and profession
Board as a national authority of the
trial board to serve as reconstituted National
the hearing body in Joint Trial Board.
disciplinary
proceedings against
members.
112. ...modify the See the Joint Ethics Accounting
contractual agreements Enforcement Programs profession
with the state CPA manual.
societies under the
Joint Ethics
Enforcement Programs to
eliminate the Regional
Trial Boards.
113. ...establish See BL �760.01. Accounting
procedures for public profession
disclosure of
information on the
disposition of
complaints.
114. ...enforce the This is done through Accounting
concept that the public the AICPA quality profession
interest is best served review program and the
through educational and peer review programs of
remedial or corrective the two sections of the
actions and only AICPA's Division for
secondarily through CPA Firms.
other disciplinary
measures.
115. The National Trial See BL �760.01. While Anderson Accounting
Board will serve as the the bylaws do not Committee profession
hearing body to dispose presently give the (1986)
of cases arising from Joint Trial Board the
complaints that are not authority to impose
resolved by the monetary fines, the two
Institute's sections of the AICPA's
Professional Ethics Division for CPA Firms
Executive Committee or have that authority.
by state society ethics
committees. The
sanctions for failure
to take corrective
action and for
egregious violations or
violations undertaken
with the intent to
mislead would include
(a) public censure and
disclosure of specified
remedial actions, with
or without a monetary
fine to defray the cost
of the proceedings, and
(b) public notice of
suspension or
termination of
membership.
116. Achieve membership The AICPA requires that Big 7 Accounting
in the SECPS for all all firms with AICPA (1986) profession
CPA firms practicing members among their
before the SEC. partners or employees
that audit companies
practicing before the
SEC be members of the
SECPS. However, the SEC
does not mandate that
all CPA firms that
audit SEC registrants
belong to the SECPS.
117. If and when the The Congress has not Big 7 Accounting
Congress extends SEC acted on this (1986) profession
jurisdiction to all recommendation.
classes of entities
justified by the public
interest, these newly
covered classes of
companies should be
subject to SECPS
jurisdiction.
118. Enhance public The SEC's 1994 Annual Big 7 Accounting
confidence in the Report to Congress (1986) profession
Special Investigations comments favorably on
Committee. QCIC activities.
119. The accounting SAS 54 discusses the GAO Accounting
profession should be consideration an (1986) profession
improving its efforts auditor should give to
in determining whether the possibility of
companies are complying illegal acts. Although
with laws and the SAS states that an
regulations. audit normally does not
include procedures
specifically designed
to detect illegal acts,
para. 9 provides
examples of specific
information that may
raise a question
concerning possible
illegal acts. The SAS
includes guidance on
audit procedures in
response to possible
illegal acts, as well
as the auditor's
response to detected
acts.
Also, SAS 68 deals with
compliance auditing
applicable to
governmental entities
and other recipients of
governmental financial
assistance. FDI Act
�36(e) requires
auditors to report on
large banks' and
thrifts' compliance
with laws and
regulations.
120. The accounting The revision of SAS 53 GAO Accounting
profession should make that was exposed for (1986) profession
sure that internal comment in May 1996
controls and accounting provides more specific
systems are in place guidance for the
that will help prevent auditor's use in
fraud and mismanagement assessing the risk of
in the companies being fraud.
audited.
121. The accounting SAS 59 required the GAO Accounting
profession should auditor who concludes (1986) profession
provide better that there is
disclosure and early substantial doubt about
warnings regarding the the entity's ability to
condition of companies continue as a going
that are in precarious concern for a
positions. reasonable period of
time to reflect that
conclusion in the
report and provides
guidance on relevant
disclosures. However,
SAS 77, issued in
November 1995 and which
supersedes SAS 59,
precludes the auditor
from using conditional
language in the
auditor's conclusion
about an entity's
ability to continue as
a going concern.
122. The accounting Peer review is GAO Accounting
profession should mandatory for all firms (1986) profession
reduce the secrecy that that perform audits
surrounds the peer whose partners or
review process, and employees are members
make the process of the AICPA. The
mandatory for all results of peer reviews
public accounting firms undertaken to meet
that audit public SECPS membership
corporations and requirements are
government entities. maintained in a public
file.
123. The ASB should The AICPA has been Treadway Accounting
revise the auditor's reluctant to assume Commission profession
standard report to these additional (1987)
describe the extent to responsibilities and
which the independent the related risk of
public accountant has additional liability
reviewed and evaluated without a legislative
the system of internal or regulatory mandate.
accounting control. The An auditing
ASB also should provide interpretation (AU
explicit guidance to �9550.03) provides
address the situation guidance to the auditor
where, as a result of who disagrees with
his knowledge of the management's published
company's internal assessment of the
accounting controls, company's internal
the independent public controls.
accountant disagrees
with management's
assessment as stated in
the proposed management
report.
124. The ASB should SAS 53 on errors and Treadway Accounting
revise standards to irregularities was Commission profession
restate the independent issued in response to (1987)
public accountant's this recommendation.
responsibility for
detection of fraudulent
financial reporting,
requiring the
independent public
accountant to (a) take
affirmative steps in
each audit to assess
the potential for such
reporting and (b)
design tests to provide
reasonable assurance of
detection. Revised
standards should
include guidance for
assessing risks and
pursuing detection when
risks are identified.
125. The ASB should SAS 56 on analytical Treadway Accounting
establish standards to procedures was issued Commission profession
require independent in response to this (1987)
accountants to perform recommendation.
analytical review
procedures in all audit
engagements and should
provide improved
guidance on the
appropriate use of
these procedures.
126. The SEC should The SEC issued a Treadway SEC
require independent release on the subject Commission
public accountants to of timely auditor (1987)
review quarterly involvement with
financial data of all quarterly reports.
public companies before However, a regulation
release to the public. was not issued.
127. The ASB should SAS 58 on reports on Treadway Accounting
revise the auditor's audited financial Commission profession
standard report to statements was issued (1987)
state that the audit in 1988 in response to
provides reasonable but this recommendation.
not absolute assurance SAS 79 was issued in
that the audited 1995 and supersedes SAS
financial statements 58.
are free from material
misstatements as a
result of fraud or
error.
128. The SEC should The SEC has the Treadway Congress
have the authority to authority to impose Commission
impose civil money civil money penalties (1987)
penalties in in certain
administrative administrative
proceedings (including proceedings, but not in
Rule 2(e) proceedings) Rule 2(e) proceedings.
and to seek civil money The Commission may seek
penalties from a court civil money penalties
directly in an in injunctive
injunctive proceeding. proceedings.
129. Criminal The SEC has Treadway SEC
prosecution of participated in a Commission
fraudulent financial number of programs to (1987)
reporting cases should coordinate enforcement
become a higher activities by the
priority. The SEC various federal and
should conduct an state administrators
affirmative program to charged with this
promote increased responsibility.
criminal prosecution of
fraudulent financial
reporting cases by
educating and assisting
government officials
with criminal
prosecution powers.
130. The SEC must be This is a judgment only Treadway Congress and
given adequate the SEC and the Commission SEC
resources to perform Congress can make. (1987)
existing and additional
functions that help
prevent, detect, and
deter fraudulent
financial reporting.
131. The Office of the The environment has Treadway Financial
Comptroller of the changed substantially Commission institution
Currency, the Federal since the Treadway (1987) regulatory
Reserve Bank, the Commission issued its agencies
Federal Deposit report, and FDICIA
Insurance Corporation, imposes many new
and the Federal Home responsibilities on
Loan Bank Board should financial institutions,
adopt measures to carry their auditors, and the
out their own regulatory system, some
regulatory of which go beyond
responsibility relating present SEC
to financial reporting requirements.
under the federal
securities laws.
132. The AICPA's SECPS Required by SECPS Treadway Accounting
should strengthen its Standards for Commission profession
peer review program by Performing and (1987)
increasing review of Reporting on Peer
audit engagements Reviews; see SECPS
involving public Reference Manual
company clients new to �2000.70(c).
a firm. For each office
selected for peer
review, the first audit
of all such new clients
should be reviewed.
133. The AICPA's SECPS Revised SECPS guidance Treadway Accounting
requirement for a on the scope of the Commission profession
concurring, or second concurring review (1987)
partner, review of the requirement (SECPS
audit report should be Reference Manual
revised as part of an �2000.39) is
ongoing process of appropriately
review of this responsive to this
requirement. Standards recommendation.
for the concurring
review should, among
other things, (a)
require concurring
review partner
involvement in the
planning stage of the
audit in addition to
the final review stage,
(b) specify
qualifications of the
concurring review
partner to require
prior experience with
audits of SEC
registrants and
familiarity with the
client's industry, and
(c) require the
concurring review
partner to consider
himself a peer of the
engagement partner for
purposes of the review.
134. Public accounting In March 1980, the Treadway Accounting
firms should recognize SECPS issued the Commission profession
and control the Position Paper of Task (1987)
organizational and Force on Certain
individual pressures Aspects of the
that potentially reduce Auditor's Work
audit quality. Environment. The SECPS
membership requirements
also mandate the
preparation and
dissemination to all
personnel of a
"Statement of Firm
Philosophy." The
illustrative statement
provided by the SECPS
Reference Manual
(�1000.42) emphasizes
the need for an
overriding commitment
to high-quality
professional
performance.
135. The SEC should The SEC considered but Treadway SEC
require all public has not implemented Commission
accounting firms that such a requirement. (1987)
audit public companies However, AICPA members
to be members of a may engage in the
professional practice of public
organization that has accounting with a firm
peer review and that audits one or more
independent oversight SEC clients only if
functions and is that firm is a member
approved by the SEC, of the SECPS. Over
such as that specified 1,260 firms are now
by the SECPS of the SECPS members; they
AICPA's Division for audit the financial
CPA Firms. statements of about
16,000 SEC clients,
representing the vast
majority of publicly
traded SEC registrants.
There are approximately
290 CPA firms not
associated with the
SECPS or the AICPA that
serve as auditors for
about 460 generally
small or inactive SEC
clients.
136. The SEC should The SEC can do this, Treadway SEC
take enforcement action and it has done it once Commission
when a public against a member firm (1987)
accounting firm fails whose membership in the
to remedy deficiencies SECPS was terminated
cited by the public pursuant to an SECPS
accounting profession's disciplinary
quality assurance proceeding.
program.
137. The financial This recommendation has Treadway Financial
institution regulatory been implemented by Commission institution
agencies and the public regulatory action and (1987) regulatory
accounting profession by the issuance of SOP agencies and
should provide for the 90-5 by the AICPA accounting
regulatory examiner and Auditing Standards profession
the independent public Division.
accountant to have
mutual access to
information they
develop about examined
financial institutions.
138. State boards of This has been done by Treadway State boards
accountancy should 25 state boards. More Commission of accountancy
implement positive important is the fact (1987)
enforcement programs that participation in
that periodically would an AICPA-approved
review the quality of practice monitoring
by services rendered by program is now
the independent public mandatory for all firms
accountants they that have partners or
license. employees who are AICPA
members.
139. Parties charged The AICPA believed Treadway Congress
with responding to there was a pressing Commission
various tort reform need for reform and (1987)
initiatives should supported passage of
consider the the Private Securities
implications that the Litigation Reform Act
perceived liability of 1995.
crisis holds for long-
term audit quality and
the independent public
accountant's detection
of fraudulent financial
reporting.
140. Business and A number of auditing Treadway Educators
accounting students texts discuss the Commission
should be well- regulatory scheme, (1987)
informed about the quality control
regulation and standards, and practice
enforcement activities monitoring programs.
by which government and Also, AICPA curriculum
private bodies recommendations specify
safeguard the financial coverage of the
reporting system and regulatory and legal
thereby protect the framework that is
public interest. designed to protect the
public interest.
141. Throughout the The issuance of the Treadway Educators
business and accounting "expectation gap" SASs Commission
curricula, educators and the COSO report has (1987)
should foster knowledge drawn the attention of
and understanding of educators, including
the factors that may textbook authors, to
cause fraudulent matters related to
financial reporting and fraudulent financial
the strategies that can reporting. In addition,
lead to a reduction in in part through grants
its incidence. by certain individuals,
there has been a
renewed interest in
academia (and in the
business community) in
business ethics.
Specific steps taken to
address fraud
prevention and
detection in the
classroom are (a)
development of an
educator workshop on
fraud, (b) a fraud
session for the 1995
Accounting Educators
Mini-Conference, and
(c) solicitation of
teaching cases on fraud
which are distributed
to all accounting
program administrators.
Also, auditors'
responsibility for
fraud detection is
included in the content
specification outline
for the Uniform CPA
Examination.
142. The business and See action taken for Treadway Educators
accounting curricula recommendation 141. The Commission
should promote a better COSO report has been (1987)
understanding of the widely distributed to
function and the college libraries and
importance of internal academics.
controls, including the
control environment, in
preventing, detecting,
and deterring
fraudulent financial
reporting.
143. The business and The Accounting Treadway Educators
accounting curricula Education Change Commission
should help students Commission, funded by (1987)
develop stronger accounting firms, has
analytical, problem- experimented with
solving, and judgment innovative educational
skills to help prevent, approaches and is
detect, and deter working to disseminate
fraudulent financial the results throughout
reporting when students the academic community.
become participants in It plans to issue final
the financial reporting recommendations in
process. about a year. The
AICPA's curriculum
recommendations specify
development of
analytical and problem-
solving skills as
essential components of
accounting education.
144. The business and See action taken for Treadway Educators
accounting curricula recommendation 143. The Commission
should emphasize development of ethical (1987)
ethical values by values is specifically
integrating their addressed throughout
development with the AICPA curriculum
acquisition of recommendations. In
knowledge and skills to addition, teaching
help prevent, detect, cases on ethics issues
and deter fraudulent have been distributed
financial reporting. to all accounting
program administrators.
145. Business schools See action taken for Treadway Educators
should encourage recommendations 141 and Commission
business and accounting 142. (1987)
faculty to develop
their own personal
competence as well as
classroom materials for
conveying information,
skills, and ethical
values that can help
prevent, detect, and
deter fraudulent
financial reporting.
Business school faculty
reward systems should
recognize and reward
the contribution of
faculty who develop
such competence and
materials.
146. Professional The Institute of Treadway Accounting
certification Internal Auditors and Commission profession
examinations should the AICPA have (1987)
test students on the undertaken practice
information, skills, surveys, the results of
and ethical values that which have been used to
further the evaluate the
understanding of appropriateness of
fraudulent financial their respective
reporting and that examinations. The
promote its reduction. Institute of Management
Accountants and the
Institute of Internal
Auditors agreed to
place greater emphasis
on ethics in their
professional
examinations. However,
the national CPA
examination does not
address ethics.
147. As part of their The sponsoring Treadway Accounting
continuing professional organizations of the Commission profession
education, independent Treadway Commission, (1987)
public accountants, acting both separately
internal auditors, and and together, have
corporate accountants developed training
should study the forces programs that respond
and opportunities that to this recommendation.
contribute to
fraudulent financial
reporting, the risk
factors that may
indicate its
occurrence, and the
relevant ethical and
technical standards.
148. Management of FDI Act �36(c) and (e) GAO Congress and
banks and bank holding require internal (1988) regulators
companies with control and compliance
securities affiliates reporting for large
should report on the banks and thrifts.
adequacy of the
entities' internal
controls and on
compliance with laws
and regulations.
Moreover, as part of
the annual financial
audit, independent
auditors should be
required to review and
report on management
assertions regarding
internal controls and
compliance.
149. The AICPA should GAO Accounting
expeditiously revise (1989) profession
the AICPA Audit and
Accounting Guide for
Savings and Loan
Associations to include
specific steps for
ensuring that those
audits are performed in
a quality manner. The See para. 6.10 and
guide should include Chapter 9 of the
detailed discussion and revised guide.
specific requirements
for, among other
things, See para. 1.31-.32 of
the revised guide.
(a) identifying the
nature and related
inherent risks of land See para. 1.47-.55 and
and ADC loans, para. 2.17 of the
revised guide.
(b) following up on the
work of federal
examiners, See para. 1.47 and
para. 2.26 of the
(c) ensuring that revised guide.
regulatory violations
and formal regulatory
actions are disclosed,
and
(d) properly reporting
all material weaknesses
in internal controls.
150. The AICPA should The full text of the GAO Accounting
communicate the results GAO report was (1989) profession
of GAO's review of the published in the March
savings and loan (S&L) 1989 issue of the
audits and others' Journal of Accountancy,
reviews of S&L which is distributed to
problems. CPA firms all AICPA members,
performing S&L audits along with an
should review the appropriate commentary.
quality of those audits
to help ensure that
See para. 5.04, 7.12,
(a) staff performing and 16.03 of the
the audits have revised guide.
sufficient knowledge in
S&L operations, See para. 2.18-19 of
the revised guide.
(b) audit methodologies
are specifically
tailored to take into
account changes in the
operations of their See the AICPA's 1993
individual S&L clients General Audit Risk
and the S&L industry Alert, section on
environment, working paper
requirements.
(c) evidence of all
audit work is properly See para. 2.17 and
documented in the para. 2.24-.26 of the
working papers, and revised guide.
(d) financial risks,
regulatory violations
and formal regulatory
actions, and internal
control weaknesses are
fully disclosed in
audit reports.
151. The SEC should The SEC proposed but GAO SEC or
adopt a requirement never implemented such (1989) Congress
that all firms a requirement. However,
practicing before the AICPA members may
SEC be subject to engage in the practice
periodic peer reviews. of public accounting
If the SEC determines with a firm that audits
that it does not have one or more SEC clients
sufficient authority to only if that firm is a
do this, legislation member of the SECPS.
would be necessary. Over 1,260 firms are
now SECPS members; they
audit the financial
statements of about
16,000 SEC clients,
representing the vast
majority of publicly
traded SEC registrants.
152. The QCIC The SEC now has access GAO Accounting
(formerly, the Special to closed case (1989) profession
Investigations summaries prepared by
Committee) should the QCIC and related
provide the SEC with POB files. The SEC has
access to all required concluded (in its 1994
information about the annual report) that the
cases it investigates. QCIC process provides
added assurances, as a
supplement to the SECPS
peer review process,
that major quality
control deficiencies,
if any, are identified
and addressed on a
timely basis.
153. The AICPA should All of the guides GAO Accounting
issue the industry mentioned in the GAO (1989) profession
audit guides currently report have been
under revision as updated. The AICPA has
quickly as possible and devoted substantial
undertake an effective resources to a program
program to keep all to keep guides current
guides current. for recent development,
including a loose-leaf
service, a separate
staff, compensated
authors for selected
guide projects, and a
series of annual audit
risk alerts for
existing guides, in
addition to the general
audit risk alerts.
154. The Congress FDI Act �36(c) and (e) GAO Congress
should amend securities contain provisions for (1990)
laws to require direct internal control and
reporting to the SEC of compliance reporting
illegalities if the for large banks and
management and/or board thrifts. The Private
of directors or audit Securities Litigation
committee of the issuer Reform Act of 1995
does not promptly (�301) provides for
terminate and correct auditor reporting of
an illegality. illegalities to the SEC
under certain
circumstances.
155. The Congress These matters were GAO Congress
should amend banking addressed in FDI Act (1990)
laws as well as �36(c) and (e). The
securities laws to Private Securities
strengthen both Litigation Reform Act
management's and the of 1995 (�301) requires
auditor's auditors to perform
responsibilities for procedures to detect
evaluating and illegal acts and to
reporting on internal identify related-party
controls (including transactions (but does
those directly and not not require auditors to
directly related to the evaluate and report on
financial statements) internal controls).
and compliance with
laws and regulations.
156. The Congress No action taken. GAO Congress
should amend securities (1990)
laws to require
regulators to share
reports and information
with independent public
accountants concerning
regulators' knowledge
of potential
mismanagement, fraud,
or abuse by companies.
157. The Congress The Private Securities GAO Congress
should amend securities Litigation Reform Act (1990)
laws to strengthen of 1995 (�301) requires
auditing procedures in audit procedures for
three areas: related- identifying related
party transactions, parties, detecting
compliance with laws illegal acts, and
and regulations, and evaluating the ability
early warning of the of the issuer to
collapse or demise of a continue as a going
company. concern.
158. The Congress Securities laws were GAO Congress
should amend securities not amended. However, (1990)
laws to require all see action taken for
auditors auditing recommendations 122 and
public companies and 166.
insured depository
institutions to obtain
a peer review.
159. The accounting Accounting standards GAO Accounting
rules and audit have not been changed. (1991) profession
procedures for related- However, SAS 45 states
party transactions that the independent
should be enhanced to accountant should be
clarify that related- aware that the
party transactions are substance of a
required to be particular transaction
accounted for and could be significantly
reported based on their different from its
economic substance. form, and that the
Also, guidance should financial statements
be provided on how to should recognize the
determine economic substance of particular
substance. transactions rather
than merely their legal
form. SAS 69 states
that the auditor should
consider whether the
substance of
transactions or events
differs materially from
their form.
160. The Congress FDI Act �36(e) requires GAO Congress
should enact auditor reporting on an (1991)
legislation requiring institution's
that independent public compliance with laws
accountants acting as and regulations.
auditors of federally However, legislative
insured financial proposals have been
institutions be introduced to repeal
required to report to this requirement.
the institution and the
regulators on the
institution's
compliance with
(a) laws and
regulations that are
identified by the
regulators as relating
to safety and soundness
where compliance can be
objectively determined
and
(b) special regulatory
directives as defined
by the regulators to
maintain prudent
operations or to
restore the financial
health of the
institution.
161. The Congress See the Private GAO Congress
should enact Securities Litigation (1991)
legislation requiring Reform Act of 1995
that independent public (�301). Also, SAS 53
accountants acting as and 54 provide guidance
auditors of federally in this area.
insured financial
institutions be
required to immediately
pursue indications of
illegality by the
institution and inform
an officer authorized
to sign management's
annual internal control
report and the audit
committee of the
institution if the
accountant determines
that an illegality
likely occurred and,
then, inform the
institution's board of
directors in a timely
manner.
162. The Congress SAS 53 and 54 provide GAO Congress
should enact guidance in this area. (1991)
legislation requiring The Private Securities
that independent public Litigation Reform Act
accountants acting as of 1995 (�301) includes
auditors of federally requirements for
insured financial reporting to the SEC
institutions be illegal acts that have
required to resign from not been properly
the audit engagement or addressed by the
report to the company.
regulators on the
illegality, or both, if
the illegality is
substantial and the
institution does not
take corrective action.
