The Accounting Profession: Status of Panel on Audit Effectiveness
Recommendations to Enhance the Self-Regulatory System (17-MAY-02,
GAO-02-411).
The accounting profession maintains a voluntary, self-regulatory
system through the American Institute of Certified Public
Accountants (AICPA) that includes establishing professional
standards, monitoring compliance with professional standards,
disciplining members for improper acts and substandard
performance, and conducting oversight. The Panel of Audit
Effectiveness, set up to examine the AICPA's methods, made
recommendations to enhance the accounting profession's
self-regulatory system. The Panel's recommendations were made
within the context of the existing self-regulatory system.
Implementing actions taken or in process have addressed many of
the Panel's recommendations. However, the Panel's recommendations
did not fully address the limitations of the self-regulatory
system identified in its report. Also, some of the Panel's
recommendations were either not accepted or are still under
study. Additional experience is needed to evaluate the
effectiveness of actions taken or planned. However, the system is
fragmented, uncoordinated, and has a disciplinary function that
is widely perceived to be ineffective. The self-regulatory system
is unable to protect the confidentiality of investigative
information about alleged audit failures or other disciplinary
matters concerning members of the profession. The lack of such
protective powers hinders the timing of investigations and
affects the public's perception of the self-regulatory system's
effectiveness. The Panel recognized the need for legislation to
address this issue, but given the uncertainty of obtaining it,
the Panel recommended other actions to protect the public
interest when public accounting firms or their members are named
in litigation alleging an audit failure.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-411
ACCNO: A03367
TITLE: The Accounting Profession: Status of Panel on Audit
Effectiveness Recommendations to Enhance the Self-Regulatory
System
DATE: 05/17/2002
SUBJECT: Accounting
Accounting standards
Auditing standards
General management reviews
Internal audits
Self-regulatory organizations
Oversight committees
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GAO-02-411
A
Report to the Ranking Minority Member, Committee on Energy and Commerce,
House of Representatives
May 2002 THE ACCOUNTING PROFESSION Status of Panel on Audit Effectiveness
Recommendations to Enhance the Self- Regulatory System
GAO- 02- 411
Letter 1 Results in Brief 4 Background 5 Objectives, Scope, and Methodology
10 POB?s Oversight Authority, Independence, and Leadership Role 12 Peer
Review Program 18 Accounting Profession?s Disciplinary Process 22
Observations 28 Agency Comments and Our Evaluation 31
Appendixes
Appendix I: POB Charter Provisions Responding to the Panel on Audit
Effectiveness? Recommendations 36
Appendix II: Actions Responding to Panel on Audit Effectivesness?
Recommendations 39
Appendix III: Comments From the Public Oversight Board 63
Appendix IV: Comments From the American Institute of Certified Public
Accountants 69
Appendix V: Comments From the National Association of State Boards of
Accountancy 72
Appendix VI: Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues 75
Abbreviations
AAER Accounting and Auditing Enforcement Release AICPA American Institute of
Certified Public Accountants ASB Auditing Standards Board CART Committee
Appointed Review Team CPA Certified Public Accountant FAF Financial
Accounting Foundation FASB Financial Accounting Standards Board GAAP
generally accepted accounting principles GAAS generally accepted auditing
standards ISB Independence Standards Board NASBA National Association of
State Boards of Accountancy PEEC Professional Ethics Executive Committee
PITF Professional Issues Task Force POB Public Oversight Board PRC Peer
Review Committee QCIC Quality Control Inquiry Committee SEC Securities and
Exchange Commission SECPS SEC Practice Section SOM Summary Observation
Memorandum SQCS Statements on Quality Control Standards
Letter
May 17, 2002 The Honorable John D. Dingell Ranking Minority Member Committee
on Energy and Commerce House of Representatives
Dear Mr. Dingell: This report responds to your request concerning the status
of recommendations made by the Panel on Audit Effectiveness 1 (Panel) to
enhance the accounting profession?s self- regulatory system. The accounting
profession maintains a voluntary, self- regulatory system through the
American Institute of Certified Public Accountants (AICPA) that includes
establishing professional standards, monitoring compliance with professional
standards, disciplining members for improper acts and substandard
performance, and conducting oversight of the system. You expressed concern
about the effectiveness of the self- regulatory system and whether the
Panel?s recommendations would be implemented fully. Specifically, you
requested that we (1) determine the status of the Panel?s recommendations to
address limitations of the self- regulatory system, and (2) identify any
gaps in actions taken to implement the Panel?s recommendations and their
likely impact on overcoming the limitations of the self- regulatory system
identified by the Panel.
The sudden failure of Enron Corporation, one of the nation?s largest
corporations, has, among other things, led to severe criticism of virtually
all areas of the nation?s financial reporting and auditing systems, which
are fundamental to maintaining investor confidence in our capital markets.
These areas include corporate governance, accounting standards and
financial reporting, auditing, and regulation of the accounting profession
and were beyond the scope of the Panel?s study. Accordingly, proposals to
overhaul or, in some cases, replace the current self- regulatory system will
benefit by consideration of proposals to improve the effectiveness of
controls in these other areas. These interrelated areas should be addressed
in a comprehensive and integrated manner, and any actions taken should be
guided by the fundamental principles of having the right incentives for
the key parties to do the right thing, adequate transparency to provide
reasonable assurance that the right thing will be done, and full
1 The Panel on Audit Effectiveness Report and Recommendations, August 31,
2000.
accountability if the right thing is not done. Further, the components in
the regulatory and corporate governance systems must proactively assess
risks within the system that inhibit effectively protecting the public
interest.
It is important to recognize that the Panel?s study and recommendations were
directed at enhancing the accounting profession?s then- current
selfregulatory system and, therefore, did not address alternative models of
governing the accounting profession, the current financial reporting model,
or various corporate governance issues.
On January 17, 2002, the Chairman of the Securities and Exchange Commission
(SEC) outlined a proposed new regulatory structure to oversee the accounting
profession. The SEC?s proposal provided for creating an oversight body that
would include monitoring and discipline functions, have a majority of public
members, and be funded through private sources, although no further details
were announced. 2 The existing oversight body, the Public Oversight Board
(POB), was critical of the SEC?s
proposal and stated that it was not consulted about the proposal that the
SEC evidently developed in consultation with the AICPA and the five largest
accounting firms. On January 20, 2002, the POB passed a resolution of intent
to terminate its existence no later than March 31, 2002. 3 In that
respect, the SEC announced on March 19, 2002, that a Transition Oversight
Staff, led by the POB?s executive director, will carry out oversight
functions of the POB, including monitoring the status of implementing the
Panel?s
recommendations. 4 However, on April 2, 2002, the POB members voted to
extend the POB through April 30, 2002, 5 to provide additional time solely
to finalize certain POB administrative matters, including preparing a letter
2 Subsequently, on March 21, 2002, the Chairman of the SEC in his statement
before the Senate Committee on Banking, Housing, and Urban Affairs provided
additional details in a working proposal for creating a new private- sector,
independent body, subject to SEC oversight, to regulate the accounting
profession in the areas of quality control reviews and disciplinary powers.
3 While the SEC proposal, including the lack of consultation with the POB on
the proposal, was the precipitating factor in the decision of the POB to
terminate its existence, other considerations played a role, as discussed in
the POB Chairman?s statement before the Senate Committee on Banking,
Housing, and Urban Affairs on March 19, 2002.
4 The Transition Oversight Staff will carry out the work of the former POB
through a memorandum of understanding signed by Transition Oversight Staff,
the SEC, the AICPA, and the AICPA?s SEC Practice Section. 5 This date was
subsequently extended by 1 day to May 1, 2002.
concerning transitioning for monitoring the implementation of the Panel?s
recommendations, and to facilitate a more orderly transition.
Although the POB has terminated its existence, the Panel?s findings
regarding limitations of the self- regulatory system and the status of
actions to address those limitations should be instructive in not only
considering the SEC?s proposal, but other proposals that may result from the
many Enron related inquires. Accordingly, as you requested, we are reporting
on the status of the Panel?s recommendations related to the accounting
profession?s current self- regulatory system. Regarding the broad range of
issues highlighted through the Enron failure, we have recently issued other
products to assist the Congress. We held a forum on corporate governance,
transparency, and accountability in February 2002 to discuss the
effectiveness of the systems of regulatory
control as well as other related areas such as pensions. 6 Also, we
testified before the Congress to further elaborate on these issues,
including considering alternatives to the current self- regulatory system of
the accounting profession. 7 In addition, we issued significant changes to
the auditor independence requirements under Government Auditing Standards,
which apply to audits of federal entities and funds. 8 While the new
standard deals with a range of auditor independence issues, the most
significant change relates to the rules associated with nonaudit or
consulting services provided to clients. These revisions were considered for
several years, as auditor independence has been a longstanding concern, and
were not a response specifically to address the various auditor independence
issues raised by the Enron failure. On May 3, 2002, at the request of the
Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, we
submitted for the record our views regarding what steps the Congress should
consider taking to strengthen oversight of the
accounting profession, auditor independence, and selected financial 6
Highlights of GAO?s Forum on Corporate Governance, Transparency, and
Accountability
(GAO- 02- 494SP, March 5, 2002). 7 Protecting the Public Interest: Selected
Governance, Regulatory Oversight, Auditing, Accounting, and Financial
Reporting Issues (GAO- 02- 483T, March 5, 2002), and Protecting the Public?s
Interest: Considerations for Addressing Selected Regulatory Oversight,
Auditing, Corporate Governance, and Financial Reporting Issues (GAO- 02-
601T, April 9,
2002). 8 Government Auditing Standards: Amendment No. 3, Independence (GAO-
02- 388G, January 2002).
reporting matters. The letter containing our views is included as appendix
VI to this report. Results in Brief The Panel?s recommendations were made
within the context of the existing self- regulatory system of the accounting
profession. Implementing actions
taken or in process have addressed many of the Panel?s recommendations.
However, the Panel?s recommendations did not fully address the limitations
of the self- regulatory system which the Panel identified in its report.
Also, some of the Panel?s recommendations were either not accepted or are
still under study. Additional experience is needed to evaluate the
effectiveness of actions taken or planned; however, the overarching issues
of a system that is fragmented, is not well coordinated, and has a
disciplinary function
that is widely perceived to be ineffective continue to exist. The POB?s
authority was extended to oversight of auditing standards as recommended by
the Panel, but gaps remained in the authority of the POB regarding oversight
of setting auditor independence rules and disciplining members of the
accounting profession. In addition, in contrast to the Panel?s
recommendation that the POB have sole authority to determine its budget and
financial and other resources, and that the accounting profession be obliged
to provide those resources, the POB?s budget was capped at $5.2 million.
Having a budget cap in the POB?s charter could be perceived as a limitation
of the accounting profession?s support for effective oversight and could
have delayed or otherwise hindered the operations of the POB. In response to
the Panel?s recommendations to improve communications, the POB established a
coordinating task force within the self- regulatory system. However, with
regard to the public regulatory systems (the SEC and the state boards of
accountancy), no substantial actions were taken to improve communications.
The SEC?s
January 17, 2002, announcement of a proposed new regulatory body without
consulting with the POB demonstrates the continuing lack of effective
communications as reported by the Panel, to jointly work together to protect
the public interest.
Changes proposed by the Panel to the peer review program, which is the
keystone of the present self- regulatory system, so that the program has a
more risk- oriented approach for all firms and, in addition, continuous peer
review and oversight of the large firms, have been tested by the AICPA.
Implementation is planned for the 2002 peer review cycle. Further, the AICPA
is considering other changes to the peer review standards, as recommended by
the Panel. The AICPA, however, did not accept the
Panel?s recommendation to have the POB considered as the client of the peer
reviews. Consistent with the Panel?s intentions, the POB?s successor needs
to have early involvement with draft peer review reports to ensure that root
causes of problems are identified and effectively addressed and
reported. The self- regulatory system lacks the power to protect the
confidentiality of investigative information regarding alleged audit
failures or other disciplinary matters concerning members of the accounting
profession. As the Panel reported, the lack of such protective power hinders
the timing of investigations, which affects the public?s perception of the
self- regulatory system?s effectiveness. The Panel recognized the need for
legislation to address this issue, but given the uncertainty of obtaining
it, the Panel
recommended other actions, which the AICPA has taken, to protect the public
interest when public accounting firms or their members overseen by the POB
are named in litigation alleging an audit failure.