163. To encourage See action taken for GAO Congress
better compliance with recommendations 160 and (1991)
laws and regulations, 161.
auditors should be
required to promptly
and fully notify audit
committees and
appropriate regulatory
authorities of
significant illegal
acts that are not
corrected.
164. The Congress FDI Act �36(g)(3)(A)(i) GAO Congress
should enact establishes access to (1991)
legislation that working papers.
requires the regulators However, legislation
to periodically review has not been enacted to
the independent require regulatory
auditor's procedures review or reliance.
and working papers for
large institutions as a
basis for regulatory
reliance thereon.
165. The Congress No action taken. GAO Congress
should enact (1991)
legislation requiring
that the regulators
biennially
report to the Congress
on the effectiveness of
the auditing and
management reforms at
large institutions and
that GAO review the
regulators' evaluation
and report to the
Congress.
166. Independent public The Congress required GAO Congress
accountants acting as peer review for (1991)
auditors of federally auditors of large banks
insured financial and thrifts. See FDI
institutions should be Act �36(g)(3)(B).
required to undergo
periodic peer review,
such as that prescribed
by the AICPA's self-
regulatory program, or
another such quality
assurance program
acceptable to the
regulators.
167. The Congress Sharing of information GAO Congress
should enact under the FDI Act is (1991)
legislation (a) incumbent on auditors
requiring that federal and management, but not
regulators of regulators. FDI Act
depository institutions �36(g)(4) addresses
share with the removal of auditors.
institution's
independent public
accountant their
knowledge of potential
illegal acts by the
institution, with
exceptions for ongoing
litigation and
investigations, and
(b) authorizing the
regulators to remove
the auditors for cause
with appropriate due
process.
168. The AICPA should The AICPA revised its GAO AICPA
clarify audit audit guide on employee (1992)
requirements in its benefit plans and
audit guide of employee publicized the results
benefit plans to of GAO's review of CPA
strengthen audits of audits of pension plans
employee benefit plans. (GAO/AFMD-92-14) to its
membership in a 1991
industry risk alert.
169. The AICPA should The AICPA publicized GAO AICPA
communicate to its the results of GAO's (1992)
membership the results review of CPA audits of
of investigations of pension plans (GAO/
deficient employee AFMD-92-14) to its
benefit plan audits. membership in a 1991
industry risk alert.
Also, the AICPA's
December 1991 Journal
of Accountancy provided
information about the
investigations of
employee benefit plan
audits.
170. Accounting firms The new series of PITF POB Accounting
should assure that practice alerts, (1993) profession
auditors more articles that will be
consistently implement, placed in the Journal
and be more sensitive of Accountancy
to the need to exercise illustrating actual
the professional frauds, and the AICPA
skepticism required by, audit risk alert series
the auditing standard put firms and members
that provides guidance on notice as to their
on the auditor's responsibilities and
responsibility to the need for
detect and report professional
errors and skepticism.
irregularities.
171. The ASB, the See action taken for POB Accounting
Executive Committee of recommendation 170. In (1993) profession
the SECPS, or some addition, in May 1996,
other appropriate body the ASB exposed for
should develop comment revisions to
guidelines to assist SAS 53 on errors and
auditors in assessing irregularities and
the likelihood that changes to other
management fraud, which standards in response
may affect financial to this recommendation.
information, may be
occurring and to
specify additional
auditing procedures
when there is a
heightened likelihood
of management fraud.
172. The AICPA's AcSEC SOP 94-6 was issued in POB Accounting
should promptly adopt a December 1994. (1993) profession
Statement of Position
providing guidance on,
and requiring
disclosure of
information about, the
nature of risks and
uncertainties
associated with the
reporting entity's
operations and
financial condition.
173. The accounting See the Private POB Accounting
profession should Securities Litigation (1993) profession
support carefully Reform Act of 1995
drafted legislation (�301).
requiring auditors to
report to the
appropriate
authorities, including
the SEC, suspected
illegalities discovered
by the auditor in the
course of an audit if
the client's management
or board of directors
fails to take necessary
action with respect to
such suspected
illegalities and the
auditor believes that
they are or may be
significant to the
entity. The profession
should seek adequate
guidance as to the
types of illegalities
that would be
encompassed by this
requirement.
174. The ASB should This recommendation was POB Accounting
revise the auditor's not adopted by the ASB. (1993) profession
standard report to make However, SOP 94-6 on
the prospective nature risks and uncertainties
of certain accounting does require disclosure
estimates clear, of the use of estimates
including a caveat that in financial
the estimated results statements.
may not be achieved.
This communication
should not be written
as a defensive
retrenchment by the
auditing profession,
but rather as a more
realistic and
reasonable explanation
of the limitation of
assurance that can be
provided on certain
accounting estimates.
175. The following An auditing POB Accounting
recommendation of the interpretation (see AU (1993) profession
Macdonald Commission �9411.11-15) was issued
should be adopted by in March 1995 that
ASB in the United provides guidance when
States: "When new management adopts
accounting policies are accounting principles
adopted in response to for new transactions or
new types of events.
transactions or new
kinds of assets or
obligations, the
auditor should be
satisfied that the
accounting policies
adopted properly
reflect the economic
substance of the
transaction, asset, or
liability in accordance
with the broad theory
governing present-day
financial reporting and
the established concept
of conservatism in the
face of
uncertainty."(Report of
the Commission to Study
the Public's
Expectations of Audits,
(Macdonald Commission),
June 1988.)
176. Peer reviewers Amended guidance POB Accounting
should evaluate a CPA addressing this (1993) profession
firm's consultation revision has been
process by which it developed and adopted
reaches specific by the SECPS peer
accounting conclusions, review committee.
and should also inquire
whether that process
leads to accounting
that is appropriate in
the circumstances. In
testing compliance with
a firm's consultation
policies and
procedures, a firm's
peer review team should
evaluate the quality of
the conclusions
reached.
177. The concurring The SECPS adopted an POB Accounting
partner, whose amendment to its (1993) profession
participation in an concurring partner
audit is a membership review membership
requirement of the requirements in April
SECPS, should be 1994 in response to
responsible for this recommendation.
assuring that those When such consultation
consulted on accounting occurs, the concurring
matters are aware of reviewer is required to
all of the relevant be satisfied that the
facts and conclusions reached are
circumstances, appropriate in light of
including an all the relevant facts
understanding of the and circumstances. (See
financial statements in SECPS Reference Manual
whose context the (�1000.39(b)), revised
accounting policy is in November 1995.)
being considered. The
concurring and
consulting partners
should know enough
about the client to
ensure that all of the
relevant facts and
circumstances are
marshalled, and also
possess the increased
detachment that comes
from not having to face
the client on an
ongoing basis. The
concurring partner
should have the
responsibility to
conclude whether the
accounting treatment
applied is consistent
with the objectives of
recommendation 175.
178. Financial The Private Securities POB Congress
responsibility among Litigation Reform Act (1993)
those involved in a of 1995 (�201) provides
financial failure or in for proportionate
fraudulent financial liability for auditors
reporting should be found to have
allocated in proportion negligently violated
to responsibility for the securities laws.
losses suffered.
Accordingly, "separate
and proportionate"
liability legislation
applicable to both
federal and state
claims should be
enacted by the
Congress. The civil
liability provisions of
RICO should be amended
to eliminate treble
damages in cases that
arise under the federal
securities laws.
179. The Congress There is no federal law POB Congress
should adopt preemptive to achieve this (1993)
legislation to permit objective. However,
the practice of most states allow firms
accountancy in a form to practice as limited
that appropriately liability partnerships
limits the liability of which limits the
individual members of liability of partners
the firm. not at fault.
180. The SEC should Although suggested as a POB SEC
amend its rules to possible alternative (1993)
require SEC registrants within SEC's 1987 rule
to disclose whether proposed on peer
their auditors have had review, no action was
a peer review, the date taken.
of the most recent peer
review, and its
results.
181. The SECPS's The SECPS Executive POB Accounting
membership requirements Committee formed the (1993) profession
should be changed to PITF. With the
require member firms to concurrence of the POB,
modify their quality the SECPS will not
control systems to change its membership
specify that they take requirements but has
the following steps in requested that the QCIC
response to allegations revise its procedures
of deficiencies in the to include determining
conduct of an audit of that a firm that is the
financial statements of subject of such an
an SEC client (or allegation conducted
another client the appropriate
encompassed by the QCIC analysis. The QCIC has
process) that are made approved in concept
in litigation against procedures for ensuring
the member firm or its that its proceedings
personnel, or in any determine that member
public proceeding or firms have
investigation by a appropriately
regulatory agency. undertaken actions
responsive to items one
(a) perform a complete through five of the POB
internal analysis of recommendations.
the audit; review all
relevant work papers,
correspondence, and
other files; and
interview members of
the engagement team,
(b) assess the
capabilities of the
senior audit personnel
and determine whether
the firm should
monitor, reassign, or
terminate such
personnel,
(c) identify any
problems with the
firm's quality control
system or training
activities,
(d) identify any
implications of the
allegations relating to
the adequacy of
auditing, quality
control, or accounting
standards,
(e) identify any
implications of the
allegations relating to
the adequacy of
guidance with respect
to the manner in which
audits are conducted,
including the
evaluation of risks in
audits, and relating to
variations in practice
and the interpretations
of standards that
should be resolved,
and
(f) communicate the
implications identified
in items (d) and (e) in
a structured manner to
the QCIC.
182. The peer review In view of actions POB Accounting
performance standards taken for (1993) profession
should be amended to recommendations 181 and
require peer reviewers 183 and the related
to test firms' QCIC involvement, no
compliance with these separate action by the
modifications (see peer review committee
recommendation 181) to is necessary.
their quality control
system.
183. The QCIC The new series of POB Accounting
procedures should be practice alerts issued (1993) profession
modified to require the by the PITF is sent to
QCIC to develop all SECPS member firms
additional procedures and also published in
to permit it, on the The CPA Letter.
basis of its analysis
of the QCIC cases and
the information
reported to it under
the expanded membership
requirements discussed
above, to facilitate
the resolution of
unresolved audit
practice issues and to
formulate, either by
itself or in
collaboration with
other appropriate
bodies, practice and
guidance directions to
the accounting
profession in a
retrievable format,
such as EITF Abstracts,
which present issues
considered by FASB's
EITF.
184. The SECPS's The SECPS has amended POB Accounting
membership requirements its requirements to (1993) profession
relating to CPEs should specify that
be revised to require professionals spending
that a substantial 25 percent or more of
number of the required their time in providing
hours of continuing accounting or audit
education relate to services or with
accounting and supervisory or review
auditing. responsibilities with
respect to such
engagements, except
compilations, must
obtain at least 40
percent of their annual
CPEs on subjects or
matters related to
accounting or auditing.
This change became
effective for
continuing professional
years beginning on or
after January 1, 1995.
185. Every participant This recommendation was AICPA Board of Management,
in the financial discussed in a meeting Directors advisors, and
reporting process between AICPA (1993) regulators
should bring to the representatives and the
independent auditor's Chairman of the SEC on
attention instances of December 15, 1993. No
suspected financial further action was
fraud. This includes taken.
management officials
and advisors such as
attorneys and
government regulators.
186. The system of See action taken for AICPA Board of Congress
joint and several recommendation 178. Directors
liability should be (1993)
replaced with
proportionate liability
except in cases of
"knowing fraud."
187. A strengthened A bill (S.1976, "Public AICPA Board of Accounting
system should be Securities Reform Act Directors profession and
established to of 1994"), introduced (1993) Congress
discipline individual on March 24, 1994, by
CPAs and firms that are Senator Dodd and
guilty of substandard publicly supported by
work or professional the AICPA, included
misconduct. This system provisions that would
should be national in establish a "public
scope and reside in the auditing self-
profession with disciplinary board,"
oversight by the which, as described in
government. It should the bill, would
apply to auditors of accomplish the
SEC registrants and objective of timely and
other publicly effective discipline.
accountable entities. This legislation was
not enacted.
188. Investigative and QCIC pursues quality AICPA Board of Accounting
disciplinary actions control implications of Directors profession
should take place alleged audit failures (1993)
regardless of whether irrespective of ongoing
legal proceedings were litigation.
also under way.
189. It is urgent that The SEC expressed Kirk Panel SEC
the SEC take the lead qualified support for (1994)
in helping the the Private Securities
profession reduce Litigation Reform Act
exposure to unwarranted of 1995.
litigation. There are
dangers, not just to
the profession but to
the investing public,
if the current
liability situation
continues to drift
without SEC leadership.
--------------------------------------------------------------------------------
Table II.3
Setting Accounting Standards
Recommendation Recommendation
Recommendation Action taken made by/date directed to
----------------------- ----------------------- -------------- --------------
1. A new foundation, to FAF was created in Wheat Accounting
be called the Financial 1972. The 16-member Committee profession
Accounting Foundation, Board of Trustees is (1972)
should be established, responsible for (a)
separate from all selecting and
existing professional evaluating the members
bodies. It would be of FASB and GASB, (b)
governed by a board of seeing that the
trustees composed of necessary funds are
nine members, whose provided, and (c)
principal duty would be overseeing the
to appoint the members standard-setting
of a financial process for fairness,
accounting standards neutrality, and
board and to raise the openness.
funds for its
operations.
2. A financial FASB was established in Wheat Accounting
accounting standards 1973. The members of Committee profession
board should be FASB serve full-time (1972)
established with seven and are fully
(full-time, fully remunerated. They are
remunerated) members. required to serve all
The board's function ties with the
would be to establish institutions they
standards of financial served previously.
accounting and Three members of the
reporting. The board of present board come from
trustees would appoint public accounting, two
members of the from financial
standards board and management, one from
designate one of them the investment
as chairman. Members of community, and one from
the standards board academia. All possess
would have no other extensive experience in
affiliations. Four of the financial reporting
them would be CPAs field. The original
drawn from public recommendation that
practice. The other four members be drawn
three would not need a from public practice
CPA certificate but was intended to address
should possess an early AICPA concern
extensive experience in and, over time, that
the financial reporting concern faded.
field.
3. When a standard is Dissents by members to Wheat Accounting
adopted by the the FASB statements are Committee profession
requisite majority, it published. However, (1972)
should be published because AICPA members
without dissents. are required by Rule
203 of the Code of
Professional Conduct to
comply with the FASB
statements and because
the SEC requires
compliance with those
statements, the AICPA
does not believe
publishing dissents
weakens the FASB
statements.
4. The standards board Since the late 1970s, Wheat Accounting
should, to the fullest all FASB meetings Committee profession
extent possible, carry attended by three or (1972)
out its functions in more board members are
public. open to the public. See
also "The 'Process' in
Due Process: A Behind-
The-Scenes Look at
Standards Setting," by.
A. Clarence Sampson,
the FASB Status Report
224, October 14, 1991,
for an informative
discussion of how FASB
obtains public input
and at the same time
undertakes to educate
the public concerning
matters on its agenda.
5. Interpretations, Interpretations are Wheat Accounting
when necessary, should issued by FASB, and Committee profession
be issued with the full FASB interpretations (1972)
authority of the have the same authority
standards board. as the FASB statements
under SAS 69.
6. The board of FASAC was established Wheat Accounting
trustees should and has evolved over Committee profession
establish a financial the years. It presently (1972)
accounting standards consists of over 30
advisory council (about members, with its own
20 members) to work chairman and executive
with the standards director. Forty-three
board as advisors. percent of the members
Members would be either are involved in
appointed by the financial management or
trustees for 1-year are the CEOs of their
terms which could be respective entities.
renewed indefinitely. CPA firms, the
They would be entitled securities industry and
to reimbursement of other users of
expenses, but no financial statements,
remuneration, and would and academics are also
be drawn from a variety represented on FASAC.
of occupations, but not
more than one-fourth of
the members should be
drawn from any single
sphere of activity. The
chairman of the board
would also be, ex
officio, chairman of
the advisory council.
7. The functions of the See FAF's 1994 Annual Wheat Accounting
advisory council would Report for details. Committee profession
include providing Among other things, (1972)
advice to the standards that report points out
board as to its that FASAC conducts a
priorities, helping it formal annual survey of
to set up task forces, its members' views
reacting to proposed about FASB projects and
standards, and priorities, considers
otherwise assisting the how FASB is allocating
standards board when its resources, and
called upon to do so. discusses not only
active FASB technical
projects but other
issues currently facing
the accounting
profession.
8. In the transition The last APB Opinion, Wheat Accounting
from the APB to the no. 31, was issued in Committee profession
standards board, June 1973. (1972)
opinions that have
reached the exposure
draft stage should be
carried through to
completion by the APB.
Other matters on the
APB's agenda should be
transferred to the
standards board.
9. Financial accounting FASB has been very Wheat FASB
research projects selective in its Committee
should be rigorously sponsored research (1972)
controlled by the reports in recent years
standards board and by and has restricted this
its research director activity to areas
to ensure that they are directly relevant to
directly germane to the current and potential
board's needs and are projects. FASB takes
carried out advantage whenever
expeditiously. possible of the
extensive academic
research being done
without FASB
sponsorship, and has
been successful in
encouraging academic
researchers to conduct
research relevant to
its projects.
10. Financial See action taken for Wheat FASB
accounting research recommendation 9. Committee
projects should be (1972)
carefully defined to
assure that what needs
to be researched is
researched.
11. In financial Project task forces Wheat FASB
accounting research have generally taken an Committee
projects, full use advisory role in FASB- (1972)
should be made of task commissioned projects.
forces established with
the cooperation of the
advisory council.
12. Authors of Authors are consulted Wheat FASB
financial accounting as necessary and Committee
research studies should appropriate. (1972)
be fully consulted in
drafting proposed
standards and their
related history.
13. The basic objective The Trueblood report Trueblood FASB
of financial statements led FASB to embark on Committee
should be to provide its conceptual (1973)
information useful for framework project, a
making economic similar basic objective
decisions. of financial reporting
in CON 1 para. 34. The
FASB concepts
statements deal with
the objectives of
financial reporting,
the qualitative
characteristics of
accounting information,
and the elements of
financial reporting.
These statements deal
with matters that are
the subject of this
recommendation.
14. An objective of The objectives of Trueblood FASB
financial statements financial statements Committee
should be to serve are set forth in CON 1 (1973)
primarily those users para. 28 and 30.
who have limited
authority, ability, or CON 1 para. 24-27
resources to obtain discusses the users of
information and who financial statements.
rely on financial
statements as their
principal source of
information about an
enterprise's economic
activities.
15. An objective of See CON 1 para. 37-39. Trueblood FASB
financial statements Committee
should be to provide (1973)
information useful to
investors and creditors
for predicting,
comparing, and
evaluating potential
cash flows to them in
terms of amount,
timing, and related
uncertainty.
16. An objective of See CON 1 para. 42-48. Trueblood FASB
financial statements Committee
should be to provide (1973)
users with information
for predicting,
comparing, and
evaluating enterprise
earning power.
17. An objective of See CON 1 para. 50-53. Trueblood FASB
financial statements Committee
should be to supply (1973)
information useful in
judging management's
ability to utilize
enterprise resources
effectively in
achieving the primary
enterprise goal.
18. An objective of See CON 1 para. 54. Trueblood FASB
financial statements Committee
should be to provide (1973)
factual and
interpretative
information about
transactions and other
events that is useful
for predicting,
comparing, and
evaluating enterprise
earning power. Basic
underlying assumptions
with respect to matters
subject to
interpretation,
evaluation, prediction,
or estimation should be
disclosed.
19. An objective should See CON 1 para. 41 and Trueblood FASB
be to provide a CON 5 para. 26-29 for Committee
statement of financial concepts concerning the (1973)
position useful for statement of financial
predicting, comparing, position.
and evaluating
enterprise earning See CON 5 para. 36-37
power. This statement for concepts concerning
should provide incomplete cycles.
information concerning
enterprise transactions See CON 5 para. 88-90
and other events that for discussion of
are part of incomplete recognition of current
earnings cycles. values.
Current values should
also be reported when Controversy continues
they differ among users as well as
significantly from preparers and auditors
historical cost. Assets concerning adoption of
and liabilities should a fair value accounting
be grouped or model, but disclosure
segregated by the of some kinds of
relative uncertainty of current value data has
the amount and timing been accepted. FASB has
of prospective required disclosure of
realization or the current value of
liquidation. financial instruments
(SFAS 107) and has
required that certain
debt and equity
securities be reported
at fair value (SFAS
115). SFAS 33, issued
in 1979, required
disclosure of
supplementary
information about the
effects of inflation
and changes in specific
prices, but that
requirement was changed
to encouragement by
SFAS 89.
20. An objective should See CON 5, para. 30-57 Trueblood FASB
be to provide a and para. 83-87 for a Committee
statement of periodic discussion of concepts (1973)
earnings useful for of earnings and
predicting, comparing, comprehensive income.
and evaluating This issue remains
enterprise earning controversial. In June
power. The net result 1996, FASB issued an
of completed earnings exposure draft,
cycles and enterprise Reporting Comprehensive
activities resulting in Income, of a proposed
recognizable progress standard that would
toward completion of require explicit
incomplete cycles reporting of
should be reported. comprehensive income as
Changes in the values well as net income.
reflected in successive Comments on this
statements of financial exposure draft are due
position should also be in October 1996. The
reported, but Jenkins Committee has
separately, since they learned that users want
differ in terms of information about the
their certainty of portion of a company's
realization. reported earnings that
is stable or recurring
and that provides a
basis for estimating
sustainable earnings.
21. An objective should SFAS 95 regarding the Trueblood FASB
be to provide a statement of cash Committee
statement of financial flows, issued November (1973)
activities useful for 1987, established
predicting, comparing, standards for cash flow
and evaluating reporting. It
enterprise earning superseded APB Opinion
power. This statement No. 19 and required a
should report mainly on statement of cash flows
factual aspects of as part of a full set
enterprise transactions of financial statements
having or expected to for all business
have significant cash enterprises in place of
consequences. This a statement of changes
statement should report in financial position.
data that require
minimal judgment and
interpretation by the
preparer.
22. An objective of Financial forecasts Trueblood FASB
financial statements have not been required Committee
should be to provide by FASB or others. The (1973)
information useful for Jenkins Committee has
the predictive process. learned that investors
Financial forecasts and creditors need
should be provided when forward-looking
they will enhance the information on which to
reliability of users' base their own
predictions. projections, but they
do not expect
management to provide
projections or
forecasts. Users also
want more information
about operating
opportunities and risks
that are relatively
near-term and
relatively certain and
quantifiable.
23. An objective of Measuring and reporting Trueblood FASB
financial statements on social interactions Committee
should be to report on in financial statements (1973)
those activities of the is in its infancy. Some
enterprise affecting applications of
society that can be existing GAAP deal with
determined and enterprise issues
described or measured affecting society.
and that are important
to the role of the
enterprise in its
social environment.