The Panel also reported that the public?s perception of the self- regulatory
system?s effectiveness is affected by the need for improved transparency of
disciplinary actions that have been taken. In response to the Panel?s
finding, a task force within the self- regulatory system has been formed to
explore more informed reporting of disciplinary activities. The
effectiveness of disciplinary actions, as reported by the Panel, remains an
open issue.
We provided for comment a draft of this report to officials of the POB, the
AICPA, the SEC, and the National Association of State Boards of Accountancy
(NASBA), as well as to the Chair of the Panel on Audit
Effectiveness. The comments we received were generally technical in nature
and were considered as appropriate throughout the report.
Background The Panel on Audit Effectiveness, a ?Blue Ribbon Panel,? 9 was
formed by the POB in response to a September 28, 1998, request from the SEC
for an
evaluation of whether recent changes in the audit process serve to protect 9
The Panel on Audit Effectiveness was chaired by a former Chair of Price
Waterhouse and included two former SEC Commissioners, a former Chairman and
CEO of the American Stock Exchange, a former President of the American Stock
Exchange, a Chair and CEO of CNA Insurance Companies, a professor of finance
and law at Columbia University, and a professor of auditing at the
University of Southern California.
the interest of investors. The SEC stated that the combination of changes in
the audit process and high profile financial frauds have raised questions
about the efficacy of the audit process. Accordingly, the Panel was formed
to conduct a comprehensive review and evaluation of the way independent
audits are performed and to assess the effects of recent trends in auditing
on the public interest. The Panel?s study included assessing the accounting
profession?s self- regulatory system. The Panel?s study also addressed
issues related to the interface of the accounting profession?s self-
regulatory system with the SEC and the state boards of accountancy (the
public regulatory systems). Our work, as requested by the Ranking Minority
Member, House Committee on Energy and Commerce, was directed at the
status of the Panel?s recommendations addressing the accounting profession?s
current governance system (the self- regulatory system and the public
regulatory system).
The Panel?s report stated that although the goals of self- regulation and
public regulation are similar, that is, protecting the public interest, and
that the two systems are intended to operate in concert with one another,
there are important differences:
Public regulation is conducted with the full power of the state in support
of established requirements. Self- regulation has no equivalent authority.
At most, it can exclude noncomplying members from whatever benefits group
membership confers or impose whatever sanctions members have voluntarily
agreed to accept. Such powers as the ability to subpoena records and
witnesses are not available in self- regulation. 10
Self- Regulatory System At the time of the Panel?s study, the self-
regulatory system included the AICPA?s SEC Practice Section (SECPS),
principally devoted to monitoring
the profession?s compliance with membership requirements and standards. The
SECPS?s subcomponents included the SECPS Executive Committee, the Peer
Review Committee (PRC), the Quality Control Inquiry Committee (QCIC), the
SEC Regulations Committee, and the Professional Issues Task Force. The SECPS
was overseen by the POB. In addition, the accounting
profession?s self- regulatory system included standards- setting activities
carried out by the Auditing Standards Board (ASB), the Independence
Standards Board (ISB), and the AICPA?s Ethics Division?s Professional
10 Robert K. Mautz, ?Self- Regulation: Perils and Problems,? Journal of
Accountancy (May 1983) (initially presented as an address at the AICPA?s
tenth national conference on current SEC developments [January 1983]).
Ethics Executive Committee (PEEC), which also performed disciplinary
activities.
The SECPS was administratively created by the AICPA in 1977, in consultation
with the SEC, and required member public accounting firms to subject their
professional practices to peer review and oversight by the POB and the SEC.
AICPA membership requires that members who provide attest services to an SEC
client be employed by or affiliated with a public accounting firm that is an
SECPS member. Within the SECPS, the
SECPS Executive Committee responsibilities include establishing membership
requirements, budget and dues requirements, determining sanctions for
noncompliance with membership requirements, and appointing persons to its
other committees and task forces.
PRC oversees all aspects of the peer review program (audit firms review
other firms? quality control systems for compliance with standards and
membership requirements) and imposes corrective measures when deficiencies
are found.
QCIC conducts investigations of alleged audit failures involving SEC
clients arising from litigation or regulatory investigations, including
criminal indictments. The QCIC?s investigation is focused on whether the
member firm has deficiencies in its system of quality control or its
compliance with the system, or whether there are deficiencies in
professional standards relevant to matters in the case. The QCIC does
not determine guilt related to the litigation of the subject firm. It does
impose corrective measures related to its objectives and, where members may
have violated professional standards, refers the cases to the Ethics
Division for investigation and possible disciplinary action.
SEC Regulations Committee acts as the primary liaison between the
accounting profession and the SEC on technical matters relating to SEC rules
and regulations.
Professional Issues Task Force accumulates and considers practice issues
that present potential audit concerns for practitioners and disseminates
information addressing those concerns, including referrals to the
profession?s standard- setting bodies.
The SECPS?s committees and task force are composed of volunteers, all of
whom are certified public accountants and members of the AICPA.
The POB was formed simultaneously with the SECPS by the AICPA, in
consultation with the SEC, to oversee the SECPS and represent the public
interest on all matters that may affect public confidence in the integrity
of the audit process. At the time of our study, the POB was comprised of
five public members with a broad spectrum of business, professional,
regulatory, and legislative experience that represents the public interest.
SECPS member dues funded the POB and the SECPS. Based on the Panel?s
recommendations, the POB received enhanced oversight authority within the
self- regulatory system that will be discussed later in this report. As
discussed earlier in the report, the POB terminated on May 1, 2002.
The AICPA established the ASB to promulgate generally accepted auditing
standards (GAAS), that are followed by independent auditors of financial
statements, and to promulgate related standards governing attest services.
The ASB also issues quality control standards that must be followed by AICPA
member firms for their internal quality control system. The ASB
consists of 15 members, with representatives from audit firms, academia, and
government, that are approved by the AICPA Board of Directors.
The ISB was created in 1997 through an agreement between the SEC and the
AICPA to, among other activities, develop auditor independence rules for
auditors of SEC registrants. The ISB consisted of four public members and
four members from the auditing profession. The ISB was terminated in 2001,
which will be later discussed.
The AICPA?s Ethics Division, through its PEEC, is responsible for setting
auditor independence rules for all members of the AICPA and determining
compliance with the independence rules and auditing standards when
allegations of noncompliance are reported or otherwise brought to the
PEEC?s attention. The PEEC consists of 16 members from all areas of practice
(public accounting, private industry, and government) and 5 public members
(academia and the legal profession).
Public Regulatory System The SEC, through its responsibilities for
administering and enforcing the federal securities laws, is the primary
federal agency involved in
accounting and auditing requirements for publicly traded companies. The SEC
has accepted accounting rules set by the Financial Accounting Standards
Board 11 (FASB)- generally accepted accounting principles (GAAP)- as the
primary standards for preparation of financial statements. The SEC has
accepted rules promulgated by the ASB- GAAS- as the standards for
independent audits. The stock exchanges, which are selfregulatory
organizations approved by the SEC under the Securities Exchange Act of 1934,
establish accounting and auditing regulations for listed companies,
including requiring published annual reports containing financial statements
prepared in accordance with GAAP and audited by independent public
accountants. The SEC reviews and comments on registrant filings and issues
interpretive guidance and staff accounting
bulletins on accounting and auditing matters. The SEC oversees the peer
review program administered by the SECPS by reviewing the POB?s oversight of
the program, selecting certain peer review workpapers for review, and
reviewing the QCIC?s summaries of closed cases.
State boards of accountancy, established by statute, regulate the practice
of public accountancy within their jurisdictions. State boards have adopted
rules of professional conduct, including compliance with auditing standards,
and can take disciplinary action against licensees who violate these rules
or standards. The individual state boards grant CPA licenses to practice,
and they are the only agencies that can revoke them. The Panel reported in
August 2000 that the accounting profession?s selfregulatory
system, while extensive, suffered from various limitations, including:
lack of sufficient public representation on the various self- regulatory
bodies, lack of unified leadership of the various self- regulatory bodies,
11 FASB, as part of the Financial Accounting Foundation (FAF), is a not-
for- profit organization supported by proceeds from the sale of its
publications and by contributions from accounting firms, corporations, and
other entities that are interested in accounting issues. FASB consists of
seven full- time members who are selected and approved by the FAF.
constraints on effective communications with the SEC and among the various
components of the self- regulatory system,
differing interests and divergent views of the AICPA?s priorities on the
part of its diverse membership, and
a disciplinary system that is perceived to be slow and ineffective. The
Panel believed that many of the limitations of the self- regulatory system
could be mitigated by building on the POB?s experience and reputation and by
giving it increased authority and resources. The Panel?s
recommendations were directed at (1) enhancing the POB?s independence and
expanding its oversight authority and resources, (2) improving communication
within the self- regulatory system and with the SEC and the state boards of
accountancy (the public regulatory systems) through POB leadership, (3)
improving the accounting profession?s peer review program and the POB?s
oversight of that program, and (4) providing more timely remedies to protect
the public interest when legal or regulatory actions allege audit failures.
Objectives, Scope, and Our objectives were to
Methodology determine the status of the actions taken in response to the
recommendations to address the limitations of the accounting profession?s
self- regulatory system contained in chapter 6, ?Governance of the Auditing
Profession,? of the Panel on Audit Effectiveness? August 31, 2000, report;
and
identify any gaps in actions taken to implement the Panel?s
recommendations and their likely impact on overcoming the limitations of the
current self- regulatory system as identified by the Panel.
To determine the status of the actions taken to address the Panel?s
recommendations, we obtained an understanding of the various components of
the accounting profession?s governance system, their functions and
responsibilities, their resources, and the interfaces among components, both
at the time the Panel issued its report and after actions had begun to
implement the Panel?s recommendations. We arranged separate interviews with
senior representatives from each system component to discuss their views
regarding the Panel?s findings and the limitations identified in the Panel
report, their agreement with
recommendations contained in the report, any limitations of the effective
execution of actions taken or planned, and their opinions on the likely
effectiveness of these actions in response to the recommendations. For
actions in process, we discussed timeframes for implementation and any
possible issues to be resolved to implement the recommendations.
We also met with the former SEC Chief Accountant serving at the time of the
Panel?s report and NASBA representatives to discuss the Panel?s
recommendations either addressed to them or related to their
responsibilities.
We conducted our review from June 2001 through April 2002 in accordance with
generally accepted government auditing standards. We provided for comment a
draft of this report to officials of the POB, the AICPA, the SEC, and the
NASBA, as well as to the Chair of the Panel on Audit Effectiveness. The
comments we received were generally technical in nature and were
considered as appropriate throughout the report. We discussed our
observations included in this report with senior representatives of the
various entities and incorporated their comments in this report as
appropriate.
The following sections discuss substantially all of the Panel?s findings and
recommendations, identify those areas of the self- regulatory system where
actions to address the Panel?s recommendations were either not taken, did
not fully address the recommendations, or are incomplete, and provide our
observations where further actions are needed to address the Panel?s
recommendations. See appendix I for the complete status of the Panel?s
recommendations affecting the provisions of the POB?s charter and appendix
II for the complete status of the Panel?s other recommendations for
improving the self- regulatory system. Appendixes III, IV, and V contain
comment letters from the POB, the AICPA, and the NASBA, respectively.
Appendix VI contains our May 3, 2002, letter to the Chairman of the Senate
Committee on Banking, Housing, and Urban Affairs regarding what steps the
Congress should consider taking to strengthen oversight of the accounting
profession, auditor independence, and selected financial reporting matters.
POB?s Oversight In the mid- 1970s, reports of U. S. companies paying bribes
to foreign
Authority, officials and several highly publicized corporate bankruptcies
resulted in congressional hearings over these matters and the role of
independent Independence, and auditors. A central focus of the hearings was
whether additional regulation Leadership Role of public accountants was
necessary or whether the system of selfregulation was sufficient. In
response, in 1977 the AICPA, in consultation with the SEC, created the
SECPS, 12 mandatory peer review to check compliance with standards, and the
POB to conduct oversight of the
SECPS. The POB did not have a formal charter but instead operated under the
SECPS?s Organization Document and its own bylaws.
A central focus of the Panel?s recommendations was for the POB, the AICPA,
the SECPS, and the SEC to work together on a charter for the POB that would
commit all parties to an expanded POB oversight role and system of self-
regulation as recommended by the Panel. On February 9, 2001, the AICPA Board
of Directors approved a charter for the POB that, in all material respects,
incorporated the POB?s Bylaws and the SECPS?s Organization Document
provisions pertaining to the POB.
In addition to incorporating the previous oversight authority of the POB and
its operating practices, the POB charter provided the POB with new authority
related to overseeing the setting of auditing and independence standards,
conducting special reviews of the profession, establishing activities to
improve communication within the self- regulatory system and with the public
regulatory systems through POB leadership, evaluating the effectiveness of
the self- regulatory components overseen by the POB and the effectiveness of
the POB, and strengthening POB membership requirements.
While actions were taken to implement many of the Panel?s recommendations,
the overarching problems of a system that is fragmented and not well
coordinated continue to exist. Further, significant gaps remain in the POB?s
oversight authority, funding limitations exist, and communications problems
continue.
12 Initially membership in the SECPS was voluntary. In 1988, the AICPA
changed its by- laws to mandate that members of the AICPA who provide attest
services to SEC clients be affiliated with a CPA firm that is an SECPS
member. There are about 1,300 member firms in the SECPS that collectively
audit more than 99 percent of all U. S.- based SEC registrants.
POB?s Oversight Authority Prior to the Panel?s report, the POB?s oversight
authority was limited to the SECPS, including oversight of peer review of
members of the SECPS and the QCIC?s activities. The Panel recommended
extending the POB?s oversight authority to the ASB, the ISB, and the auditor
independence standard- setting activities of the PEEC that relate to audits
of public companies. The POB received oversight authority over the ASB and
the ISB, but did not get oversight authority over the PEEC?s auditor
independence standard- setting activities with respect to public companies.
Notwithstanding the responsibilities of the ISB, in November 2000, the SEC
issued auditor independence rules for auditors of SEC registrants. The
former SEC Chief Accountant, who served in that position when the SEC?s
auditor independence rules were issued, stated that the SEC was dissatisfied
with the progress of the ISB and, therefore, issued the rules itself.
Subsequently, on July 17, 2001, the SEC and the AICPA agreed that the ISB
would be terminated and the SEC would resume responsibility for setting
auditor independence rules for auditors of SEC registrants. With the SEC
assuming auditor independence responsibilities and the POB not
having received any oversight authority over the PEEC?s independence
standard- setting activities, the POB was left with no oversight authority
over the setting of auditor independence rules- exactly where it was before
the Panel?s recommendations.
The PEEC Chairman stated that since the SEC sets auditor independence rules
for auditors of SEC registrants, the independence rules set by the PEEC
essentially govern those members of the AICPA who do not audit SEC
registrants. Therefore, the PEEC Chairman believes the auditor independence
standard- setting activities of the PEEC are outside the basic authority of
the POB, which was limited to oversight of SECPS member firms. Further, the
PEEC Chairman believes that POB oversight was unnecessary because the PEEC
added five public members who can serve to protect the public interest.
However, SEC officials told us it might consider independence standards
established by the PEEC in reaching a decision on an issue that is not
covered by the SEC?s rules.
As will be discussed later, the Panel identified significant limitations of
the self- regulatory disciplinary function, recommended measures to protect
the public interest following a legal or regulatory action alleging an audit
failure, but did not address in its report whether the POB should have
authority over the AICPA?s Ethics Division?s disciplinary activities. The
Panel advised us that they viewed disciplinary actions against SECPS members
as primarily a function of the SEC and the courts. The PEEC Chairman, whose
committee is part of the AICPA?s Ethics Division and is
responsible for investigating and disciplining members of the AICPA
concerning violations of standards, stated that its cases involving SECPS
members are a relatively small percentage of its total cases and that having
public members on the PEEC adequately protects the public interest without
POB oversight.
The Panel recommended that the professional staff of the SECPS, the ASB, and
the PEEC remain employees of the AICPA. The Panel advised us that
consideration was given to whether the functions of these components of the
self- regulatory system should be under the POB, which would be similar to
the United Kingdom model for regulation of the auditing profession, but at
that time the United Kingdom model was relatively new and not fully
operational. Also, the Panel stated that concerns were raised about whether
having these functions under the control of the POB would be in conflict
with the POB?s oversight role. Therefore, the Panel recommended that no
changes be made.
The Panel was concerned that the differing interests and divergent views of
the AICPA?s priorities on the part of its diverse members could affect the
resources of the components of the self- regulatory system. Therefore, the
Panel recommended that the POB should oversee the AICPA?s evaluation,
compensation, hiring, and promotion decisions with respect to its employees
who constitute the ASB and SECPS staffs. The AICPA did not accept this
recommendation, as it believed human resource decisions are management
functions and would be in conflict with the POB?s oversight role. However,
the POB under its charter is responsible for overseeing the adequacy of the
ASB?s and SECPS?s resources. Further, the POB believed that if staffing
issues were to arise, its oversight activities would have put it in a
position to raise the problem for resolution.
The Panel recommended that (1) the POB approve appointments to the ASB, the
SECPS Executive Committee, and the ISB, and that (2) the SECPS Executive
Committee retain responsibility for approving appointments to the various
SECPS committees that report to it, namely the PRC, the QCIC, the SEC
Regulations Committee, and the Professional Issues Task Force. The AICPA
accepted the latter recommendation but did not accept the
former recommendation. The POB?s charter provides that the POB shall be
consulted on appointments of members to the ASB and the SECPS Executive
Committee, and that its concurrence on the chair of the ASB and the SECPS
Executive Committee should not be unreasonably withheld. The POB believed
that the consultative role in its charter with respect to the appointment of
committee chairs and members would lead to the same
outcome as the approval role recommended by the Panel. The POB believed that
if a problem were to arise, the AICPA would reasonably consider the POB?s
views.
In addition to the gaps in the POB?s authority for oversight of the
selfregulatory system highlighted in the Panel?s study, the POB?s oversight
authority was limited to those firms that are members of the SECPS. Although
the 1, 300 firms that are members of the SECPS audit SEC
registrants, which are the nation?s largest companies, there are thousands
of other public accounting firms that are also members of the AICPA that
provide audit and attest services that businesses, creditors, and investors
rely on in making business and financial decisions. As members of the AICPA,
these firms are subject to peer review through the AICPA?s peer review
program for auditors of non- SEC clients, rather than the SECPS
and, therefore, are outside the oversight authority of the POB. Funding the
POB and Its
The POB was funded through the membership dues of the SECPS. The Activities
Panel recommended that the POB?s charter should provide the POB with sole
authority to determine its budget and financial and other resources, and the
accounting profession?s obligation to provide those resources. The Panel
strongly believed that such ?no- strings- attached? funding was absolutely
essential if the POB was to be effective and independent of the accounting
profession and if the self- regulatory system was to be viable. The Panel?s
recommendation was not fully accepted. The POB charter
provides for the POB to submit its budget to the SECPS Executive Committee,
and, if the AICPA Board requests, to the AICPA Board, for consultation. The
POB advised us that its charter essentially formalized and continued the
budget process that it previously followed, except for a cap on its budget,
which attaches an additional ?string? on the POB?s funding.
The POB charter contains a new provision capping the POB?s annual budget at
$5.2 million. The charter does contain provisions for supplemental requests
subject to the above review process and adjusting the ceiling for inflation.
Further, the POB charter provides that the SECPS Executive Committee and the
AICPA Board may raise the budget ceiling based on consideration of all the
circumstances and public interest at any time during the year.
The POB stated that the principal players who developed the concept of a
budget ceiling were one or more of the five largest public accounting firms
and the AICPA, and the concept was then agreed to by the SEC Chairman. The
SEC Chief Accountant at that time told us that the SEC was having difficulty
getting the largest public accounting firms to agree on a charter for the
POB, and at the same time, there was some reluctance by one or more of the
firms to fund the POB to arrange for review of the largest
public accounting firms? internal systems for compliance with auditor
independence rules. He stated that the SEC Chairman viewed the budget cap as
a way to get the firms to agree on a charter for the POB. The POB
Chairman told us he did not support the budget cap, and had initiated
actions, including the additional provisions discussed above in the POB
charter, to mitigate the impact of a ceiling provision on its operations and
independence.
The POB believes it did not have sole authority to determine its budget,
financial, and other resources in light of the ceiling in its charter. The
POB believes that notwithstanding the restrictive budget provisions in the
charter, the provisions should not have impeded its ability to operate. The
POB and the Panel believe that because funding problems for the POB could be
made public, there was a strong incentive for the SECPS to meet the funding
needs of the POB and not have such issues aired in public.
In July 2001, the POB told us it believed it had the resources to conduct
the enhanced oversight role as provided for in its charter. The POB?s budget
data for its recurring expenditures show that the $5.2 million budget
ceiling represents more than a 50 percent increase over its fiscal years
2000 and 2001 budget and 2002 preliminary budget expenditures. However, the
POB budget data for fiscal year 2000 show that when nonrecurring
expenditures, such as special studies, are included, the budget total is
within about $700,000 of the $5.2 million ceiling. 13 In addition, it
clearly did not have the funding autonomy called for by the Panel.
13 The POB charter provides that the $5. 2 million limit does not include
expenditures by the POB for the reviews of the Big 5 firms conducted
pursuant to the ?Term Sheet for Independence Look- Back Testing Program?
entered into by the SEC and those firms in June 2000.
Communications Within the Constraints on effective communication with the
SEC and among the
Self- Regulatory System and various entities in the self- regulatory system
were among the overarching
With the Public Regulatory limitations of the accounting profession?s
governance system identified by
Systems the Panel. Given the multiple components of the governance system,
the
Panel believed that the POB should serve as a strengthened, unifying
oversight body to whom the SEC, the state boards of accountancy, the
accounting profession, and the public should look to for leadership. The
Panel intended for the POB to enhance communications among the components of
the accounting profession?s governance system in order to facilitate the
profession?s continuous improvement efforts and to identify and resolve
important issues on a timely basis.
The Panel?s recommendations included that (1) the POB establish an advisory
council to advise the POB on issues related to projects on its agenda, (2)
the POB establish a coordinating task force of the chairs of each body
within the POB?s oversight, (3) the POB and the SEC acknowledge the need to
maintain a mutual respect and confidence, and increase the public?s respect
for the profession and its role in the capital markets, and (4) the POB and
state boards of accountancy, perhaps through the NASBA, determine how best
to facilitate meaningful continuing dialogue between the POB and state
boards. The POB charter provides for a coordinating task force as
recommended
by the Panel, but does not establish an advisory council. The POB charter
instead provides for the POB to hold an annual outreach meeting to solicit
views and recommendations about the accounting profession?s selfregulatory
program and the POB?s oversight process. Further, the POB charter provides
that the effectiveness of the annual outreach meeting and whether it
alleviates the need for an advisory council be included in the 3- year
evaluation of the POB?s effectiveness required by its charter.
The POB advised us that it planned to have periodic meetings with the SEC.
Also, the POB planned to begin a dialog with the NASBA and several state
boards of accountancy to explore ways to improve communications. However, on
January 20, 2002, the POB passed a resolution expressing its intent to
terminate its existence. In the resolution, the POB Chairman was critical of
the SEC for not consulting with the POB on the SEC?s plans for a new body to
govern the accounting profession?s discipline and quality control functions.
The POB?s resolution stated, in relevant part,
Be it resolved, after due consideration of the importance of effective self-
regulation as one aspect of the oversight of the accounting profession, but
with recognition of the obstacles to achieving this goal which have been
encountered in recent years, and given the proposal of
the SEC in consultation with the AICPA and the SECPS Executive Committee,
without input from the POB, to reorganize the self- regulatory structure,
the POB intends to terminate its existence pursuant to Section IX of the POB
Charter no later than March 31, 2002. 14
Peer Review Program The structure of the SECPS peer review program has
evolved since its inception in response to many studies of the program over
the years. The
latest study of the peer review program, conducted in March 1999 by the Peer
Review Process Task Force, identified areas of the peer review program that
needed improvements. 15 The formation of the Peer Review Process Task Force
and the need to reexamine the peer review program was encouraged by the PRC,
the POB, and the SEC, which were seeking
enhancements in the reporting of the results of peer reviews; improvements
in the effectiveness of peer reviews; comprehensive governance and oversight
of the peer review process; and peer reviews performed by appropriately
qualified and trained reviewers. A Panel staff member participated in the
Peer Review Process Task Force?s deliberations. In its report, the Panel
recommended that all of the Peer Review Process Task Force?s recommendations
be implemented and made additional recommendations to the SECPS, the POB,
the ASB, and the SEC to strengthen the peer review process and expand
oversight of peer reviews. Both the work of the Peer Review Process Task
Force and the Panel was limited to improving the peer review program within
the existing self- regulatory system and therefore did not consider a
different body for
conducting or overseeing the program. 14 As discussed previously, the POB
ultimately extended its existence solely for administrative purposes through
May 1, 2002. 15 The Peer Review Process Task Force?s report, which was
issued in January 2000, is included in Exhibit 4 of the Panel?s report, The
Panel on Audit Effectiveness Report and Recommendations, August 31, 2000.