24. The SEC should The SEC continues to Moss SEC
prescribe by rule a look to FASB to set Subcommittee
framework of uniform accounting standards (1976)
accounting principles. and exercises oversight
over the process, as
explained in its
various annual reports
to the Congress. The
FASB concepts
statements, statements
of financial accounting
standards,
interpretations, and
other guidance provide
the framework
contemplated in this
recommendation. The SEC
issues accounting
guidance in the form of
rules or
interpretations when it
thinks it necessary or
appropriate.
25. The Congress should Congressional Metcalf Congress
exercise stronger committees exercise Subcommittee
oversight of accounting oversight of the SEC, Staff Study
practices promulgated other regulatory (1977)
or approved by the bodies, and the
federal government and accounting profession.
more leadership in FASB representatives
establishing goals and have appeared before
policies. various congressional
committees.
26. The federal The Congress has not Metcalf Federal
government should acted on this Subcommittee government
directly establish recommendation, relying Staff Study
financial accounting on oversight by the SEC (1977)
standards for publicly of standards set in the
owned corporations. An private sector by FASB.
alternative could be to The SEC's annual
use a board similar to reports to the Congress
the Cost Accounting cover its oversight of
Standard Board or to the accounting
establish standards by standards-setting
GAO. process.
27. The federal See action taken for Metcalf Federal
government should recommendation 26. Subcommittee government
establish financial Staff Study
accounting standards, (1977)
cost accounting
standards, auditing
standards, and other
accounting practices in
meetings open to the
public.
28. The nature of the FASB involves its FAF FASB
standard-setting constituencies in all (1977)
process requires the aspects of the
involvement of all standards-setting
those who might be process, including the
affected. Therefore, selection of its
FASB should lead its projects, the
constituency and be preparation of
prepared to follow when discussion memorandums
a constituent can and exposure drafts,
demonstrate a better and the conduct of
way for the field tests. FASB also
constituency overall. has made a significant
effort to communicate
developments to its
constituencies,
including liaisons with
interested professional
and business groups.
FASB's decisions are
made in meetings open
to the public and are
widely reported. FASB
frequently revises its
proposals when
constituents point out
ways to achieve better
standards.
29. The makeup of FASAC FAF appointed an FAF FASAC
should be carefully independent chair to (1977)
reviewed to make sure FASAC. As of May 1996,
that it includes a there were 33 FASAC
representative cross members of whom 43
section of FASB's percent represented
constituencies, preparers, 27 percent
including preparers, represented auditors,
attestors, educators, 12 percent represented
analysts and advisors, users, and 18 percent
creditors and represented educators
investors, government, and others.
and the public.
Further, the membership
must be carefully
reviewed to make sure
that all are working
members who will take
the time and give the
effort to consider
FASB's technical
concerns. FASAC should
be headed by its own
part-time chairman, a
preeminent individual.
The chairman would be
responsible to see that
FASAC acted as a
"window to the world"
in communicating the
thoughts and progress
of FASB to the
constituency and
feeding back ideas for
improvement.
30. FAF should be FAF replaced the AICPA FAF FASB/FAF
reconstituted to as the sole elector of (1977)
include as its FAF trustees with a
"members" one panel comprised of one
representative of each representative from
of the six sponsoring each of FAF's six
organizations. sponsoring
organizations. As of
July 1996, the head of
each sponsoring
organization is an
elector of FAF
trustees.
31-33. The FAF
responsibilities of the (1977)
four primary accounting
standard-setting bodies
would be
31. ...FAF and the FAF Recommendations were FAF
Board of Trustees. generally adopted and
(a) The members of FAF are reflected in
would no longer be the current operating
Board of Directors of procedures.
the AICPA, but would be
composed of individuals
representing each of
the sponsoring
organizations. Their
responsibility would be
to elect the FAF Board
of Trustees.
(b) The FAF Board of
Trustees would select
their Chairman and
establish their
committees to recommend
FASB members, fund
FASB's activities, and
perform the oversight
role. The FAF Board of
Trustees would elect
FASB members.
(c) The FAF Board of
Trustees would meet
with FASB at least
quarterly to review
performance against
plan and discuss
operating matters with
FASB.
32. ...the Advisory Recommendations were FASAC
Council. generally adopted and
(a) The Advisory are reflected in
Council members would current operating
be appointed by the procedures.
Trustees, the same as
at the present.
However, the FASAC
Chairman would be paid
by and report to FAF.
(b) FASAC would
facilitate the work of
FASB by suggesting from
its membership
participants to serve
on task forces. Also,
it would assist in
obtaining staff and
research help for FASB
from among the
constituency.
(c) FASAC, either in
whole or through
committees, would
become knowledgeable on
the major issues under
consideration by FASB.
It would discuss those
issues with its
constituent groups and
ultimately with FASB.
The Chairman would see
that those views were
crystallized for FASB's
consideration.
33. ...FASB. Recommendations were FASB
(a) FASB members would generally adopted and
be appointed by the are reflected in
Trustees, based on current operating
their knowledge of procedures.
accounting, finance,
and business, and their
concern for the public
interest. The prior
affiliation of a
potential FASB member
would be considered
only to the extent of
obtaining the proper
mix of talent.
(b) FASB would continue
to have sole
responsibility for the
development and
promulgation of
standards, and would be
responsible for
selecting and managing
the members of its
organization required
to do this work. To the
extent the internal
organization lacks the
personnel resources to
accomplish its work
adequately and on time,
FASB would be expected
to delegate staff and
research work outside
the organization,
retaining its decision-
making authority over
all that work. FASB
would continue to
pursue every
opportunity to involve
their constituents in
the standard-setting
process, soliciting
their input, asking for
their reactions, and
looking for new ideas.
FASB will carefully
guard its independence
but it will see its
constituents as
participants in the
process.
(c) FASB would maintain
continuous
communication with
FASAC, as necessary to
report FASB's views and
progress and to gather
FASAC's views and
suggestions. FASB would
not be bound by the
views of FASAC, but
would be expected to
listen carefully.
(d) FASB would meet at
least quarterly with
the FAF Board of
Trustees to review
operating results.
34. FASB should improve The resources were FAF FASB
its staff relationship. provided to strengthen (1977)
FASB should delegate as the FASB staff,
much work as possible accelerate its work
to the staff, and it pace, and improve the
should remain in the effectiveness of FASB's
decision-making mode. operations. Since 1977,
But FASB must have staff work for FASB,
additional qualified not individual members.
staff so that the Also in 1977, FASB
system can work, and began a recruiting
then it must be careful program designed to
to let the staff double the size of the
exercise the Research and Technical
responsibility it has Activities Division
given them. FASB must staff. Also, efforts
work with the managers, were under way to
helping them keep their increase experience
projects moving, and levels and abilities of
helping the staff grow. the staff.
35. The role of FASB's This recommendation was FAF FASB
Research Director adopted in full by FASB (1977)
should be more broadly in 1977. The Director
defined, and his of the Research and
responsibilities should Technical Activities
be put on a level at or Division continues to
almost equal to that of perform that role.
the FASB members. The
entire research staff
should be consolidated
under the Research
Director.
36. An appropriately The research and FAF FASB
high authority within technical staff of FASB (1977)
the FASB structure was substantially
(probably the Research increased in size and
Director but perhaps was upgraded in terms
his associate) should of experience and
be specifically charged knowledge through
with the responsibility selective recruitment
to develop the research policies, including an
staff. increase in the number
of FASB Fellowships,
and an in-house
professional
development program.
37. FASB should be FASB continues to FAF FASB
encouraging its staff actively seek out (1977)
people to accept speaking engagements
speaking engagements and opportunities to
and writing issue publications.
opportunities because
those outside
involvements have a
number of benefits.
38. FASB should The other development FAF FASB
continue its program of of subtle but strong (1977)
exploiting the significance in 1979
resources available in was the broadening of
the task forces. public participation in
Specifically, the task FASB's research and
forces should be asked decision-making
to review and comment processes. Since FASB
on all of the FASB began operation in
issuances related to 1973, there also has
their projects, been recurring
beginning with the discussion of possible
discussion memo but ways of "leveraging"--
also including the of making use of the
exposure draft and the work of other
final statement. The organizations and the
task force members expertise of outside
should be enlisted in individuals. Activities
the campaign to take both before and after
the pronouncement to issuance of SFAS 33 are
the public, encouraging illustrative of
a public discussion of increased constituent
the issues and participation. FASB
explaining the formed task groups in
decision. Further, FASB six industries to
should experiment with identify special
the task force idea to measurement problems
see if the task forces and propose solutions.
can be used to leverage
FASB.
39. FASB has a positive In 1977, FASB began FAF FASB
responsibility to having open meetings. (1977)
encourage and promote In that year it began
the broadest possible publishing a status
participation in the report titled The
due process, and FAF Board's Plan for Work
has recommended several on Technical Projects
modifications in the and Other Technical
present procedures to Activities, which was
encourage a broader meant to make public
response. FASB should meetings more
publish an action meaningful to FASB's
document, as the basis constituency. FASB also
for the public hearing. began mailing of a
Notice of Meetings. The
Notice provides dates,
times, and a brief
summary of agendas. The
above documents have
evolved into a weekly
Action Alert and
generally a monthly
Status Report that have
grown and evolved since
the FAF
recommendations.
40. FASB should FASB does hold public FAF FASB
experiment with several hearings, but the (1977)
different approaches to formats have changed
the public hearing over time and do not
process: (a) one reflect the recommended
alternative is that format. Debates of the
FASB consider sort described do occur
sponsoring a public at FASAC and other
proceeding where forums.
proponents of a
particular view on an
issue could be invited
to argue their
position, debating it
with others who have
presented papers
advocating an opposite
point of view, or (b)
FASB might select
representative papers
submitted to them and
ask the preparers of
those papers to engage
in a public debate with
FASB or staff expert on
the subject.
41. To help FASB meet This is a continuing FAF FASB
its own production effort of FASB and is (1977)
plans, it should part of its current
maintain a more strategic plan.
explicit, more
effective control
system. We strongly
recommend that FASB
establish a more formal
monitoring and follow-
up program which will
help FASB members
follow the progress of
projects and take
appropriate remedial
action when necessary.
42. FASB should discuss The most dramatic FAF FASB
the issues involved in change in 1977 was (1977)
the subjects under emergence of meetings
deliberation, in public of FASB, FASAC, task
forums and particularly forces, the Screening
with FASAC. Committee on Emerging
Problems, as well as
the FAF Board of
Trustees, into the
"sunshine."
43. An economic impact In 1977, independent FAF FASB
analysis should be research studies were (1977)
included in important commissioned on the
exposure drafts. impact of FASB
Similarly each exposure Statements 5 and 8, and
draft and each final three of those studies
pronouncement should were published in 1978.
review FASB's tentative Also, in 1977, a call
conclusions as to the was issued for
objectives of financial independent research
statements and should papers on the impact of
explain how the financial accounting
proposed pronouncement standards in general.
fits into the overall Papers selected from
framework. among the submissions
that resulted from that
call were presented at
a conference on
economic consequences
sponsored by FASB in
1978. It is anticipated
that improvements in
research techniques for
measuring actual or
potential economic
impact of financial
accounting standards
will be a continuing
concern of FASB.
However, the FASB
concepts statements
emphasize neutrality in
setting accounting
standards. FASB does
not set standards to
achieve particular
economic consequences,
but wants to be aware
of the consequences of
its actions. The "Basis
for Conclusions"
sections of FASB
exposure drafts and
statements discuss,
where appropriate, the
concepts underlying
those accounting
standards.
44. When FASB votes on The voting requirement FAF FASB
a pronouncement, a for adoption of (1977)
simple majority should pronouncements by FASB
suffice. was reduced from five
affirmative votes among
the seven members to a
simple majority. The
FAF Board of Trustees
subsequently revised
the voting procedures
to require a super
majority effective in
1991 (switched back to
five of seven members).
45. FASB should express See action taken for FAF FASB
its tentative views on recommendations 39 and (1977)
the major issues 42. Also, FASB has, on
instead of publishing a occasion, used
neutral discussion "Preliminary Views"
memorandum. FASB documents or similar
should, as a matter of publications to obtain
policy, discuss in discussion on its
public the issues it is initial conclusions.
deliberating.
46. FASB must actively See action taken for FAF FASB
search for ways to recommendations 39, 42, (1977)
gather informal but and 45. Also, FASB
public input from frequently meets with
concerned constituents. groups of constituents.
It has been suggested
that FASB arrange for
informal meetings on a
regular basis in the
major metropolitan
areas among FASB
members, staff, and
constituents. It has
also been suggested
that FASB sponsor
seminars dealing with
general accounting
problems as well as
specific issues
presently under
consideration. Those
informal contacts will
help FASB members and
staff deal more
effectively with the
issues on their agenda;
in addition, they will
help bring FASB closer
to its constituency.
47. FASB must have a FASB meets frequently FAF FASB
coordinated campaign to with groups of (1977)
convince the public of constituents, but does
the validity of its not have a formal
statements once they postissuance program to
are adopted. discuss views of
constituents.
48. FASB should As noted in its various FAF FASB
continue to maintain a reports to the (1977)
close but open working Congress, the SEC and
relationship with the its staff work closely
SEC, talking about with FASB in an ongoing
major issues and agenda effort to improve the
additions. The FASB standard-setting
staff should also process. The FASB
maintain a day-to-day liaison with the SEC
working relationship includes regular staff
with the SEC staff, as communication,
one approach to the quarterly briefings for
current practice. the Chief Accountant's
office staff, and
periodic meetings
between FASB and SEC
Commissioners.
49. FASB should In 1977, FASB announced FAF FASB
continue to be its intent to evaluate (1977)
available to hear its statements that had
appeals of issued been in effect for at
pronouncements. FASB least 2 years. For
should also experiment example, as a result of
with a formal such evaluations,
postenactment review FASB's controversial
process. After the SFAS 8 on foreign
financial community has currency translation
had 1 or 2 years' was rescinded and
experience with a FASB replaced by SFAS 52,
pronouncement, FAF and SFAS 96 on income
suggests that FASB take taxes was rescinded and
a retrospective look at replaced by SFAS 109.
the logic in that FASB's operating
pronouncement and the procedures require all
implementation problems requests for
it may have created. reconsideration be
evaluated in an open
meeting. The EITF
provides a forum for
airing and resolving
questions about FASB
pronouncements.
50. A change in the In 1977, the FAF Board FAF FASB
funding system is of Trustees adopted a (1977)
important to maintain resolution limiting
the credibility of contributions to FAF to
FASB's independence and $50,000 from any firm
also to provide a sense in a single year. That
of assurance for FASB change took effect in
and the staff. 1978. In 1977, efforts
to broaden the base of
support for FAF were
successful, especially
in the industry sector.
51-58. Recommendations Metcalf
of the FAF Structure Subcommittee
Committee (made in (1977)
1977) endorsed by the
Metcalf Subcommittee
51. ...open all aspects All FASB meetings are FASB
of FASB to public view. open to the public.
Also, see "The
'Process' in Due
Process: A Behind-The-
Scenes Look at
Standards Setting," by
A. Clarence Sampson,
the FASB Status Report,
224, October 14, 1991.
52. ...increase the Involvement of all FASB
involvement in FASB members of FASB's
from all segments of constituency in its
its broad constituency. work is reflected in
the activities of
FASAC, the various task
forces appointed to
assist FASB in the
development of
standards, the public
hearings and comment
process, and FASB's
EITF. The FASB Status
Report is a
communications device
that seeks, among other
things, to encourage
involvement by
individuals who are not
members of those
groups.
53. ...strengthen the FASB is effectively FASB
organization of FASB. organized and fully
staffed to carry out
its mission.
54. ...accelerate the FASB has issued 125 FASB
FASB work pace. statements, as well as
many interpretations,
technical bulletins,
and EITF consensuses.
Some in the preparer
community have
complained that FASB is
doing too much, too
fast, but such
complaints are the
inevitable result of
mandates for change.
55. ...establish The FASB technical plan FASB
planning goals. is published in its
Status Reports.
56. ...issue documents The FASB Status Reports FASB
explaining proposed and Action Alerts
standards in layman's discuss current
language before public projects in layman's
hearings are held. terms.
57. ...systematically All requests to FASB
review existing reconsider a standard
standards. are discussed by FASB
in an open meeting.
Also, the EITF
addresses emerging
issues in open
meetings.
58. ...broaden the base The FAF annual reports FASB
of FASB financial discuss the source of
support. contributions.
59. All segments of See FAF annual reports Metcalf FAF
FASB's broad for the composition of Subcommittee
constituency must be FAF, FASB, and FASAC. (1977)
fairly represented at Also, see action taken
all levels of FASB's to recommendation 90.
operation--from FAF, FAF believes that all
FASB, and its staff to constituencies are
the advisory councils adequately represented.
and task forces. FASB's Also, efforts to
broad constituency enhance the involvement
includes the public, of preparers and users
the investors and are ongoing. See, for
creditors, the example, the July 8,
analysts, the 1986, response of FASB
investment advisers and Chairman Kirk to the
underwriters, the Phase II report of the
preparers, the Special Review
attestors, the Committee of the FAF
educators, and the Board of Trustees.
governments.
60. FASB should adopt FAF has adopted, Metcalf FASB
and strictly enforce maintained, and Subcommittee
new rules that will enforced rules to (1977)
correct the ensure the fact and
deficiencies in its appearance of
policies, which are independence by FASB
designed to prevent members and staff. Note
FASB members and senior that a July 1985 study
staff. conducted by Louis
Harris and Associates,
Inc., for FAF,
consisting of personal
interviews with 451
leaders in the
financial, investment,
and accounting
communities, revealed
that by an 81 to 15
margin, those leaders
believe FASB is
objective in its
decision-making to
ensure the neutrality
of information
resulting from its
standards. According to
FASB, most criticisms
of FASB are that it is
too independent, too
conceptual, and too
theoretical. FASB is
not aware of any
instances in which the
personal or financial
integrity of FASB or
its staff has ever been
criticized.
61. FASB should make a This information is Metcalf FASB
wide public reviewed by the FAF Subcommittee
distribution of Board of Trustees, but (1977)
information reported by is not available for
individuals under its public comment.
conflict-of-interest
policies through such a
medium as its annual
report.
62. FASB should Meetings of FASB are Metcalf FASB
annually publish a list announced in the Action Subcommittee
of the meetings held Alert. Private meetings (1977)
with various parties (meetings with staff
and interest groups, and with one or two
along with a synopsis FASB members) are not
of the topics published. Any meeting
discussed. with outsiders that
involves three or more
FASB members is a
public meeting.
63. Immediate This is an area that Metcalf FASB
recognition should be has been frequently Subcommittee
given to the financial reviewed--and still is. (1977)
reporting problems of FASB and AICPA actions
small businesses and in this area have
the accounting firms focused on disclosures
that serve them. and on the use of other
Reporting requirements bases (tax, cash) of
that are necessary for accounting,
publicly owned particularly when
corporations may be financial statements
inappropriate for small are not audited. In
businesses. 1995, FASB began a
project to evaluate
disclosure
effectiveness and
issued a paper for
public comment (FASB is
currently considering
comments received).
FASB members and staff
meet regularly with
small business groups
and hold regular
meetings with the users
of small business
financial statements
and with bankers who
serve small businesses.
FASB representatives
have been active
participants in the SEC
Government Business
Forum on Small Business
Capital Formation since
its founding over 10
years ago.
64. Increased See action taken for Metcalf FASB and
representation in recommendation 52. In Subcommittee accounting
standard-setting bodies particular, FASB (1977) profession
from small businesses members and staff do
and accounting firms not represent any
must be achieved. particular group. They
Organization of meet with the PCPS
standard-setting bodies Technical Issues
should be improved to Committee on a regular
focus knowledgeable basis to obtain input
attention on the about the special needs
problems of small of private companies
businesses and the and the CPAs who serve
accounting firms which them. Industry and
serve them. small CPA firm
representatives are
included on AcSEC and
on the various AICPA
industry committees,
and the ASB includes
representatives of
small CPA firms.
65. Uniformity in the FASB concepts emphasize Metcalf FASB and
development and that similar Subcommittee accounting
application of transactions must be (1977) profession
accounting standards accounted for
must be a major goal of similarly. FASB
the standard-setting statements,
system. interpretations, and
technical bulletins;
EITF consensuses; and
AcSEC statements of
position and practice
alerts, coupled with
the GAAP hierarchy and
related requirements
established in SAS 69,
have significantly
narrowed the number of
alternatives available
to management. Also,
AICPA industry audit
and accounting guides
are being used as a
vehicle to achieve more
uniform application of
accounting principles.
For example, the
banking guide and the
savings institutions
guide, which differ in
some respects, were
combined into one guide
(issued in April 1996).
66. Until uniformity in See action taken for Metcalf FASB and
the development and recommendation 65. Subcommittee accounting
application of Interestingly, users (1977) profession
accounting principles have informed the
is achieved, the public Jenkins Committee that
should be informed of information about a
the effect on financial company that is
statements from using a consistent over time is
particular accounting valued more highly than
standard to report a information that is
transaction, rather comparable between two
than using any of the or more companies--
acceptable they believe
alternatives. differences in
accounting principles
and methods of
application should be
permitted as long as
there is disclosure.
67. The SEC must See the SEC's annual Metcalf SEC
vigorously oversee the reports to the Congress Subcommittee
present accounting for a description of (1977)
standard-setting system its oversight.
on behalf of the
public. The standards
and operation of the
system should not be
accepted automatically
by the SEC, but should
be evaluated and
questioned to determine
if they meet the public
policies set forth by
the Congress.
68. The SEC's annual See the 1978 SEC staff Metcalf SEC
report to the Congress report, The Accounting Subcommittee
on accounting matters Profession and the (1977)
should comment on Commission's Oversight
progress made in Role, various SEC
reaching the public annual reports to the
policies established by Congress, as well as
the Congress. SEC testimony in
various congressional
hearings over the
years.
69. There is continued The SEC, through its Metcalf SEC
need for the SEC to programs and Subcommittee
exercise vigorously its activities, has (1977)
own rule-making and continued to oversee
enforcement activities and regulate the
in order to achieve securities markets and
reforms. related financial
disclosures.
70. A separate note, FASB did not agree that Cohen Accounting
similar to that for there was a need to Commission profession
accounting policies, amend SFAS 5 for this (1978)
should be required for recommendation.
uncertainties. Moreover, SOP 94-6 on
disclosure of risks and
uncertainties explains
that the required
disclosures "...are not
mutually exclusive. The
information required by
some may overlap.