In January 2001, the SECPS Executive Committee approved a pilot test of a
plan to modify the approach to conducting and reporting on peer reviews,
including expanding the oversight of peer reviews. The pilot program
incorporates almost all of the recommendations made by the Peer Review
Process Task Force and the Panel. The peer review program currently being
piloted places a greater emphasis on obtaining an understanding of the audit
team?s approach to the audit, including the team?s thought processes and
identification and testing of emerging issues and high- risk areas, as well
as better insight into the knowledge, skills, training, and
experience of the audit team. The pilot program separates SECPS member firms
into two tiers primarily based on the firm?s size and requires the larger
firms 16 to undergo ?continuous? peer reviews, that is, some level of review
each year. The PRC has also approved new reporting standards for peer
reviews, effective June 30, 2001, that require peer review reports to be
more descriptive to enable users to better understand the peer review
findings and peer review process. In addition, the POB?s oversight of the
peer reviews of the largest firms was expanded to include more timely and
extensive visits to the offices that are being reviewed.
Other than approving new reporting standards, the AICPA has not finalized
these enhancements to the SECPS peer review program. Also, there are certain
recommendations made by the Peer Review Process Task Force and the Panel to
strengthen peer review that either were not addressed or were not fully
implemented at the time of our study. These recommendations concern
revisions to the standards governing peer review; the qualifications and
training of peer reviewers; consideration of
the POB as the primary client of peer review; and the development, analysis,
and reporting of performance measures, performance indicators, and other
data that may be useful to users of peer review reports.
Quality Control Standards The Peer Review Process Task Force believes that
one of the root causes of some of the criticisms of the peer review process
relates to the lack of specificity of the quality control standards. 17 In
the Panel?s view, the quality
16 Large firms are defined as those firms with 30 or more SEC clients and at
least 100 accounting and auditing professionals. 17 The AICPA?s ASB issues
quality control standards that provide that firms have a system of quality
control for their accounting and auditing practice and broadly describes
elements of quality control and other matters essential to the effective
design, implementation, and
maintenance of the system.
control standards are broad and general, making it difficult to critique
compliance against the standards; thus, the Panel believes that firms with
weaker practices can still receive unqualified peer review opinions. The
Panel recommended that the quality control standards be made more specific
and definitive for firms with public clients, especially for the largest
firms.
An AICPA task force (made up of the ASB, the PRC, the QCIC, and other AICPA
groups), which was established to consider the Panel?s recommendation
concerning the quality control standards, has tentatively concluded that
given the variety of attest services covered by the standards and the
various sizes of public accounting firms that follow the standards, the
Panel?s recommendations can best be addressed by providing more specificity
to a guide that accompanies the standards. 18 Through its process of
updating the guide, the AICPA task force plans to consider whether any
guidance should be elevated from the guide to a standard. Qualifications and
Training
Peer reviews are performed by public accounting firms that have received of
Peer Reviewers an unqualified report on their own peer review. The PRC
issues standards describing the qualifications and training requirements for
peer reviewers 19 and in each peer review, the PRC evaluates the peer
reviewer?s competence and performance. The PRC has the authority to reject a
firm that has been
engaged to perform a peer review. The Peer Review Process Task Force
believes the current training courses and approach to training peer review
team captains and reviewers needs to be enhanced to meet the needs of the
peer review program. The Peer Review Process Task Force also believes
there are additional measures that should be taken to promote independence
and objectivity of peer reviewers.
The Peer Review Process Task Force made several recommendations to improve
the performance and independence of peer reviewers including recommending
that the PRC (1) establish a standing task force that will oversee the peer
review training programs, (2) develop a system for evaluating the
performance of the team captains, and (3) limit the peer review team
captains for the reviews of the largest firms to two
18 Guide for Establishing and Maintaining a System of Quality Control for
CPA Firm?s Accounting and Auditing Practice.
19 Standards for Performing and Reporting on Peer Reviews.
consecutive triennial reviews of the same firm and a total of three
consecutive reviews as an engagement team member. The Panel recommended that
the POB should review the qualifications of the peer review firm and the
peer review captain.
The PRC has acted on the recommendations concerning qualifications and
training of peer reviewers; however, not all actions are finalized. For
example, the PRC told us it plans to revise the peer review standards in the
spring of 2002 to enhance peer reviewer independence and objectivity such
as to limit the peer review team captains for the reviews of large firms to
two consecutive reviews of the same firm and a total of three consecutive
reviews as engagement team members. The AICPA told us that the large firms
have already voluntarily complied with the related planned changes to the
standards. Also, the POB indicated that it has always reviewed the
qualifications of the peer reviewers and the peer review team captains, and
when it believes appropriate, makes suggestions for changes.
Primary Client of Peer Peer reviews are performed to enhance the public?s
confidence in
Review independent auditors. The Panel felt that the POB, as the public?s
representative, should be viewed as the principal stakeholder in the peer
review process and accordingly recommended that it should be made clear to
peer reviewers that the POB, not the firm being reviewed, is the primary
client. The Panel wanted the peer reviewers to have the ?mind- set? that
peer reviews are performed in the best interest of the public, and not
solely for the benefit of the reviewed firm. By considering the POB as the
primary client, the Panel hoped the peer reviewers would bring the POB more
into the process up front and continue to keep them apprised of issues
throughout the review. The POB could then be in a better position to monitor
and oversee the reporting of peer review results.
The AICPA did not accept the Panel?s recommendation that the POB should be
the primary client of the peer review because the PRC, not the POB, is
responsible for maintaining and administering the peer review program. The
AICPA did adopt a related Peer Review Process Task Force recommendation to
address the peer review reports to both the PRC and
the reviewed firm. The Peer Review Process Task Force made this
recommendation because it felt that the PRC serves as an ?audit committee?
and that including the PRC as an addressee on the peer review report would
emphasize to peer reviewers and reviewed firms that they should consider the
PRC as the ?audit committee.? However, the Panel told us that including the
PRC as an addressee on the peer review report does
not satisfy the intent of its recommendation to have the POB be the primary
client of peer review. The Panel acknowledged that the new pilot program now
underway, which includes greater involvement by the POB on a continuous,
real- time basis, should help the POB gain insight early on as to any
quality control issues that should be reflected in the peer review report.
However, the Panel cautioned that until the pilot procedures are made
final, it is uncertain the POB would have continued with its real- time
oversight of peer review.
Peer Review Reporting The Peer Review Process Task Force believes that in
order to best serve
Model the public interest, the peer review reporting model, in addition to
communicating matters identified during peer reviews, should also provide
for the communication of best practices, constructive suggestions that go
beyond the professional standards, and matters for the attention of
standard setters. To address these points, the Peer Review Process Task
Force recommended that the SECPS study whether there are key quantitative
and qualitative performance indicators that would be useful to users of
SECPS member firms? annual reports or peer review reports. The Panel further
recommended that the SECPS develop specific performance measures, to be
included in the peer review report, that relate to the quality of the firm?s
practice/ effectiveness of audits. The AICPA has told us that it has not
been able to identify indicators that are relevant, objective, or
measurable; however, the PRC has established a standing task force to
continuously consider ways of improving the peer review process including
the identification of such quantitative matters. Accounting
The Panel found that the public perceives the self- regulatory system?s
Profession?s disciplinary process to be slow and ineffective and to suffer
from a number of limitations. Specifically, the Panel reported that
Disciplinary Process
the Ethics Division has limited investigative powers as it cannot issue
subpoenas or compel testimony; therefore, it must rely on the cooperation of
the individual being investigated but cannot talk to the plaintiff or the
client company involved;
investigative proceedings are not timely because the Ethics Division?s
policy is, in the interest of fairness to the member, to defer its
investigation until all litigation or regulatory actions are concluded;
discipline proceedings are confidential and, therefore, the public cannot
determine the reason why a sanction was imposed or, in some cases, whether a
sanction was imposed at all; and
the Ethics Division can impose only limited sanctions, such as requiring
continuing professional education or suspending or revoking AICPA
membership, because the Division?s authority extends only to membership
rights.
The Panel found that the QCIC process suffers from many of the same
limitations, although its investigations are timely. QCIC corrective actions
imposed on firms are not made public. In addition to lacking subpoena power,
both the QCIC and the Ethics Division lack protective power for their
investigative files.
The Panel found that some state boards of accountancy have not been
effective in disciplining substandard conduct due to limited budgets and the
lack of effective means to investigate allegations and impose disciplinary
measures. Similarly, the Panel found that competing demands on the SEC?s
resources and its own prosecutorial priorities limit its enforcement
activities.
The Panel concluded that while the self- regulatory system is not totally
satisfactory, the profession has made a significant effort to make it as
workable as practicable given its inherent limitations. The Panel also
concluded that the self- regulatory system needs protective power over its
disciplinary activities if it is to resolve disciplinary matters on a timely
basis, but that such protective powers are obtainable only through
legislation. The Panel believed that there was little assurance that such
legislation was attainable at the time of its study or in the foreseeable
future. Therefore, the Panel made various recommendations to improve the
disciplinary process to provide greater protection to the public without
recommending legislative changes necessary to provide protective powers. The
Panel?s recommendations, instead, were directed at protecting the public
interest, the timing of investigations, the transparency of information
reported on investigations and disciplinary actions, and leveraging the
results of investigations.
The Panel?s recommendations were largely made to components of the
selfregulatory system, although some recommendations were made to the SEC
regarding resources and leveraging information from its investigations. The
Panel did not recommend extending the POB?s authority to oversee
disciplinary functions other than to have the POB involved with the QCIC in
reviewing certain firm?s actions when there is an allegation of audit
failures as discussed below. In addition, the Panel did not make any
recommendations to the state boards of accountancy in the area of the
profession?s disciplinary process. The Panel recommended that the POB and
the SECPS review the results of implementing its recommendations over a 2-
to 3- year period to determine their effectiveness. The Panel recommended
that if the POB and the SECPS subsequently find that actions taken in
response to the Panel?s recommendations to improve the disciplinary process
have not satisfactorily protected the public, the POB, in cooperation with
the SEC, should seek legislation to achieve the protections necessary to
make the disciplinary process more effective.
Immediate Disciplinary In accordance with the Panel?s recommendation, the
SECPS membership Actions When Members
requirements were revised as follows when civil litigation or a criminal or
Named in Litigation
public regulatory investigation contains allegations of an audit failure:
The firm is required to conduct an internal review of the subject
engagement to evaluate the performance of the senior engagement personnel.
The QCIC should conduct its usual inquiry. If the QCIC believes that
standards may have been violated and, accordingly, refers the case to the
Ethics Division, the firm would be notified that the Ethics Division is
deferring its investigation pending the completion of the litigation. The
firm is then required to take one of the following options to apply to
the partner during the period of deferral, if the individual is still
associated with the firm: (A) terminate or retire the individual from the
member firm, (B) remove that individual from performing or supervising
audits of public companies until the Ethics Division?s enforcement process
is completed, or (C) subject that individual to additional oversight on all
public company audit engagements in which that individual is involved.
Additional oversight is defined to mean for at least 1 year, the individual
will perform such audits subject to oversight by a senior technical partner
appointed by the member firm?s Managing Partner/ CEO. The senior technical
partner oversight of such engagements, at a minimum, will meet the SECPS?s
concurring partner review membership requirement and procedures prescribed
for engagements defined as high risk. Thereafter, the individual must remain
under the additional oversight that the firm?s Managing
Partner/ CEO determines, in light of that person?s evaluation of the
individual?s performance, is necessary to protect the public interest.
The member firm has the responsibility of deciding on the selection of one
option A, B, or C above. The implementation of the option selected is
subject to review in the member firm?s peer review and by the POB. In the
event that the partner in question joins another SECPS member firm, the new
firm must apply one of the above options to the partner until the Ethics
Division completes its investigation. However, should the partner in
question join a firm that is not a member of the SECPS, no such restrictions
on the partner?s activities would apply during the course of the litigation
or the Ethics Division?s investigation. The POB and the SECPS advised us
that
the above options are effectively ?career ending actions? for the members.
Reducing the Time for
The Panel recommended that the Ethics Division devote more resources to
Ethics Division and SEC
its investigations in order to decrease the time it takes to conduct an
Investigations
investigation after a deferral is lifted. The Panel also recommended that
the SEC allocate additional resources to its enforcement activities directed
at allegations of failed audits.
Because the Ethics Division lacks protective power, the Ethics Division?s
policy is to defer its investigation pending the outcome of litigation or
regulatory enforcement actions in fairness to the AICPA members.
Accordingly, the Ethics Division defers cases involving SEC registrants,
generally for 2 to 3 years, until litigation or regulatory enforcement
actions
are completed. The Ethics Division stated that if it had protective power,
deferral of the investigation would be unnecessary and the timeliness of the
disciplinary process would be significantly enhanced because the legal or
regulatory enforcement and ethics disciplinary processes could proceed
simultaneously.
The lack of protective power not only contributes significantly to the
length of time before the Ethics Division commences its investigations, but
also results in other regulatory bodies not being willing to share
investigative information, which also adds to the time required to complete
the Ethics Division?s investigation. The Ethics Division believes that
having subpoena power would allow its staff to investigate cases more
effectively once it begins an investigation. However, the ability to issue
subpoenas would not likely result in significant improvements to the
timeliness of the process.
The lack of protective power may also affect the Ethics Division?s ability
to work cooperatively with the state boards of accountancy on
investigations. The Ethics Division has entered into cooperative
investigative agreements with four states that, with the member?s consent,
allow it to conduct investigations and share the results with the four state
boards of accountancy. The Ethics Division stated it will attempt to expand
this type of cooperative agreement to other states, but states previously
have expressed little interest in such an arrangement.
The Ethics Division told us that, in the past few years, it had difficulty
recruiting qualified staff with expertise in SEC accounting and reporting
matters, which resulted in excessive caseloads for existing staff. However,
the Ethics Division currently believes it now has the necessary resources to
complete investigations involving SEC registrants in an effective and timely
manner as a result of the SECPS providing funding for three additional staff
members. The Ethics Division told us that, in the past, its average time to
complete an investigation was 18 months after a deferral was lifted;
however, it now estimates that such cases will be completed in about 11 to
14 months.
In response to the Panel?s recommendation that the SEC allocate additional
resources to its enforcement activities directed at allegations of failed
audits, the SEC believes that its recently created Financial Fraud Task
Force will improve the timeliness of SEC enforcement actions, which usually
take 2 to 3 years or longer to investigate. The SEC also believes that
encouraging companies to engage in cooperative measures that are both
preventive and remedial will allow the SEC to maximize the use of its
enforcement staff. Lack of Coordination Within
NASBA officials told us that neither the SEC nor the AICPA share the
Disciplinary Process
information involving disciplinary matters freely with the state boards,
which delays the timing of disciplinary actions the state boards can take
and therefore allows auditors to continue to practice at the potential risk
to the public. 20 NASBA officials believe the AICPA?s lack of protective
powers has inhibited it from sharing information with the state boards of
accountancy; however, the NASBA officials stated that even though the
20 NASBA officials stated that in some cases where a violation is obvious,
state boards are able to get the practitioner to surrender his/ her license
or to agree to a monitoring agreement while the AICPA or the SEC
investigation proceeds.
SEC has protective powers, it still does not share information freely. The
SEC told us that both during and after an investigation, the SEC enforcement
staff may discuss cases with state board investigators. The SEC also said it
sends information pertaining to an enforcement case to the relevant state
board along with a draft access request that the board may use to contact
the SEC. Further, the SEC stated it had recently discussed
with the representatives of the NASBA and of several state boards ways in
which the state boards might gain access to the SEC?s investigative records
while the investigation is still in process in order to improve the
timeliness of the state boards? access to SEC records. The Panel did not
recommend any specific actions for the SEC, the AICPA, or the state boards
of accountancy to better facilitate coordination of investigations and
disciplinary actions between them. However, the Panel indicated it would
support legislation giving the self- regulatory bodies protection through
the right of privilege over their disciplinary activities if this would
ensure more timely resolution of alleged audit failures.
Transparency of To improve the public?s perception of the effectiveness of
the selfregulatory
Disciplinary Actions disciplinary system, the Panel recommended that the POB
(1) summarize in its annual report the status of all Ethics Division
investigations of AICPA members when civil litigation and public regulatory
investigations related to audits of SEC registrants have been concluded, and
(2) report in its annual report on an aggregate, no- name basis, including
matters that are concluded through the retirement of the partner, Ethics
Division decisions or settlement of litigation.
The AICPA advised us that the Ethics Division?s PEEC has appointed a
Statistical Reporting Task Force and a Disciplinary Task Force with the
objectives of improving statistical reporting and making the information
more descriptive and informative. A representative of the POB attends the
ongoing meetings of the Statistical Reporting Task Force aimed at addressing
the Panel?s recommendations.
Leveraging the Results of The Panel recommended that the POB leverage the
knowledge it gains
Disciplinary Investigations through oversight to determine whether changes
in professional standards
or further guidance is needed and communicate these findings to the
appropriate standard setter or authoritative bodies. The POB has formed a
coordinating task force, comprised of the heads of each of the components of
the self- regulatory system, that will be used to share and leverage
information. The staff director of the Transition Oversight Staff (see
footnote 4) informed us that the coordinating task force will continue to
exist after the POB?s termination. The Panel recommended that the SEC should
periodically undertake
studies of its Accounting and Auditing Enforcement Releases (AAER) and
disseminate the results. The Panel also recommended that the SEC document
information on the auditors? work in every enforcement investigation
involving materially misstated financial statements, not just those in which
the auditor is named in the enforcement action. However, the SEC did not
accept these recommendations as it believes its
enforcement actions are sufficiently analyzed and publicly discussed by the
SEC and others and that the marginal benefits of additional study would not
justify the use of limited staff resources and other costs. Also, the SEC
stated it already reviews the conduct of auditors in virtually every
enforcement investigation involving materially misstated financial
statements. The SEC further stated that if it finds that the auditor?s work
constitutes a violation of the securities laws or professional standards,
the SEC documents its findings in public proceedings, AAERs, or press
releases. The SEC staff question the advisability of discussing, in public
enforcement releases, the conduct of accountants that is not deemed to
violate the securities laws or professional standards, as such discussions
may be viewed as tantamount to the SEC writing auditing standards.
Observations The Panel?s recommendations were made within the context of the
existing self- regulatory system and the actions taken by the various
parties enhanced the self- regulatory system that existed at that time. On
balance though, the overarching problems of the self- regulatory system
remain. The system continues to be fragmented, and communications and
coordination problems continue. The disciplinary function has limited
investigative powers and sanctions, lacks transparency, is not timely, and
is widely perceived to be ineffective.
Significant gaps continued to exist in the authority of the POB to oversee
the functions of setting auditor independence rules and disciplining members
of the auditing profession. These functions are fundamental to the self-
regulatory system and therefore should be included as part of the
oversight function. Further, we believe such oversight authority should
extend to ensuring that the standard- setting bodies of the self- regulatory
system address areas of concern about the adequacy of the standards and that
revisions to the standards effectively protect the public interest.
Improvements recommended by the Panel for the accounting profession?s peer
review program are being focused on an approach to more directly address the
public accounting firms? consideration of the audited entity?s risks and
ensure the appropriate resources of the firm are involved with the audit
work. Further, the continuous peer reviews of the large firms, together with
real time oversight, have the potential to more timely identify and
effectively address problems. However, the AICPA has not finalized these
enhancements and experience will be needed to judge their effectiveness in
enhancing the peer review program.
On a related issue, consistent with the Panel?s recommendation, the POB?s
successor needs to ensure that the final peer review report reflects the
problems identified by peer review and that the root cause is effectively
addressed, which could be within the public accounting firm, accounting and
auditing standards, or with quality control standards. Further, as the Panel
recommended, the ASB needs to ensure that the quality control standards are
sufficiently clear to provide for meaningful and consistent
application and enforcement. The independence of the POB?s successor needs
to be assured. The POB did not receive sole authority to determine its
budget and resources, and the accounting profession?s obligation to provide
them, as recommended by the Panel. It is not unreasonable for the SECPS to
expect that the POB would be accountable for funds received and expended.
However, capping the POB?s budget in its charter could be perceived as a
limitation of the
accounting profession?s support for effective oversight to protect the
public interest. Further, necessary work by the POB?s successor may be
delayed if it needs to seek funds for special studies or other matters. If
funding for the POB?s successor is to continue to come from the accounting
profession, then as the Panel stated, the profession must not be able to
control or cut off resources, which would potentially destroy the oversight
body?s independence and others? confidence in it.
Experience with the SECPS?s new membership requirements that may
?effectively bench? members named in litigation alleging an audit failure is
needed to judge its ultimate effectiveness. However, as recognized by the
Panel, the self- regulatory system must also have the necessary powers to
timely and effectively address alleged noncompliance with professional
standards. The Ethics Division?s investigations without protective powers
will continue to take years to complete after an allegation of an audit
failure is initially made through litigation and will perpetuate the Panel?s
findings that the public?s perception is that the disciplinary process of
the self- regulatory system is not timely or effective.
Providing powers to the self- regulatory system to protect the
confidentiality of investigation files raises difficult issues regarding the
lack of a statutory basis of the self- regulatory system and whether
fundamental changes to the self- regulatory system will be needed if the
powers are provided. As the Panel reported, this issue needs to be resolved
by the POB?s successor working cooperatively with the AICPA, the SEC, and
other stakeholders. Further, the Panel recognized the limited disciplinary
measures that exist within the self- regulatory system. The effectiveness of
disciplinary actions taken by the self- regulatory system remains an open
issue. It is too early to evaluate whether the SEC?s task force approach to
investigations will significantly reduce the time for investigations.
Similarly, the SEC needs to gain experience with its efforts to encourage
companies to engage in preventive and remedial measures. If resource
limitations continue to affect the SEC?s timeliness for investigations, as
well as the number of cases it can effectively process simultaneously, then
the SEC, as recommended by the Panel, should pursue obtaining the necessary
resources.
Although the SEC did not accept the Panel?s recommendations for leveraging
the results of every disciplinary investigation, the successor to the POB?s
coordinating task force could fill this void by ensuring that SEC
enforcement actions are discussed by the task force, with the SEC
participation, for consideration of whether changes in professional
standards or further guidance is needed.
As the Panel recognized, the transparency and completeness of disciplinary
actions could be enhanced by relating the AICPA?s disciplinary actions to
disciplinary actions of regulators, so that the public has a more complete
picture of the disciplinary actions of the self- regulatory and public
regulatory systems. Further, transparency could be improved by providing
more detailed information about the case, such as naming the firm,
individuals involved by position, the standards violated, and the
disciplinary action taken.
The action by the SEC and the AICPA, working with the largest public
accounting firms to develop a proposed change to the self- regulatory system
without involving the POB, demonstrates the seriousness of the
communication problems that exist within the self- regulatory system and the
lack of effective relationships between the POB and the SEC. The SEC, as a
public regulator under the Securities Act of 1933 and the Securities
Exchange Act of 1934, has significant responsibilities related to accounting
and auditing rules and the accounting profession?s self- regulatory system.
The SEC needs to work cooperatively with the POB?s successor to support
the self- regulatory system and leverage SEC activities to enhance the
effectiveness of the self- regulatory system to support the public interest.
The POB?s successor, the AICPA?s Ethics Division, and the SEC also need to
build effective working relationships with the state boards of accountancy.
Although these parties have common interests, they generally work separately
and information is not freely shared, which contributes to the public
perception that the disciplinary function of the accounting profession is
not timely or effective. As discussed above, this issue is complicated by
jurisdictional issues as well as the lack of powers within the self-
regulatory system to protect the confidentiality of investigative
information, all of which limit actions that can be taken to improve the
disciplinary process. Legislation will likely be necessary to effectively
resolve this problem since the self- regulatory system lacks a statutory
foundation.