Accordingly, they may
be combined in various
ways, grouped together,
or placed in diverse
parts of the financial
statements, or included
as part of the
disclosures made
pursuant to the
requirements of other
authoritative
pronouncements."
71. FASB should amend FASB did not formally Cohen FASB
APB Opinion 20 to address this Commission
require a standard note recommendation. Note, (1978)
to financial statements however, the present
covering accounting requirement imposed by
changes (both changes the ASB for an
in accounting explanatory paragraph
principles and changes in the auditor's report
in accounting when there has been a
estimates). material change.
72. While these efforts In 1981, FASB undertook FAF FAF, FASB, and
of FASB to reach a three new activities to (1979) FASAC
wider public are increase public
significant, more is awareness of its
needed. The FAF Board activities: (a)
of Trustees, FASB, and produced an audio/
FASAC should consider visual presentation
developing additional stressing the openness
programs to increase and responsiveness of
public awareness of the FASB procedures,
FASB, its current (b) distributed a book
activities, plans, and titled Understanding
accomplishments. Inflation Accounting,
and (c) started a new
publication titled
Highlights of Financial
Reporting Issues,
designed to help
constituents who are
not technically
oriented understand the
implications of major
FASB projects. FASB has
continued to do these
kinds of public
awareness steps and
many more. Examples
include FASB's recent
series of special
reports, scores of
articles in magazines,
an informational video,
and a worldwide web
site.
73. FASB should One development in 1979 FAF FASB
experiment more with was the broadening of (1979)
hearings in other parts public participation in
of the country. FASB FASB's research and
might consider not decision-making
having full attendance processes. Activities
at all FASB hearings. both before and after
issuance of SFAS 33 are
illustrative of
increased constituent
participation.
Following the issuance
of a discussion
memorandum in July
1979, arrangements were
made with three
societies of financial
analysts and three
chapters of Robert
Morris Associates for
them to sponsor
seminars based on the
discussion memorandum.
FASB members and staff
participated in each of
the sessions. FASB has
continued its efforts.
A more recent example
was in 1993 when FASB
held a hearing in
Silicon Valley,
California on stock
compensation.
74. It may be necessary Today, most FASB FAF FASB
for FASB to publicize documents include an (1979)
further the executive summary that
availability of is designed to
nontechnical summaries, communicate key
such as discussion provisions in everyday
memorandums and language. FASB is
exposure drafts. constantly striving to
Additionally, FASB make its documents more
should continue its accessible.
efforts to improve the
format and style of its
pronouncements.
75. Communication of FASB members express FAF FASB
FASB members' leanings their views in a (1979)
as early as possible is variety of forums.
desirable by whatever However, it is
vehicle is most important to recognize
appropriate at the that FASB members
time. strive to keep an open
mind to opposing views
throughout FASB's due
process.
76. FASAC should FASAC has, from time to FAF FASAC
consider ways to time, formed committees (1979)
improve its input to to assist FASB in its
FASB on major technical efforts.
matters. This is
probably best
accomplished through
the use of committees.
77. FASB has increased Task force activity FAF FASB
its use of task forces. varies through the life (1979)
FASB should continue of a technical project,
the practice of meeting and the best time to
with members of task involve a task force
forces after the public varies from one project
hearings. FASB can to the next.
continue to improve its
use of task forces in
all phases of a
project, particularly
during FASB's
deliberative
proceedings, although
care should be taken to
avoid slowing down
decision-making
processes.
78. FASB should See action taken for FAF FASB
consider the potential recommendation 95. (1979)
economic consequences
in its standard-
setting process, but in
doing so it should
recognize that one
cannot set accounting
standards based on an
amalgam of opinions as
to impact of a standard
on individual entities.
As in other areas of
its work, FASB needs to
search for additional
ways to show the extent
to which it considers
economic consequences
in making its
pronouncements.
79. The FAF Board of See action taken for FAF FAF
Trustees might be recommendation 90. (1979)
expanded by still
another at-large
trustee to increase
constituency
participation at the
Trustee level.
80. Where there appears This has been FASB's FAF FASB
to be continuing deep practice for several (1979)
concern, FASB should years. All requests for
advise its constituents interpretation or
that it is ready to amendment are
consider requests to considered in public
interpret or amend any FASB meetings.
pronouncement without
waiting for formal
periodic review.
81. FASB should give A statement of FASB's FAF
high priority to mission was developed (1982)
improving relations and published in a new
with its edition of Facts About
constituencies. This FASB along with
would include upgrading information about the
all support services standard-setting
that involve direct structure, how
contact with members of decisions are made to
FASB's constituencies, place items on FASB's
developing a long- agenda, and the due
range plan to educate process required by the
the public, and Rules of Procedure.
providing the necessary More than 85,000 copies
staff and budget. The were distributed.
objective would be to Speeches delivered by
fulfill FASB's FASB members exceeded
educational mission, to 200. The newsletter
broaden the public Status Report was
understanding of FASB's redesigned to
work and achievements, incorporate viewpoints
and to enhance the and highlights
goodwill of FASB's eliminating confusion.
constituents. Efforts were made to
identify special groups
having an interest in
particular technical
projects and to
establish two-way
communication with
them. FASB's current
strategic plan includes
an objective to build a
broader acceptance for
the FASB process among
constituents.
82. FASB should (a) FASB's EITF FAF FASB
continue to follow its provides input on (1982)
present due process implementation and
procedures. Refinements practice problems. The
of those procedures work of other task
that should be forces is limited to
considered are (a) specific projects.
increasing the use of (b) FASB members and
task forces to work staff often meet with
with staff in preparing constituent groups
recommendations for during the comment
FASB consideration in period. Those meetings
connection with are designed to answer
selected implementation questions and explain
and practice problem documents.
projects, (b) assisting (c) Exposure Drafts now
respondents in include a "Notice to
preparing comments on a Recipients" that
Discussion Memorandum identifies key issues.
or Invitation to Many constituents use
Comment, and (c) the series of questions
identifying in exposure raised in the Notice to
drafts key changes to structure their comment
present accounting letters.
practice that are
expected to result,
industries most likely
to be impacted, and
issues of particular
sensitivity on which
FASB is seeking
comments.
83. FASB should take FASB actively solicits FAF FASB
steps to try to comments from those (1982)
increase the number of groups and has made a
responses to Discussion number of attempts to
Memorandums, encourage their
Invitations to Comment, participation. However,
and Exposure Drafts comment letters from
from small businesses, those groups continue
security analysts, to represent a small
investment advisors, fraction of the total
bank credit officers, comments received.
and nonfinancial
executives.
84. FASB should develop In response to the FAF FASB
a plan, for recommendations of an (1982)
consideration by the earlier task force on
FAF Board of Trustees, timely financial
to provide timely reporting guidance,
guidance for FASB formed the EITF,
implementation whose members are drawn
questions and emerging primarily from public
issues. accounting firms but
also include
representatives of
large companies and
major associations of
preparers and CPAs who
serve small businesses.
The chief accountant of
the SEC attends
regularly as an
observer with the
privilege of the floor.
A FASB committee to
review the EITF
concluded in its 1995
report that the EITF
serves a valuable
function and satisfies
many needs of a variety
of constituents.
85. The process by The process continues FAF FASB
which a subject is to evolve and (1982)
considered for addition frequently involves a
to the FASB agenda wide cross section of
should be better FASB's constituencies.
communicated to FASB's
constituencies.
86. Accelerate progress CON 5, concerning the FAF FASB
on the accounting recognition and (1982)
recognition and the measurement in
income, cash flows, and financial statements of
financial position business enterprises,
projects. The concepts was issued in 1984. It
statements that are the did not resolve all the
objectives of these issues, and work on
projects are important these concepts
and should be published continues at the
as quickly as is standards level. SFAS
feasible. 95, concerning the
statement of cash
flows, was issued in
1987.
87. Although the FASB is constantly fine FAF FASB
organizational tuning its (1982)
structure of FASB and organization. The basic
staff works well with structure of FASB and
the principal staff remains similar
incumbents, FASB should to the structure that
review its internal existed in 1982,
organizational although the number of
structure to ascertain activities has expanded
whether it will considerably. For
continue to meet the example, FASB's EITF
long-term needs of FASB was formed in 1984,
as incumbents are and, since 1990, FASB
replaced. has devoted much more
effort to international
issues.
88. (a) FASB and its FASB submitted a report FAF FAF and FASB
staff should be asked to the Special Review (1985)
to assess in the first Committee in July 1986.
half of 1986 the A Special Review
feasibility and Committee of the FAF
desirability of Board of Trustees
shortening the due reviewed this report
process and of and issued a report in
modifying the December 1986. In the
"sunshine" rule within report, the Special
the original spirit of Review Committee
that rule, (b) a concluded the
special committee of following: "The
the FAF Board of Committee recommends
Trustees should be that the FAF Board of
appointed to consider Trustees accept and
these matters, (c) FASB approve the responses
should submit a report received and recorded
to the special herein, and further
committee by mid-1986, recommends that the FAF
setting forth possible Board of Trustees
courses of action and encourage and support
pros and cons for each the FASB staff in the
of them, and (d) the follow-up commitments
special committee included in the
should submit responses."
recommendations to the
FAF Board of Trustees
by year-end 1986.
89. FASB and its staff Actions taken to FAF FASB
should be asked to improve participation (1985)
consider in the first have included efforts
half of 1986 ways of to gain participation
broadening of users and CEOs on
participation by and task forces, FASAC, and
communication with the FAF Board of
corporate CEOs and Trustees; speeches to
users of financial user groups; meetings
information. FASB of FASB members or
should report on its staff with user groups;
progress to the FAF special mailings;
Board of Trustees in telephone contacts with
the second half of constituent groups; and
1986, specifying its informal meetings.
recommendations for Further plans for
encouraging constituent broadening user
involvement. participation include:
(a) expanding the
number of speeches
given to user groups,
(b) considering
modifying expense
reimbursement policy so
that contact may be
made with user groups
unwilling to pay
expenses; and
(c) expanding the
number of general
liaison meetings with
user groups. Further
plans for broadening
CEO participation
include: (a) expanding
lists of CEOs and audit
committees receiving
copies of Status
Report, (b) expanding
use of personalized
letters from FASB to
CEOs, (c) formalizing
and expanding use of
regional and industry
CEO groups; and (d)
encouraging the FAF
Board of Trustees to
elect CEOs to the FAF
Board of Trustees and
FASAC. FASB's current
strategic plan includes
an objective to build a
broader acceptance for
the FASB process among
constituents.
90. The FEI, NAA, and The FAF Board of FAF FAF
BRT have recommended Trustees accepted the (1985)
greater representation AICPA's offer to
on the FAF Board of relinquish the ex
Trustees from business officio seat on the FAF
and industry. The Board of Trustees and
Special Review amended FAF's bylaws to
Committee recommends increase the number of
that the FAF Board of at-large trustees from
Trustees take the two to three. One of
following steps: (a) the two at-large seats
accept the AICPA's has been filled by the
offer to relinquish the election of a retired
ex officio seat on the partner of a regional
FAF Board of Trustees public accounting firm.
heretofore held by the The other was filled by
Institute's chief election of a high-
officer, (b) amend the level corporate
FAF bylaws to increase executive. Since then,
the number of at-large in July 1996, FAF
trustees from two to agreed to amend its
three, and (c) elect to bylaws to add two new
the unfilled at-large at-large trustees,
seats on the FAF Board replacing a trustee
of Trustees individuals position held by the
with business, accounting profession
professional, and a position held by
government, or other FEI. In addition, FAF
experience who, in the is in the process of
judgment of the FAF filling two existing
Board of Trustees, can at-large vacancies with
contribute to advancing public representatives.
the purpose of FAF. The
Special Review
Committee believes that
a chief executive
officer from business
or industry would make
a worthwhile
contribution.
91. The Special Review The Chairmen of FASB FAF FAF, FASB, and
Committee recommends and GASB and the (1985) GASB
that steps be taken to Advisory Councils, as a
increase the FAF Board part of their
of Trustees' knowledge educational role vis-
of FASB and GASB a-vis the FAF Board of
activities. The Special Trustees, are
Review Committee encouraged to bring to
recommends that (a) the the FAF Board of
FAF Board of Trustees Trustees candid
should recognize that assessments of
the chairs of FASB and nontechnical problems,
GASB and their both present and
respective Advisory potential, on which the
Councils have an FAF Board of Trustees
educational role vis- may be able to assist.
a-vis the FAF Board of The FAF Board of
Trustees, (b) the FAF Trustees formalized a
Board of Trustees program of regular
should formalize what trustee observation of
has been an informal meetings of the two
program of trustee standard-setting
observation of meetings Boards, their Advisory
of the two standard- Councils, and FASB's
setting Boards, EITF. (In the past,
Advisory Councils, and such observation has
FASB's EITF, and (c) in occurred only on an
keeping themselves occasional basis.)
informed about the
progress of specific
technical projects
undertaken by the two
Boards, the FAF Board
of Trustees should
focus on the nature of
controversies that may
arise concerning those
projects.
92. The Special Review The FAF Board of FAF FAF and FASB
Committee recommends Trustees accepted (1985)
that the FAF Board of recommendations at
Trustees defer their July 1986
consideration of FASAC meeting, except for the
matters until the recommendation to
Special Review eliminate permanent
Committee on the Future FASAC seats of four
Role of FASAC completes sponsoring
its work and submits it organizations.
to FASAC in the first
half of 1986. The FASAC
chair then would be
asked to submit
recommendations for
consideration by the
FAF Board of Trustees
at their meeting in
July 1986.
93. The Special Review FASB and staff has FAF FASB
Committee recommends responded with a (1985)
that FASB and its staff special issue titled
pay particular FASB Analyzes Small
attention to the small Business Concerns About
business area in 1986 Accounting Standards.
and urges FASB to meet The issue summarizes
with interested groups FASB's beliefs
and then determine what concerning alternatives
reasonably can and what to GAAP, simplification
cannot be done to of standards, and
alleviate the problems differential
of small businesses and measurement. FASB
small public accounting considers small
practitioners regarding business issues on
GAAP, and finally to every project, and
publish those seeks advice on such
conclusions and the matters from
reasons for them. organizations concerned
with these issues. On
all projects, FASB will
seek answers to the
following with regard
to whether small
businesses should be
treated differently
than corporations: (a)
whether the different
treatment would
alleviate "standards
overload," (b) whether
a proposed solution
would enhance or
diminish the
credibility of
financial reporting,
(c) whether there is
persuasive evidence
that user needs are
different for different
entities or that costs
outweigh the benefits,
and (d) whether there
is a difference in the
economic basis of a
transaction for
different entities.
94. While the EITF At the July 1986 FAF FASB
received general meeting of the FAF (1985)
approval in both the Board of Trustees,
Harris survey and the James J. Leisenring, as
Special Review director of FASB
Committee's interviews, research and technical
some constituents are activities and as EITF
concerned as to whether chair, reviewed for the
the Task Force is, in FAF Board of Trustees a
effect, establishing full report on EITF,
standards. Some also dated June 27, 1986,
believe that there is developing the reasons
insufficient the Task Force was
representation in the established, the broad-
membership of the Task range composition of
Force by persons other membership, the purpose
than practicing CPAs. of EITF in assisting
The Special Review FASB in identifying
Committee believes financial reporting
these matters should be problems as they
the subject of a report emerge, the
by the Task Force chair accomplishments of EITF
to the FAF Board of in suggesting solutions
Trustees in 1986. to problems, and the
potential for solving
problems through
discussion and
formation of consensus
on appropriate
accounting. It was the
recommendation of the
FAF Board of Trustees
that the full report on
EITF be made available
to interested
constituents. A FASB
committee conducted a
10-year review of the
EITF and concluded in
its 1995 report that
the EITF was serving a
valuable function.
95. In its CON 2 para. 143 FAF FASB
consideration of the concluded that the (1985)
costs/benefits of following two actions
specific standards and should be taken: (a)
proposed standards, before a decision is
FASB should be made to develop a
encouraged to find ways standard, FASB needs to
to articulate its satisfy itself that the
positions to a greater matter to be ruled on
degree and make them represents a
more visible to the significant problem and
constituency. that a standard that is
promulgated will not
impose costs on the
many for the benefit of
a few and (b) FASB
should explain the
benefits of the
resulting financial
reporting, for example,
if a standard is less
costly and only
slightly less
effective. FASB
attempts to do that in
the basis for
conclusions for each of
its standards and will
continue to do so.
96. FASB should discuss The FASB staff is FAF FASB
with appropriate complemented by (1985)
constituents ways of Fellows, consultants,
making employment on and task force members.
the FASB technical To encourage
staff more attractive participation in the
to persons with Industry Fellow
professional or Program, FASB undertook
business careers. Among an active campaign in
the ideas that might be 1984 and 1985. Current
explored are short- Industry Fellows were
term assignments for made available for
persons at or near speeches, the program
retirement and on leave was publicized in
or loan from their accounting periodicals,
firms for specific Industry Fellowship
assignments. The meetings were sponsored
president of NAA has by accounting
offered to form a organizations, and FASB
coordinating committee has encouraged one-on-
for this purpose. one meetings with
companies interested in
the program. When
appropriate, FASB has
utilized executives
upon retirement from
industry or on loan
from their companies.
97. Enhance the AcSEC issued SOP 94-6 Big 7 Accounting
relevance of financial in December 1994. It (1986) profession
statements through calls for increased
improved disclosures of disclosures of risks
risks and and uncertainties.
uncertainties.
98-101. A business AICPA Task
enterprise should make Force on Risks
disclosures beyond and
those now generally Uncertainties
made in financial (1987)
reports about the risks
and uncertainties
facing it as of the
date of the financial
reports. The
disclosures should
include
98. ...a description of SOP 94-6 requires FASB
the kinds of products disclosure of these
or services the matters.
enterprise sells, its
principal markets, and
the locations of those
markets.
99. ...an explanation See action taken for FASB
that the preparation of recommendation 98.
historical financial
information requires
the use of management's
estimates.
100. ...a discussion of See action taken for FASB
significant, change- recommendation 98.
sensitive estimates
used by management to
measure assets and
liabilities at the
reporting date.
Disclosure would be
required for any
significant estimate
used in the
determination of the
carrying amount of an
asset or a liability at
the current reporting
date that based on
facts and circumstances
existing at that date,
is particularly
susceptible to changes
that could result in
material effects on
near-term results of
operations.
101. ...information See action taken for FASB
about current recommendation 98.
vulnerability to risk
due to concentrations
(for example, in the
enterprise's assets,
customers, or
suppliers) other than
those generally known
to be associated with
the industry or trade
in which the entity
operates would be
required in the
following
circumstances:
(a) concentrations
existing at the report
date make the
enterprise vulnerable
to the risk of severe
impact on near-term
cash flows or results
of operations and
(b) it is at least
reasonably possible
that the events that
could cause the severe
impact will occur.
102. FASB should use a Adopted, after FAF FASB
computerized log to development in 1995. (1989)
record technical
inquiries.
103. The FAF Board of A standing oversight FAF FAF and FASB
Trustees should review committee of trustees (1989)
the standard-setting has been formed to
apparatus at some time evaluate on an ongoing
within the next 5 years basis whether FASB's
in order to determine standard-setting
whether actions taken activities are
as a consequence of consistent with the
this review have been FASB mission statement.
effective and what
other improvements
should be made.
104. The FAF Board of Not under FAF FAF and FASB
Trustees should consideration. (1989)
consider changing the
name of FAF to
something like the
"National Accounting
Standards Foundation"
to avoid having a name
so similar to that of
FASB.
105. FAF should hold Current practice FAF FAF and FASB
confidential through the FAF (1989)
consultations with each Selection Committee.
member periodically
during his or her term
to discuss the member's
performance.
106. FAF should All terms now end on FAF FAF and FASB
consider changing the June 30. (1989)
end of FASB members'
terms to June 30.
107. FAF should be Current practice FAF FAF and FASB
explicitly obligated to through the FAF (1989)
conduct a performance Selection Committee.
evaluation prior to the
completion of a FASB
member's initial term
in order to determine
the appropriateness of
the member as a
candidate for
reappointment.
108. Losses for problem SFAS 114 para. 10 GAO Accounting
loans should be taken clarified the threshold (1991) profession
if more likely than for impairment. FASB and FASB
not, rather than and AcSEC support the
probable. A problem �probable� threshold.
loan should be
accounted for as an in-
substance foreclosure
unless there is clear
evidence of the
lender's ability to
collect the loan based
on its contractual
terms, as opposed to
existing accounting
rules that require
probable nonpayment and
clear evidence that the
loan will default.
109. The definition and Recently issued GAO Accounting
determination of fair accounting standards, (1991) profession
market value should be such as SFAS 121, 122, and FASB
changed. The value of 123, and 124, define
in-substance foreclosed "fair value." Also, SOP
loans and other real 92-3 requires that
estate owned should be foreclosed assets be
determined based on reported (at
existing market foreclosure) at the
conditions unless there lower of their (a) cost
is clear evidence to or (b) fair value less
support projections of estimated costs to
improved financial and sell.
economic conditions--
for example, signed
leases from responsible
tenants. The carrying
value for other real
estate owned should be
reduced by estimated
carrying costs,
including a cost of
capital, to the
expected date of sale.
110. The accounting Accounting standards GAO Accounting
rules and audit have not been changed. (1991) profession
procedures for related- However, SAS 45 states and FASB
party transactions that the independent
should be enhanced to accountant should be
clarify that related- aware that the
party transactions are substance of a
required to be particular transaction
accounted for and could be significantly
reported based on their different from its
economic substance. form, and that the
Also, guidance should financial statements
be provided on how to should recognize the
determine economic substance of particular
substance. transactions rather
than merely their legal
form. SAS 69 states
that the auditor should
consider whether the
substance of
transactions or events
differs materially from
their form.
111. FASB should add to FASB does not believe POB FASB
its agenda a project to it is appropriate at (1993)
study comprehensively this time to add this
the possibility of project to its agenda.
requiring the reporting The Jenkins Committee
of values and changes reported in 1994 that
in values rather than users oppose replacing
historical transaction the current historical
prices, either as a cost-based accounting
basis to propose model with a
changes to financial comprehensive fair
accounting standards or value accounting model.
to explain publicly why However, FASB continues
such a change in to consider value-
accounting standards is based reporting for
impractical or certain kinds of assets
otherwise and liabilities. FASB's
inappropriate. In June 1996 exposure
carrying out this draft, Accounting for
effort, FASB should Derivative and Similar
consider the Financial Instruments
conclusions of the and for Hedging
AICPA, the FEI, and the Activities, would
AIMR studies with require fair value for
respect to the future all derivatives
of financial reporting. (comments are due
October 1996). Further
extension of fair value
is under discussion in
FASB's financial
instruments project and
SFAS 107 requires
disclosure of fair
values for all
financial instruments,
subject to a
practicability
exception.
112. Accounting firms Representatives of the POB Accounting
should take special SECPS of the AICPA (1993) profession
care to ensure that Division for CPA firms
their participation in and the POB have met
the standard-setting with the chairmen of
process is FASB, the ASB, and
characterized by AcSEC to discuss this
objectivity and subject. The chairs of
professionalism. the ASB and AcSEC have
Standard setters and reminded their members
leaders of the of the need to ensure
profession should that objectivity is
discuss and address the maintained in the
issues related to standard-setting
client advocacy in the process. In August
standard-setting 1995, the Professional
process and establish Ethics Division issued
ways of identifying and Interpretation 102-6
correcting aberrant that addresses these
behavior when it recommendations to the
occurs. satisfaction of the
POB.
113. Strive for In February 1996, FASB AIMR FASB
globally acceptable issued an Invitation to (1993)
accounting principles, Comment on the
including disclosure recommendations of
standards. AIMR. Comments were due
to FASB by July 31,
1996.
114. Consider cost/ In February 1996, FASB AIMR FASB
benefit analysis from a issued an Invitation to (1993)
user viewpoint (i.e., Comment on the
the shareholders and recommendations of
their financial AIMR. Comments were due
advisors should best be to FASB by July 31,
able to advise 1996.
standard-setting and
regulating bodies as to
the proper balance of
costs and benefits
associated with
accounting and
disclosure standards).
115. Appoint more In February 1996, FASB AIMR FASB
representatives from issued an Invitation to (1993)
the community of Comment on the
financial statement recommendations of
users in determining AIMR. Comments were due
the form and content of to FASB by July 31,
financial statements. 1996.
116. FASB should SFAS 119 concerning GAO FASB
proceed expeditiously disclosure of (1994)
to issue its existing derivatives and fair
exposure draft on value of financial
disclosures of instruments was issued
derivatives and fair in October 1994.
value of financial
instruments.
117. FASB should FASB issued its GAO FASB
proceed expeditiously exposure draft, (1994)
to develop and issue an Accounting for
exposure draft that Derivative and Similar
provides comprehensive, Financial Instruments
consistent accounting and for Hedging
rules for derivatives Activities, in June
products, including 1996. Comments are due
expanding disclosure in October 1996.
requirements that
provide additional
needed information
about derivatives
activities.
118. FASB should This matter is under GAO FASB
consider adopting a consideration as part (1994)
market value accounting of the Board's
model for all financial financial instruments
instruments, including project. The exposure
derivatives products. draft issued in June
1996 (see action taken
for recommendation 117)
proposes to require
that all derivatives be
accounted for at fair
value.
119. The SEC should The SEC is working GAO SEC
ensure that FASB closely with FASB on (1994)
proceeds expeditiously this issue. On
to develop and adopt December28, 1995, the
comprehensive, SEC proposed rules to
consistent accounting require additional
rules and disclosure disclosures about
requirements for registrants' accounting
derivative products. policies for
derivatives products
and risks inherent in
these instruments. The
comment period expires
May 7, 1996. FASB's
June 1996 exposure
draft (see action taken
for recommendation 117)
proposes comprehensive
accounting standards
for derivatives and
revised disclosures in
line with this proposed
accounting.
120. Because they share The AICPA and FASB are Kirk Panel Accounting
the objective of committed to working in (1994) profession and
providing the public a cooperative way with SEC
with relevant and the SEC. Although from
reliable financial time to time
information, the public relationships have been
accounting profession strained, the process
and the SEC must have of resolving conflict
more cooperative, less is a positive one. In
adversarial that connection, the
relationships. CPA POB's Kirk Panel report
firms should be careful itself is a response to
in how they communicate criticisms voiced by
their views to FASB, the former chief
the SEC, their clients, accountant of the SEC.
and the public at Also, the new AICPA
large. The SEC should Financial Reporting
help identify Coordinating Committee,
accounting practice formed to follow up on
problems and look to the recommendations of
the private sector the Jenkins Committee,
standard setters to has already met with
solve them--only being the SEC to exchange
a standard setter of ideas and views on key
"last resort" and only issues.
after appropriate due
process.
121. Improve the FASB has issued an Jenkins FASB and SEC
disclosure of business Invitation to Comment Committee
segment information. addressing the Jenkins (1994)
Committee
recommendations
(comments were due in
July 1996). In January
1996, FASB issued an
exposure draft of a
proposed standard that
would revise the
requirements under
which public entities
report disaggregated
information. The SEC
will hold a symposium
on these
recommendations during
1996. Also, the Jenkins
Committee found that
users believe that
current disaggregated
disclosures do not
provide adequate
information to help
them predict an
entity's future
earnings and cash
flows. In January 1996,
FASB issued an exposure
draft of a proposed
standard that would
revise the requirements
under which public
entities report
disaggregated
information.
122. Address the See action taken for Jenkins FASB and SEC
disclosures and recommendation 121. As Committee
accounting for noted in the action (1994)
innovative financial taken for
instruments. recommendation 119, the
SEC has issued a rule
proposal to require
disclosures about
derivative products.
123. Improve the See action taken for Jenkins FASB and SEC
disclosures about the recommendation 122. Committee
identity, Many off-balance-sheet (1994)
opportunities, and financing arrangements
risks of off-balance- are dealt with in FASB
sheet financing statement 125 issued in
arrangements and June 1996.
reconsider the
accounting for those
arrangements.
124. Report separately See action taken for Jenkins FASB, SEC, or
the effects of core and recommendation 121. Committee public
noncore activities and (1994) companies
events, and measure at
fair value noncore
assets and liabilities.
125. Improve the See action taken for Jenkins FASB, SEC, or
disclosures about the recommendation 121. SOP Committee public
uncertainty of 94-6 requires (1994) companies
measurements of certain explanation that
assets and liabilities. preparation of
historical financial
statements include use
of estimates.
126. Defer attention to See action taken for Jenkins FASB and AICPA
issues that have low recommendation 121. Committee
priority according to (1994)
current evidence of
users' needs.
127. Standard setters An SEC Task Force on Jenkins FASB, AICPA,
should search for and Rule Simplification Committee and SEC
eliminate less relevant issued a proposed rule (1994)
disclosures. to simplify and reduce
certain disclosures.
The SEC is currently
reviewing comments
received on this
proposed rule. In 1995,
FASB issued an
invitation to comment
on disclosure
effectiveness and is
currently considering
comments received.
Recommendations of the
Jenkins Committee were
included in a FASB
Invitation to Comment
issued in February 1996
(comments were due by
July 1996).
128. National and The new AICPA Financial Jenkins FASB, AICPA,
international standard Reporting Coordinating Committee SEC, and
setters and regulators Committee will follow (1994) international
should increase their up on this standard
focus on the recommendation. FASB's setters and
information needs of current strategic plan regulators
users, and users should includes an objective
be encouraged to work to develop and enhance
with standard setters the reporting model as
to increase the level a tool for decision-
of their involvement in making in a rapidly
the standard-setting changing economic and
process. technological
environment. Another
one of the plan's
objectives is to build
a broader acceptance
for the FASB process
among constituents.
129. U.S. standard FASB, the SEC, and the Jenkins FASB, AICPA,
setters and regulators AICPA are all actively Committee and SEC
should continue to work involved in efforts to (1994)
with their non-U.S. achieve international
counterparts and accounting standards
international standard that meet users' needs
setters to develop for information. For
international example, FASB meets
accounting standards, regularly with
provided the resulting standards setters from
standards meet users' the United Kingdom,
needs for information. Australia, Canada, and
the International
Accounting Standards
Committee and has
jointly published
studies with them about
future events, hedge
accounting, leases, and
loss provisions.
The International
Accounting Standards
Committee has set a
goal of producing, by
1998, accounting
standards sufficient in
quality to be adopted
by the International
Organization of
Securities Commissions,
of which the SEC is a
member, as suitable for
financial statements
supporting securities
issuance in any
country.
130. U.S. standard See action taken for Jenkins FASB and AICPA
setters should adopt a recommendation 121. Committee
longer-term focus by (1994)
developing a vision of
the future business
environment and users'
needs for information
in that environment.
Standards should be
consistent
directionally with that
long-term vision.
--------------------------------------------------------------------------------
Table II.4
Setting Auditing Standards
Recommendation Recommendation
Recommendation Action taken made by/date directed to
----------------------- ----------------------- -------------- --------------
1. The SEC should The SEC continues to Moss SEC
prescribe by rule look to the ASB to set Subcommittee
auditing standards to auditing standards and (1976)
be followed by exercises oversight
independent accountants over the process, as
who certify financial explained in its
reports filed with the various annual reports
SEC. to the Congress.
2. The federal See action taken for Metcalf Federal
government should recommendation 1. Subcommittee government
establish auditing Staff Study
standards used by (1977)
independent auditors to
certify the accuracy of
corporate financial
statements and
supporting records. The
standards could be
established by the SEC,
GAO, or by federal
statute.
3. The federal See action taken for Metcalf Federal
government should recommendation 1. Subcommittee government
define the Staff Study
responsibilities of (1977)
independent auditors so
that they clearly meet
the expectations of the
Congress, the public,
and courts of law.
4. The federal The SEC continues to Metcalf Federal
government should look to private sector Subcommittee government
establish financial standard-setting bodies Staff Study
accounting standards, to set such standards (1977)
cost accounting and practices and
standards, auditing exercises oversight
standards, and other over those bodies
accounting practices in (which hold meetings
meetings open to the open to the public) as
public. explained in its
various annual reports
to the Congress.
5. The auditing and All AICPA senior Metcalf Accounting
behavior standards of technical committees Subcommittee profession
the organization of adhere to open meeting (1977)
accounting firms (see policies. Meetings of
recommendation 20, the SECPS Executive
"Audit Quality" Committee may be
section) should be attended by
established in open representatives of
meetings with broad member firms and all
representation of meetings are attended
interests. by members and staff of
the POB.
6. The organization of The AICPA's vision of a Metcalf Accounting
accounting firms (see more responsive Subcommittee profession
recommendation 20, organizational (1977)
"Audit Quality" structure that will
section) should have enable the AICPA to
sufficient staff to better achieve its
assure that standards objectives and fulfill
are well researched and its mission is
can be handled on a encompassed in the
timely basis. AICPA's strategic
planning process. For
example, in 1995, the
AICPA reorganized to
better focus and
utilize its resources
to serve the needs of
its members, including
accounting firms;
members in industry,
government, and
education; the state
CPA Organizations;
newly licensed CPAs;
recruits; and retired
members.
7. The organization of All enforceable AICPA Metcalf Accounting
accounting firms (see technical and ethical Subcommittee profession
recommendation 20, pronouncements are (1977)
"Audit Quality" widely exposed for
section) should develop comment and are
rules of procedure for discussed in open
standard setting that meetings of the
emphasize basic due relevant board or
process and periodic committee, pursuant to
review of established operating policies
standards. approved by the Board
of Directors.
8. Standards developed The AICPA believes that Metcalf Accounting
by the organization of none of its technical Subcommittee profession
accounting firms (see or ethical (1977)
recommendation 20, pronouncements and none
"Audit Quality" of the SECPS membership
section) should not act requirements prevent or
to prevent new entry make burdensome entry
into the field of into the field of
auditing publicly owned auditing public
corporations or be companies.
overly burdensome on
accounting firms with
only a few publicly
owned clients.
9. The organization of SECPS peer review Metcalf Accounting
accounting firms standards (SECPS Subcommittee profession and
envisioned by the Reference Manual (1977) SEC
subcommittee (see �2000.137) state that
recommendation 20, "(t)he review should be
"Audit Quality" concerned with the
section) and the SEC accounting and auditing
should focus attention engagements performed
on both domestic and by the U.S. offices of
international the reviewed firm
operations of selected for review and
independent auditors with the supervision
when formulating and control, in
appropriate standards accordance with U.S.
and a responsive professional standards,
quality review program. on work of segments of
such engagements
performed by foreign
offices...." The SECPS
made significant
efforts to obtain
agreement by other
countries to an
extension of peer
review to the work
performed in those
countries, but was
unable to overcome the
legal and other
barriers to access by a
U.S. organization to
the foreign
accountant's
confidential work
product.
10. There should be no In response to this Cohen Accounting
differences in the recommendation, the Commission profession
standards that apply to AICPA mounted a (1978)
the performance of research effort that
audits, whether the resulted in the
audits are of public or publication of an audit
private entities. research monograph.
However, present This was followed by a
guidance on the major task force effort
application of auditing that resulted in SAS
standards to audits of amendments and
different size entities interpretations as well
is inadequate. Both as an audit procedures
users and clients would study on audits of
be better served by small businesses. Also,
more guidance on SAS 61 is applicable
accounting and related only to SEC clients and
services and on the clients that have audit
application of auditing committees, and other
standards to audits of standards, such as
smaller entities. those on the internal
control structure and
audit sampling,
implicitly or
explicitly recognize
that the procedures
followed to comply with
GAAS may differ
depending on the size
and related
characteristics of an
entity. In addition,
the AICPA has issued a
series of Statements on
Standards for
Accounting and Review
Services that address
the special needs of
private companies for
nonaudit financial
statement services.
11. Many auditing After substantial Cohen Accounting
pronouncements could study, no action was Commission profession
usefully provide more taken with respect to (1978)
specific guidance. the recommendation.
However, SAS 65
provides more detailed
guidance on using the
work of an internal
auditor. Also, many
recent auditing
standards go into
significant detail in
explaining their
applications.
12. The present AudSEC The 21-member AudSEC Cohen Accounting
should be replaced by a was reconstituted as Commission profession
smaller, full-time the ASB. It consists of (1978)
group compensated only 15 AICPA members who
by the AICPA. are expected to devote
600-800 hours to ASB
activities each year.
ASB members who request
compensation receive
it, up to an annual
maximum of $40,000. The
ASB has issued more
than 55 SASs since the
Cohen Commission issued
its report, or an
average of three per
year, and many
interpretations. The
AICPA believes the
present ASB structure
is working well.
13. A full-time As a result of actions Cohen Accounting
auditing standard- taken in response to Commission profession
setting body will this recommendation, (1978)
require a larger, the ASB staff is led by
highly qualified staff. a highly qualified
Other possibilities AICPA vice president,
should be considered, and the staff usually
such as a fellowship includes a professional
program. fellow.
14. The standards for Rule 201 of the Code of Cohen Accounting
the audit function Professional Conduct Commission profession
should have broader establishes general (1978)
scope than the present standards of
standards. They should professional
be applicable whenever competence, due
a CPA undertakes an professional care,
audit engagement. The planning and
restructuring should supervision, and
include a statement of sufficient relevant
the independent data that are
auditor's role. applicable to all
services provided by
all AICPA members. The
ASB initiated a new
series of attest
standards to govern
services that do not
involve financial
statements. Also, the
ASB has dealt with and
will continue to deal
with matters that go
beyond the boundaries
of the financial
statements, such as
compliance auditing and
special reports.
15. Other groups who The AICPA established Cohen Accounting
have a strong interest an Auditing Standards Commission profession
in auditing standards Advisory Committee and (1978)
should be encouraged to some years later
become more involved in disbanded it at the
the standards-setting committee's own
process. Industry audit request. Afterwards,
guides appear to the ASB placed public
constitute a special members on its planning
case in which committee but
particular attention subsequently concluded
should be paid to that insufficient
obtaining the benefits accrued from
participation by their participation.
management in the Now, the ASB relies on
affected industry. frequent and extensive
While the Cohen communication with
Commission has outside groups, such as
concluded that there is the FEI, SEC, American
a need for formal Bar Associations, etc.,
outside participation and on its extensive
in the process of due process procedures
setting auditing to obtain input from
standards, it has no preparers and users. In
specific recommendation addition, committees
on the form this dealing with specific
participation should industries include
take. An advisory significant
committee or direct representation of
participation by a few members working in
knowledgeable those industries; see
individuals on the the handbook titled
board or its AICPA Committees for
subcommittees are two data on the composition
distinct possibilities. of AICPA boards and
committees.
16. The standards- The CPA Letter Cohen Accounting
setting body should announces all ASB Commission profession
increase communication pronouncements, and the (1978)
about its work within ASB frequently
the profession. publishes notices or
alerts on practice
matters. See, for
example, "The Auditor's
Responsibility to
Detect Fraud" in the
January 1994 CPA
Letter. Also, a new
information newsletter,
In Our Opinion, was
inaugurated and is
distributed to a number
of interested groups
and individuals.
17. The ASB should have A formal, periodic Cohen Accounting
a periodic review of review procedure has Commission profession
its operations to not been established. (1978)
identify needed changes However, the Treadway
and improvements. Commission reviewed the
structure and functions
of the ASB as part of
its work.
18. AudSEC should be See action taken for Oliphant Accounting
reconstituted within recommendation 12. Committee profession
the AICPA as the AICPA (May 1978)
ASB, responsible for
the promulgation of
auditing standards and
procedures that define
the nature and extent
of the auditor's
responsibility; provide
guidance to the auditor
in carrying out his
duties; make special
provisions, where
appropriate, to meet
the needs of small
enterprises; and
consider costs and
benefits.
19. The new auditing The AICPA plans to Oliphant Accounting
standards board shall issue supplemental Committee profession
provide auditors with guidance, such as (May 1978)
all possible guidance Technical Practice Aids
in the implementation and educational
of its pronouncements. materials, to aid
auditors in
implementing new
auditing standards. In
response to a
suggestion by the SEC's
Chief Accountant, the
ASB in 1989 inaugurated
a procedure for issuing
audit risk alerts
annually to provide
additions with an
overview of current
economic, professional,
and regulatory
developments that may
affect audits they
perform.
20. The new auditing See action taken for Oliphant Accounting
standards board should recommendation 12. Committee profession
have 15 members, to be (May 1978)
appointed for renewable
1-year terms, by the
chairman of the AICPA
with the consent of the
AICPA Board of
Directors. The
chairman's and member's
terms should not exceed
6 years.
21. Any person who has No action was taken Oliphant Accounting
had extensive with respect to this Committee profession
experience in auditing, recommendation. All ASB (May 1978)
whether a member of the members are members of
AICPA or not, should be the AICPA.
eligible to serve on
the new auditing
standards board.
22. Nine affirmative No action was taken Oliphant Accounting
votes (out of a board with respect to this Committee profession
of 15 members) should recommendation. Ten (May 1978)
be required to approve affirmative votes (out
an auditing standard. of a board of 15
members) are required
to approve an auditing
standard.
23. Meetings of the new Meetings of the ASB are Oliphant Accounting
auditing standards open to the public. Committee profession
board relating to the (May 1978)
establishment of
standards through
statements on auditing
standards, and other
auditing and reporting
matters directly
affecting the public
interest, will be open
to the public.
24. The board chairman See action taken for Oliphant Accounting
or a board member (of recommendation 12. Committee profession
the new auditing (May 1978)
standards board) may
request compensation,
in return for a
commitment of at least
50 percent of his time
to the work of the
board, and should
routinely be reimbursed
for expenses.
25. The new auditing See action taken for Oliphant Accounting
standards board staff recommendation 13. Committee profession
should be considerably (May 1978)
expanded and
strengthened to enable
it to undertake more
research, to provide
more support for the
task forces, and to
take over more of the
drafting.
26. The new auditing See action taken for Oliphant Accounting
standards board should recommendation 13. Committee profession
have a highly (May 1978)
qualified, well-paid
executive director, who
will report to and work
closely with the
chairman and members of
the new auditing
standards board.
27. The new auditing In response to this Oliphant Accounting
standards board should recommendation, the Committee profession
have a research AICPA created a (May 1978)
director to direct its research director
research activities. position. However, this
position was recently
vacated.
28. The new auditing See action taken for Oliphant Accounting
standards board should recommendation 15. Committee profession
have an advisory (May 1978)
council composed of
between 12 and 18
members to be appointed
by the chairman of the
AICPA for a 1-year term
that is renewable up to
3 years. No member of
the council shall be a
member of the auditing
standards board.
Members of the council
will not be
compensated. The
council should meet at
least once a quarter,
in public.
29. Enhance the ASB's Changes in ASB Big 7 Accounting
capacity to develop composition and (1986) profession
auditing standards. operations have been
made as necessary, as
evidenced by the
issuance of 23 SASs
between 1987 and July
1995, including the
nine "expectation gap"
SASs. However, a full-
time chairman and board
was not deemed
necessary.
30. The AICPA should See action taken for Treadway Accounting
reorganize the ASB to recommendation 15. Commission profession
afford a full (1987)
participatory role in
the standard-setting
process to
knowledgeable persons
who are affected by and
interested in auditing
standards but who
either are not CPAs or
are CPAs no longer in
public practice.
--------------------------------------------------------------------------------
Table II.5
Expanded Reporting and Auditor Services
Recommendation Recommendation
Recommendation Action taken made by/date directed to
----------------------- ----------------------- -------------- --------------
1. A basic objective of See CON 1 para. 34. The Trueblood FASB
financial statements requirements for Committee
should be to provide information included in (1973)
information useful for financial statements
making economic are continually being
decisions. improved.
2. An objective of See CON 1 para. 28 and Trueblood FASB
financial statements 30. Committee
should be to serve (1973)
primarily those users
who have limited
authority, ability, or
resources to obtain
information and who
rely on financial
statements as their
principal source of
information about an
enterprise's economic
activities.
3. An objective of See CON 1 para. 37. Trueblood FASB
financial statements Committee
should be to provide (1973)
information useful to
investors and creditors
for predicting,
comparing, and
evaluating potential
cash flows to them in
terms of amount,
timing, and related
uncertainty.
4. An objective of See CON 1 para. 42-48. Trueblood FASB
financial statements Committee
should be to provide (1973)
users with information
for predicting,
comparing, and
evaluating enterprise
earning power.
5. An objective of See CON 1 para. 50-53. Trueblood FASB
financial statements Committee
should be to supply (1973)
information useful in
judging management's
ability to utilize
enterprise resources
effectively in
achieving the primary
enterprise goal.
6. An objective of See CON 1 para. 54. Trueblood FASB
financial statements Committee
should be to provide (1973)
factual and
interpretative
information about
transactions and other
events that is useful
for predicting,
comparing, and
evaluating enterprise
earning power. Basic
underlying assumptions
with respect to matters
subject to
interpretation,
evaluation, prediction,
or estimation should be
disclosed.