Agency Comments and We provided the POB, the AICPA, the NASBA, the SEC, and
the former
Our Evaluation Chair of the Panel on Audit Effectiveness, with a draft of
our report for
review and comment. The POB commented that the draft report provided useful
information concerning the status of the Panel?s recommendations. The POB
also stated that it would be helpful to readers of the report to include not
only any differences between the Panel's recommendations and the actions,
taken or proposed, to implement those recommendations, but also (1) an
explanation for the differences, and (2) an evaluation of the reasonableness
of such differences. We believe that we have identified all significant
differences and provided observations on such differences. The POB provided
one example of where it believed a gap existed between the Panel?s
recommendation and the AICPA?s implementing action. The POB stated that the
AICPA?s response to the Panel?s recommendation only addressed the POB?s
authority to review the implementation of a firm?s action against a partner
when legal action is taken against the partner
resulting from the audit. The POB pointed out that the Panel also
recommended that the POB review the firm?s process for deciding its
action against the partner. The AICPA advised us that the POB had the
authority to also review the firm?s decision as recommended by the Panel.
The AICPA commented that it does not believe the POB oversight over the
PEEC?s standard- setting activities was necessary given the level of public
representation on the PEEC and given that the SEC is the primary
independence standard- setter for public company auditors. However, we
continue to support the Panel?s recommendation that the POB?s successor
should have oversight over the PEEC?s independence standard- setting
activities, particularly in light of the SEC?s point made in its comments on
our draft report. The SEC?s Chief Accountant, who provided comments on the
draft report, explained that in some instances the PEEC independence
rules can apply to SEC registrants. For example, in situations where a PEEC
ruling addresses an area that is not covered by the SEC?s rules and is not
inconsistent with the general policies underlying the SEC?s rules, the SEC
staff might consider the PEEC ruling in reaching its decision on an issue.
The AICPA also commented that it has always supported independent public
oversight with fiscally accountable ?no strings? funding. However, in the
POB Chairman?s recent statement during a congressional hearing, 21 he
specifically mentioned that the current system of self- regulation of the
accounting profession has significant problems, including the fact that POB
funding is subject to control by the firms through the SECPS. He pointed out
that in the past, the SECPS cut off that funding in an effort to restrict
POB activities. In addition, the AICPA and the SECPS insisted on a cap on
the POB funding when the new POB charter was created.
The AICPA commented that although the Panel report recommended that peer
review reports be addressed to the POB rather than the firm subject to peer
review, 22 the PRC fully considered this recommendation and concluded that
it would have no affect on the quality of the peer review or the content of
the peer review reports. The PRC further concluded that the peer review
reports would be more appropriately addressed to the PRC as the body
responsible for maintaining and administering the peer review program. As
discussed in our report, we continue to believe that
21 Statement of the Honorable Charles A. Bowsher, Chairman, Public Oversight
Board, Before the Senate Banking Committee (March 19, 2002). 22 Technically,
the Panel report contained a recommendation that the POB be the primary
client of the peer review.
addressing the peer review report to the PRC does not satisfy the intent of
the Panel?s recommendation to have the POB be the primary client of the peer
review. The Panel wanted the peer reviewers to have the ?mind- set? that
peer reviews are performed in the best interest of the public, and not
solely for the benefit of the reviewed firm. By considering the POB as the
primary client, the Panel hoped the peer reviewers would likely bring the
POB more into the process up front and continue to keep them apprised of
issues throughout the review. In its comments on the draft, the POB also
expressed concerns that peer review reports are addressed to the PRC rather
than the POB. The POB stated that it believes that the PRC, which has
responsibility for maintaining and administering the peer review program, is
more like a management function rather than an audit committee function and,
therefore, should not be the primary client of the peer review process.
In comments on the draft report, NASBA officials reiterated the importance
of communication, coordination, and sharing of information between the
various components of the regulatory structures and the state boards of
accountancy to better protect the public interest. For example, NASBA
officials believe that for peer review to be effective, it has to be more
clearly linked to the regulatory process, which would include forwarding to
all state boards modified or adverse peer review reports so that licenses
could be limited when appropriate, suspended, or revoked. In addition, firm
registration renewal in many states depends on having completed a peer
review, but the results of those reviews, in most cases, are not provided to
the state boards. NASBA officials also stated that state boards operate on a
complaint- driven system. Accordingly, NASBA officials believe that, to
protect the public interest, the PEEC should directly make referrals,
whether or not they relate to members of the SECPS, to state
boards. We share the NASBA?s concerns related to the need to improve working
relations between the state boards and the other components of the
regulatory structure. As stated in our report, we believe that the POB?s
successor, the Ethics Division, and the SEC need to build effective working
relationships with the state boards of accountancy. Although these parties
have common interests, they generally work separately and information is not
freely shared, which contributes to the public perception that the
disciplinary function of the accounting profession is not timely or
effective. The comments of the Chair of the Panel on Audit Effectiveness
were
provided orally and were in agreement with our findings and observations.
The SEC Chief Accountant?s comments were primarily technical comments, which
are incorporated as appropriate. The POB, the AICPA,
and the NASBA, also provided technical comments, which we incorporated as
appropriate. Written comments from the POB, the AICPA, and the NASBA are
included in appendices III through V, respectively.
As agreed upon with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 30 days after its
issuance. At that time, we will send copies of this report to officials of
the Public Oversight Board, the American Institute of Certified Public
Accountants, the Panel on Audit Effectiveness, the Securities and Exchange
Commission, the National Association of State Boards of Accountancy, and
other interested parties. We will make copies available to others upon
request. For additional information, please contact Jeffrey C. Steinhoff,
Managing Director, Financial Management and Assurance, at 202- 512- 2600 or
steinhoffj@ gao. gov. Robert W. Gramling, Cheryl E. Clark, and Michael C.
Hrapsky made key contributions to this report.
Sincerely yours, David M. Walker Comptroller General of the United States
Appendi xes POB Charter Provisions Responding to the Panel on Audit
Effectiveness?
Appendi x I
Recommendations Recommendations Related to the POB Charter Contained in
Provisions in the POB?s Charter Responding to the Panel?s the Panel on Audit
Effectiveness Report Recommendations
1.1) The POB charter should address its sole authority to The POB's funding
shall be provided by the SECPS and its determine its budget and financial
and other resources, and the
members through the AICPA. The POB must submit an annual profession's
obligation to provide those resources. (Paragraph budget to the SECPS
Executive Committee, and to the AICPA 6.25)
Board if requested, for consultation. The budget shall not exceed $5. 2
million. Provisions are made for unanticipated oversight reviews by
submitting a supplemental budget that is also subject to the above review
process. Once this consultive process is done, the SECPS Executive Committee
and the AICPA are not to withhold funding for any reason. The annual budget
ceiling is indexed to the
Consumer Price Index. The POB is required to monitor its expenses and report
any material variations likely to occur to the SECPS Executive Committee and
the AICPA.
1.2) The POB's annual statement of expenditures should be In furtherance of
financial accountability, the POB is required to audited and included in the
POB's Annual Report to evidence its
have its expenses audited annually and included in its annual financial
accountability. (Paragraph 6.25)
report. 2.1) The POB charter should address its authority to oversee the
The POB's charter provides oversight authority with respect to the
activities of the ASB, the Independence Standards Board, the ASB,
Independence Standards Board, SECPS Executive SECPS Executive Committee, the
QCIC, the SECPS Peer Review Committee, QCIC, SECPS Peer Review Committee,
Professional Committee, the Professional Issues Task Force, the SEC
Issues Task Force, and the SEC Regulations Committee, but not Regulations
Committee, and the standard- setting activities of the
the PEEC. PEEC that relate to audits of public companies. (Paragraph 6.25)
2.3) The POB should approve all appointments to the ASB, For the ASB and the
SECPS, the POB is to be consulted for
SECPC Executive Committee, and the Independence Standards nominations for
members and concur in the selection of the chairs;
Board?s Independence Issues Committee, as well as Independence such
concurrence is not to be unreasonably withheld. Regarding Standards Board
members who represent the public accounting the Independence Standards
Board, the POB is to consult and profession. (Paragraph 6.25) advise on all
nominations.
2.4) The POB should annually evaluate whether the resources that The POB's
charter provides for the POB to evaluate the adequacy the AICPA and the
SECPS provide to the ASB and the SECPS are
of resources provided to the ASB and the SECPS, and to set forth sufficient
for those bodies to meet their mandates. (Paragraph its evaluation in its
annual report. 6.25)
2.5) The POB should oversee the AICPA's evaluation, Not addressed in the
POB's charter. compensation, hiring and promotion decisions with respect to
employees who constitute the ASB and SECPS staffs. (Paragraph
6.25) 3.1) The POB charter should establish term limits for POB
The term of a member is 5 calendar years ending on December 31. members.
(Paragraph 6.25) A member may be reappointed by a two- thirds vote of
members in office, but shall not serve for more than two full terms plus the
balance of any term filled by that member as a result of a vacancy. 3.2) POB
members should be limited to two 5- year terms, with
As stated above, members terms are limited to two 5- year terms. staggered
terms to ensure continuity. (Paragraph 6. 25) The POB's charter provides
that members terms shall be staggered to ensure continuity so that the term
of one member shall expire each year.
(Continued From Previous Page)
Recommendations Related to the POB Charter Contained in Provisions in the
POB?s Charter Responding to the Panel?s the Panel on Audit Effectiveness
Report Recommendations
4.1) The POB charter should address establishing a nominating The POB's
charter provides for a nominating committee consisting committee responsible
for identifying and nominating new POB of three persons with the authority
to nominate new members for members. (Paragraph 6.25)
the POB for each vacancy on the POB caused by resignation, removal, or
death, consistent with the eligibility requirements in section 11. A. of the
charter, which provides that members shall be drawn from among prominent
individuals of integrity and reputation, including, but not limited to,
former public officials, lawyers, bankers, non- practicing CPAs, securities
industry executives, educators, economists, and business executives.
4.2) The nominating committee should be appointed by the POB The nominating
committee is to consist of the POB chair or his/ her from names suggested by
public and private institutions that are
designee from among the members, a former public member of the most
concerned with the quality of audits and financial reporting.
AICPA Board to be selected by the AICPA Board, and a person (Paragraph 6.25)
from the private sector. The POB chair or his/ her designee and the former
public member of the AICPA Board will, in turn, jointly select the third
member of the nominating committee from the private sector.
5.1) The POB charter should address establishing an advisory The POB's
charter does not provide for establishing an advisory council to advise the
POB on issues related to its agenda, new
council. The charter does provide for the POB to hold an annual agenda
items, project priorities, and related matters. (Paragraph outreach meeting
to solicit views and recommendations about the 6.25)
accounting profession's self- regulatory program and the POB's oversight
process.
5.2) The POB should appoint the council members, whose service The POB's
charter does not provide for establishing an advisory should be limited to
two 3- year terms. (Paragraph 6.25) council.