7. An objective should The FASB concepts Trueblood FASB
be to provide a statements deal with Committee
statement of financial the objectives of (1973) nd
position useful for financial reporting,
predicting, comparing, the qualitative
and evaluating characteristics of
enterprise earning accounting information,
power. This statement and the elements of
should provide financial reporting.
information concerning These statements deal
enterprise transactions with matters that are
and other events that the subject of this
are part of incomplete recommendation.
earnings cycles. However, financial
Current values should reporting is evolving
also be reported when and the Jenkins
they differ Committee has made
significantly from recommendations on the
historical cost. nature and extent of
information that should
Assets and liabilities be made available to
should be grouped or others by management.
segregated by the The committee has
relative uncertainty of learned that users
the amount and timing oppose replacing the
of prospective current historical
realization or cost-based accounting
liquidation. model with a fair value
accounting model.
However, they view fair
value information as
useful for particular
types of assets and
liabilities and in
certain types of
industries. In that
connection, FASB has
required disclosure of
the current value of
financial instruments
(SFAS 107) and has
required that certain
debt a equity
securities be reported
at fair value (SFAS
115). SFAS 33, issued
in 1979, required
disclosure of
supplementary
information about the
effects of inflation
and changes in specific
prices, but that
requirement was changed
to encouragement by
SFAS 89.
8. An objective should See action taken for Trueblood FASB
be to provide a recommendation 7. Committee
statement of periodic (1973)
earnings useful for The Jenkins Committee
predicting, comparing, has learned that users
and evaluating want information about
enterprise earning the portion of a
power. The net result company's reported
of completed earnings earnings that is stable
cycles and enterprise or recurring and that
activities resulting in provides a basis for
recognizable progress estimating sustainable
toward completion of earnings. Also, users
incomplete cycles believe that current
should be reported. disaggregated
Changes in the values disclosures do not
reflected in successive provide adequate
statements of financial information to help
position should also be them predict an
reported, but entity's future
separately, since they earnings and cash
differ in terms of flows.
their certainty of
realization.
9. An objective should See action taken for Trueblood FASB
be to provide a recommendation 7. Committee
statement of financial (1973)
activities useful for The Jenkins Committee
predicting, comparing, has learned that users
and evaluating want information about
enterprise earning the portion of a
power. This statement company's reported
should report mainly on earnings that is stable
factual aspects of or recurring and that
enterprise transactions provides a basis for
having or expected to estimating sustainable
have significant cash earnings.
consequences. This
statement should report
data that require
minimal judgment and
interpretation by the
preparer.
10. An objective of The Jenkins Committee Trueblood FASB
financial statements has learned that Committee
should be to provide investors and creditors (1973)
information useful for need forward-looking
the predictive process. information on which to
Financial forecasts base their own
should be provided when projections, but they
they will enhance the do not expect
reliability of users' management to provide
predictions. projections or
forecasts. Users also
want more information
about operating
opportunities and risks
that are relatively
near-term and
relatively certain and
quantifiable.
11. An objective of Measuring and reporting Trueblood FASB
financial statements on social interactions Committee
should be to report on in financial statements (1973)
those activities of the is in its infancy. The
enterprise affecting present focus is on
society that can be efforts to deal with
determined and environmental costs.
described or measured AcSEC issued in 1995 an
and that are important exposure draft of a
to the role of the proposed SOP on
enterprise in its environmental
social environment. remediation
liabilities.
12-16. The SEC should Moss
act promptly to Subcommittee
promulgate rules (1976)
necessary to assure
that
12. ... publicly owned COSO received 1,014 SEC
corporations adopt and responses to a 1988
enforce codes of survey of over 8,500
business conduct that public companies that
conform to the laws of indicated that a
all countries in which significant number of
a corporation operates companies have written
and that are disclosed codes of conduct:
publicly to --87 percent of
shareholders through companies with over
filings with the SEC. 10,000 employees,
--60 percent with 1,000
to 10,000 employees,
--32 percent with 100
to 1,000 employees,
and
--15 percent with under
100 employees.
13. ...procedures which The SEC encouraged SEC
allow corporations to adoption of the Foreign
develop off-the-book Corrupt Practices Act
accounts are of 1977 and adopted
eliminated. rules under those laws
to address this
concern. The SEC
further stated that
public companies
"should review their
accounting procedures,
systems of internal
accounting controls and
business practices" in
order to take any
actions necessary to
comply with this act.
14. ...uniform See action taken for SEC
financial controls are recommendation 13.
applied throughout
every department and
operating division of
the consolidated
corporation and
complementary accounts
among subsidiaries and
between subsidiaries
and the parents are
reconciled regularly.
15. ...communication is See action taken for SEC
strengthened among in- recommendation 13. Also
house accountants and see discussions of
auditors and the communications
appropriate levels of requirements in SAS 53,
management. on errors and
irregularities; SAS 54,
on illegal acts by
clients; and SAS 61, on
communication with
audit committees. Note
that "Information and
Communication" is one
of the five components
of internal control
under the COSO report.
The Private Securities
Litigation Reform Act
of 1995 (�301) requires
certain communications
from the auditor to the
company's management
and board of directors,
and, under certain
circumstances, to the
SEC.
16. ...independent On two separate SEC
auditors attest to the occasions (1979 and
quality of internal 1988) the SEC proposed
controls and the for public comment
quality of enforcement management and/or
of those controls in auditor reports on the
the annual report. adequacy of
registrants' internal
controls. Comments on
these proposals
suggested that the
costs of such reports
may exceed any benefit
to investors and noted
other concerns. The
proposals were not
adopted.
17. In instances where In the absence of an Moss SEC
uniformity in authoritative Subcommittee
accounting principles pronouncement, there is (1976)
is not practicable, the no basis for
SEC should require the determining which
independent auditor to principle or method
attest that the produces the "most
accounting principles fair" result. In any
selected by management event, FASB statements,
represent financial interpretations, and
data most fairly. The technical bulletins;
SEC should also EITF consensuses; and
prescribe supplemental AcSEC statements of
data to permit a position and practice
translation from one alerts have
set of assumptions to significantly narrowed
another, thereby the number of
permitting alternatives available
comparability among to management. The SEC
companies in a requires that auditors
particular industry. of companies making a
discretionary change in
accounting file a
letter indicating that
such change is to a
preferable method of
accounting. Moreover,
users have informed the
Jenkins Committee that
information about a
company that is
consistent over time is
valued more highly than
information that is
comparable between two
or more companies--
they believe
differences in
accounting principles
and methods of
application should be
permitted as long as
there is disclosure.
18. Corporate The September 1992 COSO Metcalf Accounting
accountability should report, Internal Subcommittee profession
be improved through Control--Integrated (1977)
strengthening internal Framework, and the
controls and enhancing publicity and
the professionalism of educational efforts
management's that accompanied its
accountants and issuance have drawn the
internal auditors attention of corporate
employed by corporate management and boards
managements. of directors, once
again, to the
significance of this
recommendation. Other
initiatives include the
establishment of a
Management Accounting
Committee and a Members
in Industry Committee
by the AICPA, the
extension of the entire
AICPA Code of
Professional Conduct to
members not in public
practice, and the
establishment by the
Institute of Management
Accountants of the
certified management
accountant program.
19. Until uniformity in FASB statements, Metcalf FASB
the development and interpretations, and Subcommittee
application of technical bulletins; (1977)
accounting principles EITF consensuses; and
is achieved, the public AcSEC statements of
should be informed of position and practice
the effect on financial alerts, along with the
statements from using a GAAP hierarchy and
particular accounting related requirements
standard to report a established in SAS 69,
transaction, rather have significantly
than using any of the narrowed the number of
acceptable alternatives available
alternatives. to management. AICPA
industry audit and
accounting guides are
being used as a vehicle
to achieve more uniform
application of
accounting principles.
For example, the
banking and the savings
institutions guides,
which differ in some
respects, are being
combined into one
guide. Interestingly,
users have informed the
Jenkins Committee that
information about a
company that is
consistent over time is
valued more highly than
information that is
comparable between two
or more companies--
they believe
differences in
accounting principles
and methods of
application should be
permitted as long as
there is disclosure.
20. An independent In the absence of an Metcalf Accounting
auditor should give an authoritative Subcommittee profession
opinion that the pronouncement, there is (1977)
standards used are the no basis for
most appropriate under determining which
the circumstances. principle or method
produces the "most
appropriate" result.
The SEC requirement for
a preferability letter
is described under
recommendation 17.
However, the revised
auditor's standard
report does indicate
that the auditor
assessed the accounting
principles used by
management (AU
�508.08). See also
action taken for
recommendation 19.
21. The independent The AICPA Board of Metcalf Accounting
auditor's report to the Directors and the POB Subcommittee profession
public should comment in their June 1993 and (1977)
on the adequacy of March 1993 reports,
internal auditing respectively, continue
controls and employee to endorse mandatory
conduct standards, as reports by managements
well as compliance with of public companies and
them. by their auditors on
the system of internal
control for financial
reporting.
22. Independent audits From a practical point Metcalf Accounting
should be continual of view, most audits Subcommittee profession
throughout the year. are conducted over a (1977)
period of time. Also,
SAS 71 provides
performance standards
and reporting guidance
on interim financial
information.
23. A standard of skill The objectives of this Cohen Accounting
and care is needed to recommendation have Commission profession
call upon the auditor been achieved to a (1978)
to extend the study and large degree by the
evaluation of internal clear statement of the
controls to all auditor's
controls that have a responsibility in SAS
significant bearing on 53, which also
the prevention and discusses (para. 11-
detection of fraud. 12) internal control
problems in the context
of the assessment of
audit risk. In
addition, SAS 78 (which
supersedes SAS 55)
requires that the
auditor obtain an
understanding of the
internal control
structure, including
the accounting system
and control procedures,
and para. 11
specifically identifies
certain types of
procedures designed to
prevent fraud. Finally,
implementation of the
recommendation in the
June 1993 policy
statement of the AICPA
Board of Directors for
management and auditor
reports on the system
of internal control
would result in full
implementation of this
recommendation.
24. Corporations should COSO received 1,014 Cohen SEC and public
be required to adopt responses to a 1988 Commission companies
codes of conduct survey of over 8,500 (1978)
indicating in detail public companies that
conduct that will not indicated that a
be tolerated. The code significant number of
should be made readily companies have written
available to codes of conduct:
shareholders and --87 percent of
others. Corporations companies with over
must also adopt 10,000 employees,
policies and procedures --60 percent with 1,000
to provide for to 10,000 employees,
effective monitoring of --32 percent with 100
compliance and should to 1,000 employees,
distribute the code to and
employees at the --15 percent with under
appropriate levels. 100 employees.
25. The standards for Rule 201 of the Code of Cohen Accounting
the audit function Professional Conduct Commission profession
should have broader establishes general (1978)
scope than the present standards of
standards. They should professional
be applicable whenever competence, due
a CPA undertakes an professional care,
audit engagement. The planning and
restructuring should supervision, and
include a statement of sufficient relevant
the independent data that are
auditor's role. applicable to all
services provided by
all AICPA members. The
ASB initiated a new
series of attest
standards to govern
services that do not
involve financial
statements. Also, the
ASB has dealt with and
will continue to deal
with matters that go
beyond the boundaries
of the financial
statements, such as
compliance auditing and
special reports.
26. The auditor should SAS 78, which revised Cohen Accounting
review the SAS 55 to conform to Commission profession
corporation's code of the COSO report, (1978)
conduct and the Internal Control--
procedures adopted to Integrated Framework,
monitor compliance with requires the auditor to
it. The auditor should obtain an understanding
determine whether there of all of the elements
are material weaknesses of the internal control
in the monitoring structure. The COSO
procedures, and report, issued in 1992
indicate his and amended in 1994,
conclusions on these has drawn the attention
matters in his report. of preparers, auditors,
and regulators to the
significance of
internal controls. COSO
points out that codes
of conduct are widely
used and may be part of
the control
environment, but
properly warns that
"existence of a written
code of conduct, and
even documentation that
employees received and
understand it, does not
ensure that it has been
followed. Compliance
with ethical
standards...is best
ensured by top
management's actions
and examples...." Full
implementation of this
recommendation is
therefore contingent on
a requirement for
written codes of
conduct, which, for
that reason, may not be
necessary for all
companies, and on
implementation of the
recommendations in the
June 1993 policy
statement of the AICPA
Board of Directors for
management and auditor
reports on the system
of internal control
over financial
reporting.
27. If there is a Although the subject of Cohen SEC and
corporate code of two separate SEC rule Commission accounting
conduct, the report by proposals, there is no (1978) profession
management in the present requirement for
annual report should a report by management
include a statement or for an auditor's
that such a code exists report thereon. See
and that procedures action taken for
have been implemented recommendation 26 for
to monitor compliance. additional commentary.
The auditor's report
should state that he
has reviewed the code
of conduct. It should
also describe his
review of the company's
monitoring procedures
and his conclusions on
those aspects that can
be audited. It should
disclose any violation
of the code found
during the course of
the audit if management
and the board of
directors failed to
make an adequate
response when it was
brought to their
attention.
28. The audit function This is an ongoing Cohen Accounting
should expand to activity of the ASB. Commission profession
include information of Over the years, (1978)
an accounting and guidance has been
financial nature that provided on matters
management has a such as interim
responsibility to information, segment
report if the auditor's information, forecasts,
competence is relevant internal control,
to verifying the "special reports,"
information and that compliance with laws
information is produced and regulations, and
by the accounting attest services in
system. general. Guidance will
continue to be provided
as necessary. Also, the
Elliott Committee is to
consider the scope and
evolution of the
assurance function over
the foreseeable future.
29. The audit should be From a practical point Cohen Accounting
considered a "function" of view, most audits Commission profession
to be performed during are conducted over a (1978)
a period of time, period of time. Also,
rather than an audit of SAS 71 provides
a particular set of guidance on reporting
financial statements. on interim financial
The annual financial information. However,
statements should be no formal action has
only one, although the been taken to implement
most important, of the this specific
elements audited. recommendation. The
Eventually, the audit work of the Elliott
function should expand Committee may, however,
to include all address this
important elements of recommendation again.
the financial reporting
process.
30. The auditor should SAS 78 (which Cohen Accounting
review and test the supersedes SAS 55) Commission profession
entire accounting requires the auditor to (1978)
control system. The obtain a sufficient
objective of this study understanding of the
and evaluation would be elements of the
to enable the auditor entity's control
to reach a conclusion structure to plan the
on whether controls audit by performing
over each significant procedures to
part of the accounting understand the design
system provide of the policies and
reasonable, though not procedures relevant to
absolute, assurance audit planning and
that the system is free whether they have been
of material weaknesses. placed in operation.
The auditor is not
required to test the
entire system because
of a belief that the
policies and procedures
are not relevant to a
financial statement
assertion, are unlikely
to be effective, or
because evaluating
their effectiveness
would be inefficient.
The AICPA believes this
is an appropriate
position until such
time as managements and
auditors are required,
as the AICPA and the
POB recommend, to
report on internal
control over financial
reporting.
31. The condition of SAS 60 requires the Cohen SEC and
the controls over the auditor to communicate, Commission accounting
accounting system and generally to the audit (1978) profession
management's response committee, "reportable
to the suggestions of conditions" noted in
the auditor for the audit of the
correction of financial statements.
weaknesses should be However, although rules
disclosed in the report were proposed on two
by management. The separate occasions,
auditor should report there is no SEC
on whether he agrees requirement for a
with management's public report by
description of the management or by the
company's internal auditor on internal
controls and should controls and weaknesses
describe material therein. (See
uncorrected weaknesses recommendations 85-90
not disclosed in that relating to depository
report. institutions.) Comments
received on the
proposals contended
that the costs
associated with such
reports might outweigh
their benefit to
investors and expressed
other concerns. The
June 1993 policy
statement of the AICPA
Board of Directors
endorses such a
requirement.
32. Information on See action taken for Cohen Accounting
internal accounting recommendation 31. Commission profession
control should be (1978)
provided whenever
audited financial
statements are issued
for use outside the
company.
33. The auditor should SAS 71 provides Cohen Accounting
be required to review guidance to auditors Commission profession
and report on the who are requested to (1978)
company's interim review and report on
information on a timely interim financial
basis. information, but the
SEC has not made this a
requirement.
34. To provide SAS 71 para. 10 Cohen Accounting
assurance when interim mandates a "sufficient Commission profession
information is knowledge of a client's (1978)
released, the auditor internal control
must have an audit structure," which is
base; that is, he normally obtained in
should have a prior audits. However,
continuing relationship the SAS allows, as it
with the company. must, for the
Normally, he should possibility of a new
have audited the auditor and requires
financial statements of that auditor to obtain
at least the preceding the same level of
period, and his audit knowledge through other
should have included a procedures. (A recent
comprehensive study and SEC enforcement case--
evaluation of the ZZZZ Best--drew
accounting system and attention to the
the controls over it. problems that can occur
when the auditor does
not have an audit
base.)
35. The auditor should SAS 8 was not modified Cohen Accounting
read all of the other for this Commission profession
information recommendation. The SAS (1978)
accompanying audited requires the auditor to
financial statements read the other
and compare it to the information and if it
information in the is materially
financial statements inconsistent with the
and his audit financial statements
workpapers to assure and not corrected, to
himself that it is not include an explanatory
inconsistent with paragraph in the audit
anything he knows as a report, withhold the
result of his audit. use of the report, or
His report should withdraw from the
include a description engagement. The auditor
of the work performed is advised to consult
and his conclusions. with legal counsel with
respect to material
misstatements that are
not inconsistent with
the financial
statements. Also, SAS
61 requires the auditor
to explain his or her
responsibility for the
other information to
the audit committee.
36. If the process of Attestation standards Cohen Accounting
preparing forecasts is have been issued for Commission profession
standardized to the financial forecasts and (1978)
same extent as that for projections, but no
other accounting requirement for their
information, then inclusion with audited
reviews could be made historical financial
of the process. The statements has been
degree of adopted. In that
standardization that connection, the Jenkins
would be required has Committee has found
so far not been that users do not
approached. expect management to
provide forecasts or
projections.
37. To the extent Such information is not Cohen Accounting
information bearing on required to be reported Commission profession
the efficiency, by public companies. (1978)
economy, or
effectiveness of
corporate programs,
including social
programs, is produced
by the accounting
system and is required
to be disclosed in
public releases of
financial information,
the audit function
should evolve to
include it.
38-42. The acceptance Cohen
and discharge of added Commission
responsibilities should (1978)
be communicated by the
auditor to users of his
work. The additional
messages, for example,
should cover
38. ...other See action taken for Accounting
information in recommendation 35 for profession
documents accompanying the auditor's
the audited financial responsibilities. The
statements. auditor's report was
not modified to report
on the execution of
those responsibilities.
To do so in today's
environment would
unduly expose the
auditor to additional
liability. However, SAS
61 requires the auditor
to explain his or her
responsibility for
other information
accompanying the
financial statements to
the audit committee.
39. ...association with Interim information Accounting
interim information. accompanying audited profession
financial statements of
public companies is
marked as "unaudited"
but is required to be
reviewed under SAS 71.
However, the auditor's
report is not modified
unless the information
is omitted or the
auditor has not made
such a review. These
requirements are
believed to be
acceptable to the SEC.
40. ...internal Neither management nor Accounting
accounting controls. the auditor of an profession
entity, with the
exception of certain
federally insured
depository
institutions, is
required to issue a
public report on an
entity's internal
controls. (SAS 60 does
mandate a report,
generally to the audit
committee, on
"reportable conditions"
noted during an audit
of financial
statements.) The AICPA
has recommended that
such a requirement be
enacted by the SEC.
41. ...corporate codes There is no requirement Accounting
of conduct. for the auditor to profession
review the company's
code of conduct. See
action taken for
recommendation 26 for
additional commentary.
42. ...meetings with The auditor is required Accounting
the audit committee. under SAS 61 to profession
communicate certain
matters to the audit
committee, but those
communications are not
mentioned in the
auditor's report.
43-47. Boards of Cohen
directors (or official Commission
bodies, if necessary) (1978)
should require the
company's chief
financial officer or
other representative of
management to present a
report by management
that
43. ...acknowledges the Although many companies Public
responsibility of voluntarily issue companies
management for the reports by management
representations in the that address some, if
financial information. not all, of the items
suggested for
disclosure, there is no
SEC requirement for
such a report.
44. ...provides See action taken for Public
managements assurances recommendation 43. companies
that the information is
presented in conformity
with GAAP appropriate
in the circumstances
and that all material
uncertainties have been
appropriately accounted
for or disclosed.
45. ...indicates that See action taken for Public
the company's legal recommendation 43. companies
counsel has been
consulted regarding the
accounting for or
disclosure of legal
matters and that those
matters have been
appropriately
disclosed.
46. ...presents See action taken for Public
management's assessment recommendation 43. companies
of the company's
accounting system and
controls over it.
47. ...describes the See action taken for Public
work of the company's recommendation 43. companies
audit committee and its
internal auditors.
48. The auditor should The recognition of Cohen Accounting
be required by the ASB compilation and review Commission profession
to report on all services in Statements (1978)
unaudited financial on Standards for
information with which Accounting and Review
he is associated. Users Services addresses this
should be informed recommendation with
about the work done and respect to private
the assurances intended companies. The audited
rather than merely information in
about the audit that is financial statements of
not done. public companies is
typically interim
financial information,
covered by SAS 71.
49. Professional SAS 71 addresses this Cohen Accounting
standards should matter in the context Commission profession
require that if of interim financial (1978)
information acquired in information and during
performing other the performance of
services indicates a other specified
material deficiency in procedures.
unaudited financial
information issued by
an audit client, the
independent auditor
should persuade the
client to correct the
information or, failing
that, assure that the
necessary disclosure is
made.
50. There should be a The SEC has been Cohen Accounting
limited extension of willing to provide a Commission profession
the "safe harbor" "safe harbor" with (1978)
concept when auditors respect to forecasts
are asked to assume new and projections. The
responsibilities or Private Securities
significantly extend Litigation Reform Act
old ones. of 1995 (�301) provides
an extension of the
"safe harbor" concept
when the auditor
notifies regulatory
authorities about
suspected fraud.
51. Existing accounting This recommendation has Price Accounting
standards should be not been adopted in Waterhouse profession
expanded to include a this form. However, SAS (1985)
requirement that the 78 (which supersedes
auditor review the SAS 55) and SAS 59
company's system of focus the auditor's
management controls, attention on the
including conducting an control environment and
audit process to more require the auditor to
adequately address the consider whether there
company's financial is substantial doubt
condition as well as about the entity's
its financial position. ability to continue as
a going concern. See
also SAS 64 and 77,
which supersede SAS 59.
52. Enhance the SOP 94-6, issued in Big 7 Accounting
relevance of financial December 1994, calls (1986) profession
statements through for increased
improved disclosures of disclosures of risks
risks and and uncertainties.
uncertainties.
53. Audit the enhanced Audits of financial Big 7 Accounting
financial statement statements that will (1986) profession
disclosures of risks encompass such
and uncertainties. disclosures include the
additional disclosures
relative to risks and
uncertainties.
54. The accounting SAS 59 required the GAO Accounting
profession should be auditor who concludes (1986) profession
providing better that there is
disclosure and early substantial doubt about
warnings regarding the the entity's ability to
condition of companies continue as a going
that are in precarious concern for a
positions. reasonable period of
time to reflect that
conclusion in his or
her report, and
provides guidance on
relevant disclosures.
However, SAS 77, issued
in 1995 to amend SAS
59, precludes the
auditor from using
conditional language in
the auditor's
conclusion about the
entity's ability to
continue as a going
concern in a going-
concern paragraph.
55. The accounting SAS 54 discusses the GAO Accounting
profession should be consideration an (1986) profession
improving its efforts auditor should give to
in determining whether the possibility of
companies are complying illegal acts. Although
with laws and the SAS states that an
regulations. audit normally does not
include procedures
specifically designed
to detect illegal acts,
para. 9 provides
examples of specific
information that may
raise a question
concerning possible
illegal acts. The SAS
includes guidance on
audit procedures in
response to possible
illegal act, as well as
the auditor's response
to detected acts. FDI
Act �36(e) requires
auditors to report on
large banks' and
thrifts' compliance
with laws and
regulations. Also, SAS
68 deals with
compliance auditing
applicable to
governmental entities
and other recipients of
governmental financial
assistance.
56. The accounting The proposed revision GAO Accounting
profession should be of SAS 53, which was (1986) profession
making sure internal exposed for comment in
controls and accounting May 1996, provides more
systems are in place specific guidance for
that will help prevent the auditor's use in
fraud and mismanagement assessing the risk of
in the companies being fraud.
audited.
57-60. A business AICPA Task
enterprise should make Force on Risks
disclosures beyond and
those now generally Uncertainties
made in financial (1987)
reports about the risks
and uncertainties
facing it as of the
date of the financial
reports. The
disclosures should
include
57. ...a description of SOP 94-6 requires FASB
the kinds of products disclosure of these
or services the matters.
enterprise sells, its
principal markets, and
the locations of those
markets.
58. ...an explanation See action taken for FASB
that the preparation of recommendation 57.
historical financial
information requires
the use of management's
estimates.
59. ...a discussion of See action taken for FASB
significant, change- recommendation 57.
sensitive estimates
used by management to
measure assets and
liabilities at the
reporting date.
Disclosure would be
required for any
significant estimate
used in the
determination of the
carrying amount of an
asset or a liability at
the current reporting
date that based on
facts and circumstances
existing at that date,
is particularly
susceptible to changes
that could result in
material effects on
near-term results of
operations.
60. ...information See action taken for FASB
about current recommendation 57.
vulnerability to risk
due to concentrations
(for example, in the
enterprise's assets,
customers, or
suppliers), other than
those generally known
to be associated with
the industry or trade
in which the entity
operates, would be
required in the
following
circumstances:
(a) concentrations
existing at the report
date make the
enterprise vulnerable
to the risk of severe
impact on near-term
cash flows or results
of operations and (b)
it is at least
reasonably possible
that the events that
could cause the severe
impact will occur.
61. For the top This responsibility is Treadway Public
management of a public emphasized in the COSO Commission companies
company to discharge report, Internal (1987)
its obligation to Control--Integrated
oversee the financial Framework, in the
reporting process, it sections on the control
must identify, environment and on risk
understand, and assess assessment.
the factors that may
cause the company's
financial statements to
be fraudulently
misstated.
62. Public companies This is required by the Treadway Public
should maintain Foreign Corrupt Commission companies
internal controls that Practices Act of 1977 (1987)
provide reasonable and emphasized by the
assurance that issuance of the COSO
fraudulent financial report and the
reporting will be surrounding publicity
prevented or subject to and educational
early detection. efforts.
63. Public companies COSO received 1,014 Treadway Public
should develop and responses to a 1988 Commission companies
enforce written codes survey of over 8,500 (1987)
of corporate conduct. public companies that
Codes of conduct should indicated that a
foster a strong ethical significant number of
climate and open companies have written
channels of codes of conduct:
communication to help --87 percent of
protect against companies with over
fraudulent financial 10,000 employees,
reporting. As a part of --60 percent with 1,000
its ongoing oversight to 10,000 employees,
of the effectiveness of --32 percent with 100
internal controls, a to 1,000 employees,
company's audit and
committee should review --15 percent with under
annually the program 100 employees.
that management
establishes to monitor
compliance with the
code.
64. Public companies This is required by the Treadway Public
should maintain Foreign Corrupt Commission companies
accounting functions Practices Act of 1977 (1987)
that are designed to and emphasized in the
meet their financial COSO report in the
reporting obligations. section on control
activities.
65. Public companies This is emphasized in Treadway Public
should maintain an the COSO report in the Commission companies
effective internal section on monitoring (1987)
audit function staffed and further discussed
with an adequate number in Chapter 8 on roles
of qualified personnel and responsibilities.
appropriate to the size In the survey referred
and the nature of the to under action take
company. for recommendation 63,
54 percent of the
respondents indicated
that their companies
have a separate
internal audit
function.
Significantly, this was
true in 98 percent of
the companies with over
10,000 employees and in
80 percent of the
companies with 1,000 to
10,000 employees.
66. Public companies This is emphasized in Treadway Public
should ensure that the COSO report in the Commission companies
their internal audit section on monitoring. (1987)
functions are While in the survey
objective. referred to under
action taken for
recommendation 63 only
26 percent of the
respondents indicated
that the person
responsible for the
internal audit function
reports to the chief
executive officer, as
recommended by the
Treadway Commission, an
impressive 86 percent
of the respondents said
that the person had
private access to the
audit committee.
67. Internal auditors This appears clear from Treadway Public
should consider the the Standards for the Commission companies
implications of their Professional Practice (1987)
nonfinancial audit of Internal Auditing
findings for the issued by the Institute
company's financial of Internal Auditors,
statements. as they relate to due
professional care.
Moreover, the COSO
report as a whole
emphasizes the notion
of bringing all
available knowledge to
bear on a control issue
and on an evaluation of
the reliability of the
financial statements.
68. Management and the SAS 65 para. 23 Treadway Public
audit committee should discusses coordination Commission companies
ensure that the of the audit work with (1987)
internal auditors' the work of the
involvement in the internal auditors, and
audit of the entire the practice is
financial reporting suggested in the Good
process is appropriate Practice Guidelines for
and properly the Audit Committee
coordinated with the published by the
independent public Treadway Commission.
accountant.
69. COSO should The COSO report, Treadway Accounting
cooperate in developing Internal Control-- Commission profession
additional integrated Integrated Framework, (1987)
guidance on internal was issued in September
control. 1992 and an addendum,
which resulted in GAO
endorsement of the COSO
report, was issued in
May 1994.
70. All public SAS 60 requires the Treadway SEC
companies should be auditor to communicate, Commission
required by SEC rule to generally to the audit (1987)
include in their annual committee, "reportable
reports to stockholders conditions" noted in
management reports the audit of the
signed by the chief financial statements.
executive officer and In 1979 and 1988, the
the chief accounting SEC proposed
officer and/or the requirements for a
chief financial public report by
officer. The management management or by the
report should auditor on internal
acknowledge controls and weaknesses
management's therein. (See action
responsibilities for taken for
the financial recommendations 78-85
statements and internal relating to depository
control, discuss how institutions.) Comments
these responsibilities received contended that
were fulfilled, and the costs associated
provide management's with such reports might
assessment of the outweigh their benefit
effectiveness of the to investors, and
company's internal others expressed other
controls. concerns. The proposals
were not adopted. The
AICPA believes such a
requirement should be
instituted.
71. All public The SEC's proxy rules Treadway SEC
companies should be require disclosure of Commission
required by SEC rule to whether the company has (1987)
include in their annual an audit committee and,
reports to stockholders if so, the identity of
a letter signed by the its members and the
chairman of the audit function it performs.
committee describing Additional disclosure
the committee's of audit committee
responsibilities and activities is required
activities during the when there is a change
year. in the company's
auditors. Therefore, no
formal action has been
taken on this
recommendation.
72. The SEC should The SEC issued a Treadway SEC
require independent release on the subject Commission
public accountants to of timely auditor (1987)
review quarterly involvement with
financial data of all quarterly reports.
public companies before Comments expressed
release to the public. concerns regarding the
costs of the reviews
and the possible delay
in the release of data
pending the
accountants' review; a
regulation was not
issued.
73. The ASB should The AICPA has been Treadway ASB
revise the auditor's reluctant to assume Commission
standard report to these additional (1987)
describe the extent to responsibilities and
which the independent the related risk of
public accountant has additional liability
reviewed and evaluated without a legislative
the system of internal or regulatory mandate.
accounting control. The Nevertheless, the ASB
ASB also should provide has a current project
explicit guidance to to consider adding
address the situation language to the
where, as a result of auditor's report that
his knowledge of the would describe the
company's internal auditor's
accounting controls, responsibility for
the independent public internal control in an
accountant disagrees audit of the financial
with management's statements. An auditing
assessment as stated in interpretation (AU
the proposed �9550.03) provides
management's report. guidance to the auditor
who disagrees with
management's published
assessment of the
company's internal
controls.
74. Management of banks The FDI Act (amended by GAO SEC and
and bank holding FDICIA) requires (1988) accounting
companies with internal control and profession
securities affiliates compliance reporting
should report on the for large banks and
adequacy of the thrifts.
entities' internal
controls and on
compliance with laws
and regulations.
Moreover, as part of
the annual financial
audit, independent
auditors should be
required to review and
report on management's
assertions regarding
internal controls and
compliance.
75. Boards of directors The COSO report GAO Public
of public companies identifies compliance (1989) companies
should encourage with applicable laws
management--which and regulations as one
should seek the advice of the three categories
of its in-house lawyers of internal controls
and outside counsel-- and provides tools to
to develop and maintain evaluate the
a compliance program. effectiveness of
The program should related controls.
include the
establishment of
internal controls to
prevent and detect
noncompliance with laws
and regulations that,
if violated, could
materially affect a
company's operations
and financial
statements.
76. The SEC should The SEC has complied GAO SEC
expedite its review of with this (1989)
MD&A disclosures and recommendation. See
issue guidance, such as Financial Reporting
the planned Release 36 concerning
interpretive release, MD&A disclosures.
to improve information
on risks and
disclosures in annual
reports.
77. The SEC should Although proposed as a GAO SEC
adopt its proposal to rule amendment, the SEC (1989)
require management of has not imposed this
public companies to requirement, which the
publicly report on its AICPA believes should
responsibility for the be implemented. See
financial statements action taken for
and internal controls. recommendation 70.
The SEC should require
the auditor to review
and publicly report on
the management report.
78. The Congress should The FDI Act (amended by GAO Congress
enact legislation FDICIA) contains (1989)
requiring each insured provisions for internal
bank to: control and compliance
(a) prepare an annual reporting for large
management report that banks and thrifts.
(1) describes
management's
responsibility for
preparing financial
statements and for
establishing and
maintaining an
effective internal
control structure and
(2) contains
management's assessment
of the internal control
structure,
(b) prepare an annual
management report that
(1) describes
management's
responsibilities for
complying with laws and
regulations related to
the safety and
soundness of thrift
operations and for
establishing methods to
monitor compliance and
(2) contains
management's assessment
of the bank's
compliance with laws
and regulations related
to operations, and
(c) have the bank's
independent auditor
report on the
management assertions
described above and
submit such reports
with the independent
auditor's audit report
to the bank's
regulator. The report
also recommends that
the insurer identify
applicable laws and
regulations that have
material consequences
on the safety and
soundness of bank
operations to be
reviewed and reported
on in management
reports.
79. The Congress should The FDI Act (amended by GAO Congress
enact legislation FDICIA) contains (1989)
requiring each insured provisions for internal
thrift to control and compliance
(a) prepare an annual reporting for large
management report that banks and thrifts.
(1) describes
management's
responsibility for
preparing financial
statements and for
establishing and
maintaining an
effective internal
control structure and
(2) contains
management's assessment
of the internal control
structure,
(b) prepare an annual
management report that
(1) describes
management's
responsibilities for
complying with laws and
regulations related to
the safety and
soundness of thrift
operations and for
establishing methods to
monitor compliance and
(2) contains
management's assessment
of the thrift's
compliance with laws
and regulations related
to operations, and
(c) have the thrift's
independent auditor
report on the
management assertions
described above and
submit such reports
with the independent
auditor's audit report
to the thrift's
regulator. The report
also recommends that
the insurer identify
applicable laws and
regulations that have
material consequences
on the safety and
soundness of thrift
operations to be
reviewed and reported
on in management
reports.
80. The Congress should These matters were GAO Congress
amend banking laws as addressed in FDI Act (1990)
well as securities laws �36(e) and (c) for
to strengthen both large banks and
management's and the thrifts. The Private
auditor's Securities Litigation
responsibilities for Reform Act of 1995 �301
evaluating and requires auditors to
reporting on internal perform procedures to
controls (including identify related-party
those directly and not transactions and detect
directly related to the illegal acts (but does
financial statements) not require auditors to
and compliance with evaluate or report on
laws and regulations. internal controls).
81-83. The Congress GAO
should enact (1991)
legislation requiring
that as a condition for
federal depository
insurance, depository
institutions
81. ...prepare annual See FDI Act �36(b)(1) Congress
financial statements in and 36(a)(2)(A)(ii),
accordance with GAAP respectively, and
and have them audited implementing
by an independent regulations.
public accountant.
82. ...maintain a See FDI Act �36. Congress
system of internal
accounting controls,
which meets
requirements like those
contained in
�13(b)(2)(B) of the
Securities Exchange Act
of 1934, as added by
the Foreign Corrupt
Practices Act.
83. ...maintain See FDI Act �36. Congress
controls to ensure
compliance with laws
and regulations and
with special regulatory
directives, such as
memorandums of
understanding or cease
and desist orders.
84. The Congress should No action taken. GAO Congress
enact legislation that (1991)
authorizes the
appropriate regulator
to require that the
independent public
accountant for large
institutions review
specific operations of
the institution, as
deemed necessary, to
ensure regulatory
objectives are met.
85-87. The Congress GAO
should enact (1991)
legislation requiring
independent auditors of
federally insured
financial institutions
to
85. ...report on FDI Act �36(c) and Congress
management's 36(a)(2)(A)(ii),
assertions described in respectively, address
its report on internal such requirements
controls by studying relative to the
and evaluating the internal control
institution's internal structure over
controls in accordance financial reporting.
with GAAS or other
procedures prescribed
by the regulators and
include the auditor's
report in management's
annual report.
86. ...report to the See FDI Act �36(h)(2) Congress
institution and the and implementing
regulators the internal regulations.
control weaknesses that
are important but are
not defined as material
to the financial
statements or already
included in
management's annual
report.
87. ...report to the See FDI Act �36(e). C ongress
institution and the Legislation has been
regulators on the introduced to repeal
institution's this requirement.
compliance with (a)
laws and regulations
that are identified by
the regulators as
relating to safety and
soundness where
compliance can be
objectively determined
and (b) special
regulatory directives,
as defined by the
regulators, to maintain
prudent operations or
to restore the
financial health of the
institution.
88-90. The Congress GAO
should enact (1991)
legislation that
requires large
institutions to have
the independent public
accountant that audits
their financial
statements
88. ...review and See FDI Act �36(g)(2). Congress
report on the
institution's quarterly
financial reports
employing specific
procedures agreed upon
with regulators.
89. ...examine a 1- No action taken. Congress
year financial forecast
prepared for the
independent public
accountant.
90. ...meet at least No action taken with Congress
annually with the respect to annual
institution's financial forecasts.
regulators and audit FDI Act �36(g) does
committee to review the require the audit
institution's annual committee to review the
financial forecast and basis for the
assessment of internal independent auditor's
controls. reports, which includes
an assessment of
internal controls.
91. Management should FDI Act �36(b)(2) GAO Congress
have to prepare an established such (1991)
annual report to be requirements for the
published along with internal control
the audited financial structure over
statements, which financial reporting for
(a) describes actions large banks and
taken to establish and thrifts.
maintain an effective
system of internal
controls that meets a
minimum set of specific
measurable legislative
objectives for internal
control structures,
(b) contains
management's assessment
of the effectiveness of
its internal control
structure and
identifies material
weakness that have not
been corrected, and
(c) is signed by the
chief executive officer
and the chief
accounting or financial
officer of the
organization.
92. Auditors should be FDI Act �36(c) and GAO Congress
required to evaluate 36(a)(2)(A)(ii), (1991)
and report on the respectively, address
assertions described in such requirements
management's report on relative to the
internal controls. The internal control
auditor's assessment structure over
should be included in financial reporting for
management's annual large banks and
report. thrifts.
93. The ASB should SSAE 2 on reporting on POB ASB
establish standards an entity's internal (1993)
that require clear control structure over
communication of the financial reporting was
limits of the issued in May 1993.
assurances being
provided to third
parties when auditors
report on the adequacy
of client internal
control systems.
94. The AICPA's AcSEC This was done in POB Accounting
should promptly adopt a December 1994 with the (1993) profession
Statement of Position issuance of SOP 94-6.
providing guidance on,
and requiring
disclosure of
information about, the
nature of risks and
uncertainties
associated with the
reporting entity's
operations and
financial condition.
95. The SEC should This recommendation was POB SEC
require registrants to discussed in a meeting (1993)
include in a document between AICPA
containing the annual representatives and the
financial statements Chairman of the SEC on
(a) a report by December 15, 1993.
management on the However, no action was
effectiveness of the taken. (For discussion
entity's internal of SEC rule proposals,
control system relating see action taken for
to financial reporting recommendation 70.)
and (b) a report by the
registrant's
independent accountant
on the entity's
internal control system
relating to financial
reporting.
96. FASB should add to FASB does not believe POB FASB
its agenda a project to it is appropriate at (1993)
study comprehensively this time to add this
the possibility of project to its agenda.
requiring the reporting Given the fact that the
of values and changes Jenkins Committee has
in values rather than learned that users
historical transaction oppose replacing the
prices, either as a current historical
basis to propose cost-based accounting
changes to financial model with a fair value
accounting standards or accounting model, the
to explain publicly why AICPA concurs with this
such a change in decision.
accounting standards is
impractical or
otherwise
inappropriate. In
carrying out this
effort, FASB should
consider the
conclusions of the
AICPA, the FEI, and the
AIMR studies with
respect to the future
of financial reporting.
97. FASB should add to SOP 94-6 partially POB FASB
its agenda a project to addresses this (1993)
design a brief recommendation by
statement explaining requiring disclosure
the limitations of about the use of
financial statements. estimates in financial
The explanation should statements. It is not
be made a part of every likely that the
set of financial benefits of an
statements described as additional FASB
being "in accordance requirement would
with generally accepted outweigh the costs
accounting principles." involved in issuing
such a document.
98. The AICPA joins the The SEC proposed but AICPA Board of SEC
POB in calling for a never implemented such Directors
statement by a requirement. See (1993)
management, to be action taken for
included in the annual recommendation 70.
report, on the
effectiveness of the
company's internal
controls over financial
reporting, accompanied
by an auditor's report
on management's
assertions.
99. Set financial In February 1996, FASB AIMR FASB
information in its issued an Invitation to (1993)
business context. Comment on the
Management should recommendations of
explicitly describe its AIMR. Comments were due
strategies, plans, and to FASB July 31, 1996.
expectations and report
its results in a manner
that is consistent with
the organization and
management of the firm.
100. Continue to See action taken for AIMR FASB
deliberate on the role recommendation 99. (1993)
of current values in
financial reports.
101. Recognize all See action taken for AIMR FASB
executory contracts. recommendation 99. (1993)
102. Develop standards See action taken for AIMR FASB
for reporting recommendation 99. (1993)
comprehensive income to
facilitate analysis of
income statement items
that have a bearing on
forecasting and
valuation of the firm.
103. Provide frequent See action taken for AIMR FASB
and detailed reports recommendation 99. (1993)
(continue quarterly
reporting and provide
more disaggregated
financial data in
interim reports).
104. The appropriate Financial regulators do GAO Regulators
regulatory authorities not think it is (1994)
should establish appropriate to mandate
specific requirements specific management
for independent, policies to dealers in
knowledgeable audit derivatives. Financial
committees and internal regulators believe that
control reporting for current assessments of
all major OTC internal controls are
derivatives dealers. adequate and cover
Internal control derivatives activities.
reporting by boards of FDI Act �36 includes
directors, managers, requirements for
and external auditors internal control
should include reporting for large
assessments of banks and thrifts.
derivatives risk-
management systems.
105. FASB should This complex matter is GAO FASB
consider adopting a on FASB's active (1994)
market value accounting agenda.
model for all financial
instruments, including
derivatives products.
106. The SEC should The SEC believes that GAO SEC
ensure that SEC at this time it is more (1994)
registrants that are beneficial to investors
major end users of to focus on improving
complex derivative the accounting for and
products establish and disclosure of
implement corporate derivatives than to
requirements for public adopt mandatory
reporting on internal reporting on internal
controls. Internal controls.
controls reporting by
boards of directors,
managers, and external
auditors should include
assessments of
derivatives risk-
management systems.
107. It is urgent that The Private Securities Kirk Panel SEC
the SEC take the lead Litigation Reform Act (1994)
in helping the of 1995 is expected to
profession to reduce reduce the profession's
exposure to unwarranted exposure to unwarranted
litigation. There are litigation.
dangers, not just to
the profession but to
the investing public,
if the current
liability situation
continues to drift
without SEC leadership.
108. Report separately FASB has issued an Jenkins FASB and SEC
the effects of core and Invitation to Comment Committee
noncore activities and addressing the Jenkins (1994)
events, and measure at Committee and AIMR
fair value noncore recommendations.
assets and liabilities. Comments were due in
July 1996. The SEC will
hold a symposium on
these recommendations
during 1996.