5.3) The council should comprise 9 to 15 people selected from the The POB's
charter does not provide for establishing an advisory constituencies that
are concerned with audit quality and financial
council. matters, thus the broadest spectrum of participants in the
selfregulation of the auditing profession. (Paragraph 6.25)
5. 4) Council members should serve on a voluntary, part- time basis The
POB's charter does not provide for establishing an advisory
and be available to meet with the POB at regularly scheduled council.
intervals (e. g., two to four times a year). (Paragraph 6.25) 6.1) The POB
charter should address establishing a coordinating The POB's charter
provides that the POB may have a Coordinating task force of the chairs of
each body within the POB's oversight. Task Force which would be a standing
committee consisting of the
(Paragraph 6.25) chairs of each body within the POB's oversight or their
designees and which would be responsible for exchanging information relating
to each body's activities. Footnote 19 of the charter provides for
the POB to monitor the agenda of the SEC and the PEEC to identify rule-
making, regulatory, and standard- setting activities that relate to the
audit of public companies for the purpose of communicating information
relating to such activities to the Coordinating Task Force for appropriate
consideration. 6.2) The coordinating task force should meet periodically (e.
g., two
The POB's charter provides for the coordinating task force to meet to four
times a year) to ensure effective communications among periodically, but at
least semiannually. bodies subject to POB oversight. (Paragraph 6.25)
(Continued From Previous Page)
Recommendations Related to the POB Charter Contained in Provisions in the
POB?s Charter Responding to the Panel?s the Panel on Audit Effectiveness
Report Recommendations
7.1) The POB charter should address its authority to commission The POB's
charter provides authority for the POB to take any action special reviews
related to significant professional matters that affect
related to its oversight activities, including authorizing any oversight the
public's confidence in the profession. (Paragraph 6.25)
reviews it may determine to be appropriate in order to carry out its
responsibilities, while noting the factor of confidentiality and having
consulted with the SECPS Executive Committee. In that respect,
the charter further provides among the POB activities that it may conduct
oversight reviews and undertake other projects and actions, after consulting
the SECPS Executive Committee, on matters covered by the POB's activities
that the POB deems
appropriate to protect the public interest. 8.1) The POB, SEC, AICPA, SECPS,
and major firms should
The POB's charter is dated February 2, 2001. The POB issued an promptly
agree to a charter for the POB. (Paragraph 6.26) accompanying news release
stating that the POB and the AICPA have formally approved the charter after
extensive discussions between both organizations, the SECPS, the large
auditing firms, and the SEC. The AICPA Board of Directors passed a
resolution
dated February 9, 2001, stating that it approves the proposed POB charter
dated February 2, 2001 and that it recognizes the good work of the POB and
that it looks forward to many more years of the POB's observations and
comment.
9.1) The POB charter should address the POB's role in the See above comment
that describes the POB's consultive role rather appointment of the chairs of
the ASB and the SECPS Executive
than appointment authority. Committee. (Paragraph 6.26)
10.1) The POB charter should address the procedures for The POB's charter
provides that the charter may be amended by a amending the charter.
(Paragraph 6.26) vote of two- thirds of members in office at a meeting duly
called for that purpose, with the concurrence of the AICPA Board. 11.1) The
draft charter should include a provision for the POB to
See above comments that describe that the POB's charter provides conduct an
annual "outreach" meeting with representatives from
for an annual outreach meeting and establishing a nominating the
constituencies that are concerned with audit quality and committee, but does
not include an advisory council. The POB's financial reporting matters
rather than establishing a nominating
charter provides for the POB to arrange for a review and issuance committee
and advisory council. The Panel recommends that this
of a written report by a panel containing an evaluation of the issue be
addressed in three years as part of the POB's review of
effectiveness of the POB's oversight role and process at the end of the
effectiveness of the self- regulatory oversight process as three years after
the adoption of the charter and periodically contemplated in the draft
charter. (Paragraph 6.26)
thereafter, for purposes of evaluating the POB's accountability. The report
is to include a review of the effectiveness of the annual outreach meeting
provided for in section VIII. H of the charter and whether this annual
outreach meeting alleviates the need for an advisory council.
Actions Responding to Panel on Audit
Appendi x II
Effectivesness? Recommendations Issue: Governance System Actions Taken as of
September 2001 Findings From Panel Recommendations Contained in Panel (as
Reported by the POB, AICPA, SEC,
Recommendations Report Report
and NASBA) Directed to
1) There is a lack of 1. 1) The POB should have a majority of
The POB consists of 5 members, all of POB sufficient public
public members whose primary whom are public members with a broad
representation on the responsibility is to serve the public.
spectrum of business, professional, various self- regulatory
(Paragraph 6.20) a regulatory, and legislative experiences. bodies.
(Paragraph 6.15)
1.2) The constituencies (both A majority of the members represented
AICPA practitioners and non- practitioners)
on the ASB provide attest services to represented on the ASB remain
SEC clients. The ASB is a 15- member unchanged; however, at least a majority
board, all of whom are CPAs, comprising of the members represented on the
ASB
representatives from each of the Big 5 should be from CPA firms that provide
firms, 2 members from other national attest services to SEC clients. firms,
6 non- national firm (Paragraph 6.31)
representatives, 1 representative from academia, and 1 representative from a
government audit position.
1. 3) The ISB should reconstitute its The ISB ceased operations in July
2001. ISB
membership to include four members representing the public and three members
representing the public accounting profession. (Paragraph 6.35)
1.4) ISB?s public members should retain The ISB ceased operations in July
2001. ISB
responsibility for the selection of their replacements, with the POB being
consulted on the selections.( Paragraph 6.35)
1. 5) Two of the members of the ISB that The ISB ceased operations in July
2001. ISB
are representing the public accounting profession should be selected by the
SECPS Executive Committee from member firms, with the third member
continuing to be the AICPA president or his or her designee. (Paragraph
6.35)
1.6) The ISB should retain sole authority The ISB ceased operations in July
2001. ISB to determine its budget and other resources. (Paragraph 6.35)
1. 7) The ISB should retain its staff and The ISB ceased operations in July
2001. ISB
the responsibility for their hiring, supervision, and compensation.
(Paragraph 6.35)
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
2) There is a lack of unified 2. 1) The POB should oversee the
The POB Charter gives the POB POB, AICPA,
leadership of the various profession's activities with respect to oversight
responsibilities for the ASB,
SECPS self- regulatory bodies. standard setting, monitoring, discipline, and
maintains its oversight responsibility (Paragraph 6.15)
and special reviews. The POB should for the SECPS Executive Committee,
oversee the ASB, the ISB, the SECPS
QCIC, Peer Review Committee, PITF, Executive Committee, QCIC, the SECPS
and the SEC Regulations Committee. Peer Review Committee, the Professional
The ISB has recently been dissolved; Issues Task Force, the SEC Regulations
accordingly there will be no POB Committee, and the standard- setting
oversight. The POB charter does not activities of the PEEC that relate to
audits
give POB oversight of PEEC, however, of public companies. (Paragraph 6.23)
the POB staff attend all PEEC meetings and monitor the agendas and
activities of the PEEC.
2. 2) The POB should report periodically The POB issues an annual report
that
POB to the public regarding its activities.
discloses its activities. (Paragraph 6.20) a 2. 3) The POB should maintain
The POB?s new charter discloses that the POB independence from both the
profession POB was created by the AICPA, in and the regulatory authorities.
consultation with the SEC, as an (Paragraph 6.20) a independent board. The
charter stresses that the POB's role is oversight and not management.
Members and staff of the POB must abide by the POB's Conflict of Interest
Guidelines.
2.4) The POB, AICPA, SECPS, and SEC The POB and the AICPA?s Board of POB,
AICPA,
should work together to create and Directors adopted the charter in SECPS,
SEC, and implement a formal charter for the POB
February 2001, after discussions with the major firms that would include the
responsibilities
SEC, the SECPS, and the large auditing and powers enumerated in the Panel's
firms. Refer to Appendix I for an analysis report. The POB, AICPA, SECPS,
SEC,
of the POB? s charter. and major firms should agree to the charter and
cooperate in facilitating its
implementation. (Paragraphs 6.24 and 6.26) 2. 5) The POB should enhance its
The POB hired additional staff members POB
resources in order to implement the (from 6 staff in 1999 to 13 staff in
2002)
POB's expanded oversight role. The and has increased its budget (from $2.5
augmented staff would assist the POB in million in 1999 to $3.5 million in
2002) in
overseeing peer reviews of the largest order to implement its expanded
firms. (Paragraph 6.29) oversight role.
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
2. 6) The POB should review its charter The POB plans to review and reassess
POB periodically to ensure its continuing
its charter on a periodic basis to assure adequacy, and, if appropriate,
work with its continuing adequacy and relevancy in the AICPA, SECPS, and SEC
to amend
the light of changing circumstances and, it. (Paragraph 6.29)
if appropriate, take steps to amend it. The charter may be amended by a vote
of two- thirds of members in office at a meeting duly called for that
purpose, with the concurrence of the AICPA Board.
2. 7) The POB should review periodically The POB's new charter includes
POB the effectiveness of the ASB, ISB, responsibility for reviewing the
SECPS, and other groups that it
effectiveness of these groups and oversees and include its findings and
reporting the results of its reviews in its conclusions in its Annual
Report.
annual report. The ISB ceased (Paragraph 6.29) operations in 2001.
2. 8) The POB should summarize in its The POB plans to include in its next
POB Annual Report the status of all AICPA
annual report summary statistics of the Ethics Division investigations of
audits of
(i) status of all AICPA Professional Ethics SEC registrants when the civil
litigation Division investigations on audits of SEC and public regulatory
investigations have registrants when the civil litigation and been
concluded. (Paragraph 6.29)
public regulatory investigations have been published and concluded; and (ii)
the actions taken by and reported to the POB by SECPS member firms with
respect to the foregoing. 2. 9) The POB should increase its public
The POB will hold an annual meeting POB
communications to expand the public's open to the public, and will also
issue an awareness of the POB, its activities, and annual report and make
public such its value to the capital markets. other written reports as the
POB may (Paragraph 6.29)
deem necessary with respect to its activities. The POB will also hold an
annual outreach meeting to solicit views and recommendations about the
accounting profession's self- regulatory program and the POB's oversight
process.
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
3) There are constraints on 3. 1) The POB should serve as an
The POB charter includes expanded POB, AICPA,
effective communications oversight body to whom the SEC, the responsibility
for improving SECPS, and SEC
with the SEC and among the state boards of accountancy, the auditing
communication among the various various entities in the current profession,
and the public should look to bodies that make up the self- regulatory
system. (Paragraph 6.15)
for leadership. This leadership position is system. A Coordinating Task
Force has intended to enhance communications been created and the POB will
hold an among the profession's self- regulatory
Annual Meeting open to the public. The bodies in order to facilitate the
POB will also hold an annual outreach profession's continuous improvement
meeting to solicit views and efforts and identify and resolve important
recommendations about the accounting issues on a timely basis. (Paragraph
profession?s self- regulatory program and 6.23)
the POB?s oversight process. This meeting may include, among others as
appropriate, representatives from the private sector, accounting profession,
government, professional organizations and public. Reference to such
meetings
will be made in the POB?s annual report. The POB will also establish
liaisons with national and international organizations regarding setting
national and international auditing and independence standards, and other
matters relevant to the cooperative self- regulation of the profession.
3. 2) The POB and SEC should The SEC recently met with the POB in
POB and SEC acknowledge the need to maintain a
one of its first outreach meetings. The continuing dialogue that will foster
a
POB stated that it meets frequently with cooperative relationship, protect
and
the staff of the SEC Chief Accountant?s enhance mutual respect and
confidence,
office and other SEC staff as deemed and increase the public's respect for
the necessary to discuss issues of concern profession and its role in the
capital
to the SEC. markets. (Paragraph 6.27)
3. 3) The POB and state boards of The POB plans to meet occasionally with
POB and state accountancy, perhaps through the
the individual state boards of boards of
National Association of State Boards of accountancy and also to have ongoing
accountancy
Accountancy, should determine how best discussions with NASBA, as the
to facilitate meaningful continuing representative of the state boards.
dialogue between the POB and state boards. (Paragraph 6.28)
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
3. 4) Restore the relationship between The AICPA and SEC have enjoyed a SEC
and the the profession and the SEC to its historic
longstanding working relationship with accounting
level of candor, trust, and respect. the mutual goal of protecting the
public
profession (Paragraphs 6.64 and 6. 20) a interest. The AICPA is committed to
(including the POB) continually strengthen the profession?s self- regulatory
activities through a
cooperative working relationship with the SEC.
3. 5) The SEC should encourage and The ISB ceased operations in July 2001.
SEC support the ISB in carrying out its mission, recognizing that the SEC
retains ultimate authority over auditor independence with respect to SEC
registrants. (Paragraph 6.36)
3. 6) The SEC should support the IIC and The ISB ceased operations in July
2001. SEC work with the ISB to clarify the IIC's role. (Paragraph 6.36)
3.7) The SEC should assist in According to the SEC, it has cooperated
SEC implementing the POB's activities
with the AICPA and others on the contemplated by the charter. (Paragraph
disbanding of the ISB, and met with the 6.36)
AICPA?s SEC Regulations Committee to discuss items of mutual interest.
Further meetings are scheduled with other AICPA committees. The SEC also
recently met with the POB in one of its
first outreach meetings. The SEC staff speaks at various AICPA conferences,
including the SEC Developments Conference. The SEC also anticipates further
meetings with the AICPA and POB in the coming months.