109. Standard setters FASB has issued an Jenkins FASB, AICPA,
should develop a Invitation to Comment Committee and SEC
comprehensive model of addressing the Jenkins (1994)
business reporting Committee and AIMR
indicating the types recommendations.
and timing of Comments were due in
information that users July 1996. The SEC will
need to value and hold a symposium on
assess the risk of these recommendations
their investments. during 1996.
110. Improve the See action taken for Jenkins FASB and AICPA
understanding of costs recommendation 109. Committee
and benefits of (1994)
business reporting,
recognizing that
definitive
quantification of costs
and benefits is not
possible.
111. Improve disclosure FASB, in cooperation Jenkins FASB and SEC
of business segment with Canadian standard- Committee
information. setting authorities, (1994)
has exposed for public
comment revised
standards for
disclosing business
segment information.
See action taken for
recommendation 109.
112. Address the The SEC recently Jenkins FASB and SEC
disclosures and published for public Committee
accounting for comment amendments to (1994)
innovative financial its rules to require
instruments. enhanced disclosures of
the accounting policies
and market risks
associated with certain
instruments. See action
taken for
recommendation 109.
113. Improve See action taken for Jenkins FASB and SEC
disclosures about the recommendations 109 and Committee
identity, 112. (1994)
opportunities, and
risks of off-balance
sheet financing
arrangements and
reconsider the
accounting for those
arrangements.
114. Improve the See action taken for Jenkins FASB, SEC, or
disclosures about the recommendations 109 and Committee public
uncertainty of 112. Also, the (1994) companies
measurements of certain accounting profession
assets and liabilities. issued SOP 94-6 on
risks and uncertainties
in December 1994.
115. Improve quarterly See action taken for Jenkins SEC or public
reporting by reporting recommendation 109. Committee companies
on the fourth quarter (1994)
separately and
including business
segment data.
116. Allow for flexible See action taken for Jenkins Accounting
auditor association recommendation 109. Committee profession
with business (1994)
reporting, whereby the
elements of information
on which auditors
report and the level of
auditor involvement
with those elements are
decided by agreement
between a company and
the users of its
business reporting.
117. The auditing Anticipating the effect Jenkins Accounting
profession should of future changes in Committee profession
prepare to be involved the reporting model is (1994)
with all the one of the major
information in the responsibilities of the
comprehensive model so AICPA's Special
that companies and Committee on Assurance
users can call on them Services as well as an
to provide assurance on ongoing responsibility
any of the model's of the ASB.
elements.
118. The newly formed The AICPA's Special Jenkins Accounting
AICPA Special Committee Committee on Assurance Committee profession
on Assurance Services Services is still in (1994)
should research and the early stages of its
formulate conclusions work.
on analytical
commentary in auditors'
reports within the
context of the
Committee's model,
focusing on users'
needs for information.
119. The profession As indicated in the Jenkins Accounting
should continue its details of the Jenkins Committee profession
projects on other Committee report, the (1994)
matters related to ASB has active projects
auditor association on reporting on
with business internal control and on
reporting. the auditor's
responsibility for the
detection of fraud.
Also, the SECPS has
issued a response to
the report of the POB
panel on auditor
independence.
120. National and The new AICPA Financial Jenkins FASB, AICPA,
international standard Reporting Coordinating Committee SEC, and
setters and regulators Committee will follow (1994) international
should increase their up on this standard
focus on the recommendation of the setters and
information needs of Jenkins Committee. regulators
users, and users should
be encouraged to work
with standard setters
to increase the level
of their involvement in
the standard-setting
process.
121. U.S. standard FASB, the SEC, and the Jenkins FASB, AICPA,
setters and regulators AICPA are all actively Committee and SEC
should continue to work involved in efforts to (1994)
with their non-U.S. achieve international
counterparts and accounting standards
international standard that meet users' needs
setters to develop for information. For
international example, FASB meets
accounting standards, regularly with standard
providing that the setters from the United
resulting standards Kingdom, Australia,
meet users' needs for Canada, and the
information. International
Accounting Standards
Committee and has
jointly published
studies with them about
future events, hedge
accounting, leases, and
loss provisions.
The International
Accounting Standards
Committee has set a
goal of producing, by
1998, accounting
standards sufficient in
quality to be adopted
by the International
Organization of
Securities Commissions,
of which the SEC is a
member, as suitable for
financial statements
supporting securities
issuance in any
country.
122. Lawmakers, The Congress recently Jenkins Congress, SEC,
regulators, and passed the Private Committee FASB, and
standard setters should Securities Litigation (1994) AICPA
develop more effective Reform Act of 1995,
deterrents to which provides a safe
unwarranted litigation harbor for certain
that discourage forward-looking
companies from statements (in �102 of
disclosing forward- this act).
looking information.
123. Companies should See action taken for Jenkins SEC
be encouraged to recommendation 109. Committee
experiment voluntarily (1994)
with ways to improve
the usefulness of
reporting consistent
with the Committee's
model. Standard setters
and regulators should
consider allowing
companies that
experiment to
substitute information
specified by the model
for information
currently required.
124. Standard setters See action taken for Jenkins FASB and AICPA
should adopt a longer- recommendation 109. Committee
term focus by (1994)
developing a vision of
the future business
environment and users'
needs for information
in that environment.
Standards should be
consistent
directionally with that
long-term vision.
125. Regulators should No action taken. Jenkins SEC
consider whether there However, the SEC has Committee
should be any changes issued a proposal that (1994)
to the current would allow for
requirement that public abbreviated financial
companies make all statements, thus
disclosures publicly acknowledging that
available. users' needs may
differ.
--------------------------------------------------------------------------------
STATEMENTS, OPINIONS, AND RELEASES
REFERENCED IN APPENDIX II
========================================================= Appendix III
Table III.1
Selected FASB Statements of Financial
Accounting Standards
FASB Statement Number and Title Date issued
-- -------------------------------------- --------------
5 Accounting for Contingencies March 1975
8 Superseded by FAS 52 October 1975
33 Superseded by FAS 89 September 1979
52 Foreign Currency Translation December 1981
89 Financial Reporting and Changing December 1986
Prices
95 Statement of Cash Flows November 1987
96 Superseded by FAS 109 December 1987
10 Disclosures About Fair Value of December 1991
7 Financial Instruments
10 Accounting for Income Taxes February 1992
9
11 Accounting by Creditors for Impairment May 1993
4 of a Loan: An Amendment of FASB
Statements No. 5 and 15
11 Accounting for Certain Investments in May 1993
5 Debt and Equity Securities
11 Disclosure About Derivative Financial October 1994
9 Instruments and Fair Value of
Financial Instruments
12 Accounting for the Impairment of Long- March 1995
1 Lived Assets and for Long-Lived Assets
to be Disposed Of
12 Accounting for Mortgage Servicing May 1995
2 Rights: An Amendment of FASB Statement
No. 65
12 Accounting for Stock-Based October 1995
3 Compensation
12 Accounting for Certain Investments November 1995
4 Held by Not-for-Profit Organizations
12 Accounting for Transfers and Servicing June 1996
5 of Financial Assets and
Extinguishments of Liabilities
----------------------------------------------------------
Table III.2
Selected FASB Concept Statements
FASB Concept Statement Number and
Title Date issued
-- -------------------------------------- --------------
1 Objectives of Financial Reporting by November 1978
Business Enterprises
2 Qualitative Characteristics of May 1980
Accounting Information
5 Recognition and Measurement in December 1984
Financial Statements of Business
Enterprises
----------------------------------------------------------
Table III.3
Selected FASB Status Reports
FASB Status Report Number and Title Date issued
-- -------------------------------------- --------------
22 FASB Issues Research Report on Hedge October 1991
4 Accounting
----------------------------------------------------------
Table III.4
Selected AICPA Statements on Auditing
Standards
AICPA SAS Number and Title Date issued
-- -------------------------------------- --------------
1 Codification of Auditing Standards and November 1972
Procedures
5 Superseded by SAS 69 July 1975
7 Communications Between Predecessor and October 1975
Successor Auditors
8 Other Information in Documents December 1975
Containing Audited Financial
Statements
11 Superseded by SAS 73 December 1975
12 Inquiry of a Client's Lawyer January 1976
Concerning Litigation, Claims, and
Assessments
16 Superseded by SAS 53 January 1977
19 Client Representations June 1977
22 Planning and Supervision March 1978
45 Omnibus Statement on Auditing August 1983
Standards -1983
50 Reports on the Application of July 1986
Accounting Principles
53 The Auditor's Responsibility to Detect April 1988
and Report Errors and Irregularities
54 Illegal Acts by Clients April 1988
55 Consideration of the Internal Control April 1988
Structure in a Financial Statement
Audit
56 Analytical Procedures April 1988
58 Reports on Audited Financial April 1988
Statements
59 The Auditor's Consideration of an April 1988
Entity's Ability to Continue as a
Going Concern
60 Communication of Internal Control April 1988
Structure Related Matters Noted in an
Audit
61 Communications With Audit Committees April 1988
64 Omnibus Statement on Auditing December 1990
Standards -1990
65 The Auditor's Consideration of the April 1991
Internal Audit Function in an Audit of
Financial Statements
67 The Confirmation Process November 1991
68 Superseded by SAS 74 December 1991
69 The Meaning of "Present Fairly in
Conformity With Generally Accepted January 1992
Accounting Principles" in the
Independent Auditor's Report
70 Reports on the Processing of April 1992
Transactions by Service Organizations
71 Interim Financial Information May 1992
73 Using the Work of a Specialist July 1994
77 Amendments to Statements on Auditing November 1995
Standards No. 22, "Planning and
Supervision," No. 59, "The Auditor's
Consideration of an Entity's Ability
to Continue as a Going Concern," and
No. 62, "Special Reports"
78 Consideration of Internal Control in a December 1995
Financial Statement Audit: An
Amendment to SAS No. 55
79 Amendment to Statements on Auditing December 1995
Standards No. 58, Reports on Audited
Financial Statements
----------------------------------------------------------
Table III.5
Selected AICPA APB Opinions
APB Opinion Number and Title Date issued
-- -------------------------------------- --------------
19 Reporting Changes in Financial March 1971
Position (superseded by FAS 95)
20 Accounting Changes (amended) July 1971
31 Disclosure of Lease Commitments by June 1973
Lessees (superseded by FAS 13)
----------------------------------------------------------
Table III.6
Selected AICPA Statements of Position
AICPA SOP Number and Title Date issued
-- -------------------------------------- --------------
92 Accounting for Foreclosed Assets April 1992
-
3
94 Disclosure of Certain Significant December 1994
- Risks and Uncertainties
6
----------------------------------------------------------
Table III.7
Selected AICPA Statements on Standards
for Attestation Engagements
AICPA SSAE Number and Title Date issued
-- -------------------------------------- --------------
2 Reporting on an Entity's Internal May 1993
Control Structure Over Financial
Reporting
----------------------------------------------------------
Table III.8
SEC Accounting Series Releases
SEC Accounting Series Release Number
and Title Date issued
-- -------------------------------------- --------------
19 Reporting Disagreements With Former April 29,
4 Accountants--Adoption of Amendments of 1976
Requirements (omitted)
25 Disclosure of Relationships With June 29, 1978
0 Independent Public Accountants (omitted)
26 Scope of Services by Independent June 14, 1979
4 Accountants (rescinded)
29 Relationships Between Registrants and August 20,
6 Independent Accountants 1981
(codified into
FRR No. 1
Sections 601
and 604)
29 Rescission of Certain Accounting August 20,
7 Series Releases and Adoption of 1981
Amendments to Certain Rules of
Regulation of S-X Relating to
Disclosure of Maturities of Long-Term
Obligations
----------------------------------------------------------
Table III.9
SEC Financial Reporting Releases
SEC Financial Reporting Release Number
and Title Date issued
-- -------------------------------------- --------------
36 Management's Discussion and Analysis May 18, 1989
. of Financial Condition and Results of
Operations; Certain Investment Company
Disclosures
----------------------------------------------------------
EXPERTS CONSULTED IN OUR REVIEW OF
THE ACCOUNTING PROFESSION
========================================================== Appendix IV
SECURITIES AND EXCHANGE COMMISSION
Office of the Chief Accountant:
Michael Sutton, Chief Accountant
Walter Schuetze, Former Chief Accountant
John Riley, Deputy Chief Accountant
John Albert, Associate Chief Accountant
Michael Kigin, Associate Chief Accountant
Robert Burns, Chief Counsel
FINANCIAL ACCOUNTING FOUNDATION
Dennis Dammerman, President
Joseph S. LaGambina, Executive Vice President
FINANCIAL ACCOUNTING STANDARDS
BOARD
Members:
Dennis R. Beresford, Chair
James J. Leisenring
Robert Swieringa
Joseph V. Anania
Robert Northcutt
Anthony T. Cope
John Foster
Former Members:
Donald J. Kirk
Frank Block
Raymond C. Lauver
Research and Technical Activities Staff:
Timothy S. Lucas, Director
J.T. Ball, Assistant Director
Wayne Upton, Project Manager
Jane Adams, Project Manager
Halsey Bullen, Project Manager
Kevin Mead, Practice Fellow
FINANCIAL ACCOUNTING STANDARDS
ADVISORY COUNCIL
Virgil E. Conway, Chair
AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors:
Ronald S. Cohen, Chair, Crowe Chizek & Co.
Robert L. Isrealoff, Former Chair, Isrealoff, Trattner & Co., CPAs,
P.C.
Barry C. Melancon, AICPA, President
Eric L. Schindler, Chair, AICPA Finance Committee, Columbia Paint &
Coatings
Accounting Standards Executive Committee:
Michael Crooch, Chair, Arthur Andersen, LLP
John Dirks, Price Waterhouse, LLP
George P. Fritz, Coopers and Lybrand, LLP
Louis W. Matusiak, Jr., Geo. S. Olive & Co.
Auditing Standards Board Members:
Edmund R. Noonan, Chair, KPMG Peat Marwick, LLP
Luther E. Birdzell, Arthur Andersen, LLP
James E. Brown, Baird, Kurtz & Dobson
Robert E. Fleming, Urbach, Kahn & Werlin, P.C.
James S. Gerson, Coopers and Lybrand, LLP
Deborah D. Lambert, Johnson, Lambert & Capron
Charles J. McElroy, Larson, Allen, Weishair & Co., LLP
Kurt Pany, Arizona State University
W. Ronald Walton, Price Waterhouse, LLP
Industry Committee Members:
John T. Shanahan, Banking Committee, Chair, KPMG Peat Marwick, LLP
Financial Reporting Coordinating Committee:
Jerry Weygandt, Chair, Professor, University of Wisconsin
Accounting Standards Executive Committee:
Arleen Rodda Thomas, Vice President, Self-Regulation and SECPS
James F. Green, Technical Manager
Auditing Standards Division Staff:
Daniel Guy, Vice President, Professional Standards and Services
Jane Mancino, Technical Manager
Judith Sherinsky, Technical Manager
Jeannie Summo, Technical Manager
Accounting and Auditing Guides:
Gerry Yarnall, Director
Former Staff:
Thomas Kelley, Vice President-Professional
Joseph Moraglio, Vice President-Federal Government Division
PUBLIC OVERSIGHT BOARD
Jerry D. Sullivan, Executive Director
ROBERT MORRIS ASSOCIATES
Charlie Huntington, Director Credit Risk Management Division
James A Gertie, Chair - Accounting Policy Committee
David Eyles, Member, Board of Directors
ASSOCIATION FOR INVESTMENT
MANAGEMENT AND RESEARCH
Peter H. Knutson, Financial Accounting Policy Committee
Alton "Chip" Jones, Advocacy Administrator
AMERICAN ASSOCIATION OF INDIVIDUAL
INVESTORS
John Markese, President
John Bajkowski, Financial Analyst
STANDARD & POOR'S
Equity Investor Services Group:
David M. Blitzer, Vice President and Chief Economist
Robert Natale, Research Director
Stephen Biggar, Equity Analyst
Jane Colis, Equity Analyst
Joshua Harari, Equity Analyst
Steve Klein, Equity Analyst
Debt Rating Group:
Mark E. Bachmann, Managing Director
Solomon B. Samson, Managing Director - Corporate Finance Department
Scott Serif, Associate Director
Scott Sprinzen, Managing Director, Corporate Ratings
BUSINESS ROUNDTABLE
Robert Butler, Chair - Accounting Policy Committee
Fredrick Batline, Vice President, Citibank
Gerand Ketz, Vice President, Citibank
Diane Staab, International Paper, Washington Council
FINANCIAL EXECUTIVES INSTITUTE
Susan Koski-Grafer, Vice President
Ken Johnson, Chair - Committee on Corporate Reporting
Mitchell Danaher, Member
David Sidwell, Member
SECURITIES INDUSTRY ASSOCIATION
Marc Lackritz, President
Stuart J. Kaswell, Senior Vice President
MOODY'S INVESTORS SERVICE
John J. Kriz, Managing Director
INSTITUTE OF MANAGEMENT
ACCOUNTANTS
Bill Ihlanfeldt, President
AMERICAN ACCOUNTING ASSOCIATION
Stephen Zeff, Former President
AMERICAN BAR ASSOCIATION
Abraham Stanger, Coordinator for Law and Accounting Committee
GAO ADVISORY PANEL
John C. Burton, Former Chief Accountant of the SEC
Alan B. Levenson, Partner, Fulbright and Jaworski
T. Timothy Ryan, Managing Director of JP Morgan
Wallace Olson, Former President of the AICPA
Katherine Ortega, Former Treasurer of the United States
GAO CONSULTANT
Douglas Carmichael, Professor, Baruch College, CUNY
(See figure in printed edition.)Appendix V
COMMENTS FROM THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the AICPA's letter dated August
26, 1996.
GAO COMMENTS
1. See the "Comments and Our Evaluation" section in chapter 2.
2. See the "Comments and Our Evaluation" section in chapter 3.
3. See the "Comments and Our Evaluation" section in chapter 4.
4. See the "Comments and Our Evaluation" section in chapter 5.
5. See the "Comments and Our Evaluation" section in chapter 6.
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE PUBLIC OVERSIGHT
BOARD
========================================================== Appendix IV
(See figure in printed edition.)
The following are GAO's comments on the POB's letter dated August 26,
1996.
GAO COMMENTS
1. The POB's reports referred to are discussed in chapters 2 and 3,
and in appendixes I and II.
2. See the "Comments and Our Evaluation" section in chapter 3.
3. See the "Comments and Our Evaluation" section in chapter 2.
4. See the "Comments and Our Evaluation" section in chapter 4.
(See figure in printed edition.)Appendix VII
COMMENTS FROM THE FINANCIAL
ACCOUNTING STANDARDS BOARD
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the FASB's letter dated August
27, 1996.
GAO COMMENTS
1. Reviewing the status of international standard-setting activities
was beyond the scope of our review of the accounting profession's
responsiveness to the many recommendations made by major study groups
from 1972 through 1995, and to identify any unresolved issues related
to those recommendations. However, we share FASB's view of the
importance of international accounting standards and, accordingly,
the priority attention to this task as a component of FASB's mission
to improve the quality of financial reporting.
2. See the "Comments and Our Evaluation" section in chapter 5.
3. FASB's letter to the POB and the letter from AIMR have been
considered in our final report.
4. We agree that these recommendations may involve different changes
in financial reporting. For example, the more comprehensive
reporting model recommended by the Jenkins Committee addresses the
current mixed attribute accounting model and makes a distinction
between core and noncore assets and liabilities and recommends fair
value measurement for the noncore assets and liabilities. Also, the
Jenkins Committee recommended model includes high-level operating
data and performance measures that may more appropriately be reported
outside the financial statements such as in a management discussion
and analysis report section. However, a common theme among the
recommendations is that the current mixed attribute report model is
not meeting the broad range of information users' needs.
5. FASB's comment references appendix II that lists the
recommendations of the major studies considered in our report and the
actions taken in response to those recommendations. The appendix is
organized by major issue, such as independence, and then, within that
issue, chronologically by study group. We selected that presentation
to provide a time line of actions taken in addressing the major
issue. The reader needs to consider all actions taken, as we have in
our analysis, to determine the status of the major issue. As FASB
has noted, actions taken in response to recommendations of a study
group may also relate to recommendations made by a previous study
group and the actions taken at that time.
6. The final report has been annotated to show that we use the term
FASB Board members in the report to refer to the information provided
to us in interviewing the individual board members and that such
positions do not reflect the official positions of FASB.
7. These additional comments have been considered in the final
report.
(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE SECURITIES AND
EXCHANGE COMMISSION
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the SEC Chief Accountant's letter
dated September 5, 1996.
GAO COMMENTS
1. See the "Comments and Our Evaluation" section in chapter 5.
2. See the "Comments and Our Evaluation" section in chapter 2.
3. It should be noted that the examples of reports cited by the
SEC's Chief Accountant as having a purpose similar to those required
by FDICIA do not provide an opinion on the effectiveness of financial
reporting controls as required by FDICIA. The auditors' reports
state that no assurance is provided on the internal control structure
and that the auditors' reports are based on the consideration of
internal controls in determining auditing procedures for the purpose
of expressing an opinion on the entities' financial statements. As
discussed in chapter 3, this auditing procedure is in accordance with
GAAS, but does not result in the auditor reporting on the
effectiveness of internal controls. However, the auditor will
communicate to the entity internal control weaknesses discovered
during the audit.
4. See the "Comments and Our Evaluation" section in chapter 3.
5. Reviewing the status of international standard-setting activities
was beyond the scope of our review of the accounting profession's
responsiveness to the many recommendations made by major study groups
from 1972 through 1995, and to identify any unresolved issues related
to those recommendations. We share the SEC Chief Accountant's view
of the importance of international accounting standards. However, we
do not believe that the status of international accounting standards
should become a barrier to improving U.S. accounting standards and
related financial reporting. Rather, such improvements should serve
to help achieve similar improved international accounting standards
and related financial reporting.
6. See the "Comments and Our Evaluation" section in chapter 6.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.
Cheryl E. Clark, Project Manager
Thomas R. Broderick, Assistant Director
John H. Stahl, Assistant Director
Regina Y. Young, Issue Area Assistant
DALLAS REGIONAL OFFICE
Kenneth R. Rupar, Assistant Director
Gloria Cano, Evaluator
Matthew F. Valenta, Evaluator
KANSAS CITY REGIONAL OFFICE
Edwin O. Boothe, Jr., Senior Evaluator
Maria Rodriguez, Evaluator
SAN FRANCISCO REGIONAL OFFICE
Perry G. Datwyler, Senior Evaluator
John M. Lord, Senior Evaluator
OFFICE OF GENERAL COUNSEL
Jeffrey A. Jacobson, Assistant General Counsel
Jacquelyn N. Desverreaux, Attorney
*** End of document. ***