3. 8) The SEC should support the POB's See action taken to recommendation
3.7
SEC authority as enumerated in its charter to
above. enable the POB to serve as an independent, effective, unifying leader
of the profession's voluntary self- regulatory process. (Paragraph 6. 36)
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
4) There are differing 4. 1) The AICPA should provide the
The AICPA has provided and is AICPA interests and divergent views
resources necessary for the ASB to meet committed to providing the financial
and of the AICPA's priorities on its mandates. (Paragraph 6.31)
human resources necessary for the ASB the part of its diverse
to meet its mandates. There are members. (Paragraph 6.15)
continual and close communications between the chair of the ASB and AICPA
staff regarding the assignment of staff to projects. The major financial
components are for staff salaries, member compensation, and reimbursements
for
meeting and travel expenses. The major human resource components are
volunteer hours and paid staff. Staff salaries are adjusted annually to be
competitive for the skills the staff member possesses. Turnover of ASB staff
has
been very low. Meeting and travel expenses are budgeted based on current and
expected projects. 4. 2) The AICPA should provide the
The AICPA has provided and is AICPA resources necessary for the SECPS to
committed to providing the financial and meet its staffing needs, including
human resources necessary for the providing QCIC with the resources SECPS,
including the QCIC, to meet its needed to enable it to act quickly in
mandates. There are continual and investigating alleged audit failures and
close communications between the chair thereby preserve the candid dialogue
of the SECPS, QCIC and AICPA staff with SECPS member firms that presently
regarding the assignment of staff to adds to the effectiveness of the QCIC
projects. The major financial components process. (Paragraph 6. 31)
are for staff salaries and reimbursements for meeting and travel expenses.
The major human resource components are volunteer hours and paid staff.
Staff salaries are adjusted annually to be competitive for the skills the
staff member possesses. Meeting and travel expenses
are budgeted based on current and expected projects.
4.3) The ASB, SECPS, and PEEC staffs ASB, SECPS, and PEEC staff are AICPA
AICPA remain employees of the AICPA.
employees. (Paragraph 6.31)
(Continued From Previous Page)
Issue: Governance System Actions Taken as of September 2001 Findings From
Panel Recommendations Contained in Panel (as Reported by the POB, AICPA,
SEC,
Recommendations Report Report
and NASBA) Directed to
4.4) The SECPS Executive Committee The SECPS Executive Committee has SECPS
retains its responsibility for approving the responsibility for approving
members members of the PRC, QCIC, the SEC
of the PRC, QCIC, SEC Regulations Regulations Committee, and the PITF;
Committee, and the PITF. These groups the preceding four groups continue to
continue to report to the SECPS report to the Executive Committee; and
Executive Committee. The SECPS the SECPS continues to fund the ISB.
continued to fund the ISB until it ceased (Paragraph 6.32)
operations in July 2001. 4. 5) The QCIC should establish a panel The QCIC
maintains an inventory of
SECPS QCIC of industry specialists and experts and QCIC member industry and
technical specialists whose members would be
skills. In the event that a QCIC, POB, or drawn from practicing profession
and SECPS staff member responsible for a industry and who would be available
to
particular review considers consultation QCIC members and the POB and
outside the review team to be necessary, SECPS staffs for consultation on
various
the first consultation source is with matters, such as industry issues and
the
another QCIC member with identified application of accounting standards.
industry skills. The review team initiates (Paragraph 6.33)
consultation beyond QCIC membership. This consultation is coordinated by the
SECPS staff through contact with the Big- 5 firm representative of the SECPS
Executive Committee. The Executive Committee member identifies a specific
experienced and highly qualified partner within his or her firm to consult
with the review team.
4. 6) Each member firm should ensure All members of the Executive Committee
Member firms of the that its representative on the SECPS
have sufficient authority to commit their SECPS represented Executive
Committee has sufficient
firms to the protection of the public on the SECPS authority and
responsibility to commit the interest, and each representative has the
Executive firm to the protection of the public interest
public interest as the paramount Committee
when this conflicts with a more favorable objective in fulfilling his or her
committee business position, and ensure that the obligations. In selecting
committee public interest remains the paramount member replacements, the
SECPS staff
objective in the representative's decision and the Executive Committee
review making and voting. (Paragraph 6.34)
resumes of prospective members prior to appointment and all nominations are
made in consultation with the POB. (See POB charter section VII. A. 1. c.) a
This was not a formal recommendation in the Panel?s report; however, this
was mentioned in the text of the Panel?s report.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
5) The peer review 5.1) The PRC should revise the standard The peer review
reporting standards were PRC
reporting model should peer review report to more fully describe
revised, effective for peer reviews completed be more transparent in
the peer review process and matters on or after June 30, 2001, to more fully
order to better facilitate relevant to the specific peer review. (Task
describe the peer review process and to
the communication of Force Recommendation 2a.)
streamline the reporting of matters relevant to matters identified the
specific peer review. Specifically, during peer reviews
to assist users of the peer review report in that should be understanding
the peer review process, each addressed by the report is now accompanied by
an attachment reviewed firm and the
that provides the following: profession. (Exhibit 4,
The objectives of a peer review. page 4)
An overview of the peer review process, including how peer reviews are
planned and performed and the roles of the PRC, POB, and the public file. In
the case of a modified report, readers will no longer have to refer to the
letter of comments to understand the reasons for the modification. Both the
reasons and the recommendations to cure deficiencies are now in the report
itself. The reviewed firm's
response will address the deficiencies and recommendations in both the
report and the letter of comments. In the case of an adverse report, all of
the deficiencies identified are required to be included in the peer review
report. The reviewed firm?s response will address the deficiencies and
recommendations identified in the report.
The PRC also reviewed the SECPS peer review standards that address the
specific matters to be reported as a result of a peer review. The PRC
concluded, and the POB staff concurred, that no changes to the criteria set
forth in the Standards were needed.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
6) The PRC needs to 6.1) The SECPS should study whether
To date, the SECPS Executive Committee and SECPS consistently consider
there are key quantitative and qualitative PRC have not been able to
identify indicators the sufficiency and
performance indicators that would be that are relevant, objective, or
measurable. adequacy of the useful to users of SECPS member firms'
However, the PRC has established a standing information it receives annual
reports or peer review reports.
task force to continuously consider ways of concerning peer
(Task Force Recommendation 1b.) improving the peer review process, including
review results in order
the identification of such quantitative to perform its function
measures. effectively. (Exhibit 4, page 4)
6.2) Peer review reports should be Effective for peer reviews completed on
or PRC
addressed to the reviewed firm and the after June 30, 2001, the peer review
report will PRC to emphasize that peer reviewers
be addressed to both the reviewed firm and and reviewed firms should
consider the
the PRC. PRC as the "audit committee." (Task Force Recommendation 2b.) 6.3)
Require a Summary Observation
The PRC is pilot testing a more qualitative, PRC Memorandum (SOM) be
prepared on all
subjective approach to the review of emerging peer reviews that describes
the peer
issues and higher- risk areas during the peer reviewer's observations
regarding best
review process. It is expected that the practices, constructive suggestions
that
findings from these procedures will result in go beyond professional
standards, and observations and recommendations regarding matters for the
attention of standardsetters. best practices, constructive suggestions that
The SOM should be submitted to
go beyond professional standards, and the PRC. The SOM should not be made
matters for the attention of standard- setters available for public
distribution, but should
that can be included in a SOM. The SOMs for be used as a basis for preparing
the PRC
all of the peer reviews performed during the annual report. (Task Force year
and significant, recurring findings in peer Recommendation 2c.)
review reports and letters of comments will be the primary source for the
PRC's annual report. The SOMs will not be publicly distributed.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
6.4) SECPS and POB staff should The SECPS has provided information to the
SECPS and POB compile data from their oversight of peer
POB regarding QCIC and peer review reviews and QCIC investigations that will
activities for reporting in its annual report. The enhance the diagnostic
value of the peer QCIC has and continues to report its findings review and
QCIC findings to standard to standard- setters as well as to the PITF.
setters and audit firms. For example, data
(The PITF issues Practice Alerts that are on disciplinary measures taken by
disseminated through the CPA Letter and member firms resulting from
substandard
Technical Practice Aids to CPAs in public performance; data on the audit
firms'
practice.) Starting in 2001, QCIC staff fraud risk assessments and related
automated its previous manual information responses on audits where fraud is
database to assist in analyzing issues that subsequently discovered; data
related to
should be brought to the attention of standardsetters emerging issues that
identify needed
and the PITF. The POB intends to modifications to professional standards or
monitor the preparation and analysis of the best practices guidance; and
data on
information contained in this database and nonaudit services provided to the
audit
comment on the monitoring process in its clients encompassed by peer reviews
and
annual report. The PRC is pilot testing an QCIC investigations. (Paragraph
6.30) enhanced peer review process, a by- product of which is to develop
recommendations to standard- setters and audit firms (see actions taken in
recommendation 6.3 above regarding preparation of an SOM).
7) Any changes to the 7.1) The SECPS should continue to The SECPS has a file
that provides for public
SECPS peer review reporting
maintain a file that provides for public access to peer review reports,
letters of
model need to access to peer review reports, letters of
comments, and the firms? responses to the continue to provide comments, and
the firms' responses to
letters of comments. The SECPS is in the appropriate access to
the letters of comments. (Task Force process of converting the public files
to information for SEC Recommendation 1a.)
provide for electronic access to the staff to assess the
information. The website is expected to be effectiveness of the fully
operational in the fall of 2001. peer review program. (Exhibit 4, page 4)
7.2) The SEC staff should have access to The PRC annual report will be a
public
PRC the PRC annual report and to the SOM
document, whose primary recipients will be (described above under
recommendation the accounting profession, standard- setters, 6.3 above) on a
no- name basis. (Task
and regulators. The POB will have access to Force Recommendation 2c.)
all SOMs and the SEC will have access to all SOMs on a ?no name? basis.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
8) The peer review 8.1) There should be a prescribed The PRC is pilot
testing a two- tiered peer PRC
standards are common differentiation of the SECPS member review program.
Tier B firms consist of larger
to all SECPS member firms, based on the effectiveness and
member firms meeting certain size criteria, firms and do not
objectivity of the firms' internal inspection i. e., firms with 30 or more
SEC clients and 100 provide for differences programs. Tier A firms should be
those or more accounting and auditing in firm size and types
that do not have an internal inspection professionals. Those firms are
required to
of practices. (Exhibit 4, program that meets specifically defined
have an effective internal inspection. Tier B page 5)
criteria for a Tier B firm. Tier B firms firms are being subjected to a
continuous
should be those firms that have an review process with prescribed procedures
effective internal inspection program that
being performed during the interim 2 years meets specifically defined
criteria. The
between peer review public reporting years. effectiveness of a reviewed
firm?s internal All other SECPS member firms are inspection program should
be determined
considered Tier A firms and are not subject to by the peer reviewer. The
PRC, with the
the continuous review process. POB?s oversight, should concur with the
classification of firms. (Task Force
Recommendation 3a.) 8.2) The peer reviews of Tier A firms
The peer review procedures for the Tier B PRC
should be systems- and compliance- firms are being better integrated with
the firm's
oriented but place greater emphasis on internal inspection programs and the
reviews
the reviews of engagements, while the of some engagements were enhanced to
peer reviews of Tier B firms should involve
generate more qualitative, subjective, and reviews of engagements but place
greater judgmental considerations and findings by the emphasis on systems
and compliance. reviewers. The approach being tested (Task Force
Recommendation 3b.)
includes: obtaining an in- depth understanding of the engagement team's
approach to the audit and
their knowledge, skills, training, and experience; developing observations
regarding the quality of the engagement team's performance in certain areas
prescribed by the PRC, including both best practices and areas for
improvement; assessing the engagement team's application of the firm's
policies, guidance, procedures, and practice aids, including best practices
and areas for improvement; and providing recommendations that would
improve the firm's policies, guidance, procedures, practice aids, or
training programs and/ or professional standards. Peer review standards for
Tier A firms will be more compliance oriented and place greater emphasis on
the reviews of engagements.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
8.3) Tier B firms should be required to As indicated above, Tier B firms
will engage
PRC engage their peer reviewers to annually
their peer reviewers to perform certain limited perform certain limited
review procedures,
review procedures developed by the PRC in in addition to the peer review
performed the years they are not subjected to their on a triennial basis.
(Task Force
triennial reviews. These limited review Recommendation 3c.) procedures will
result in reports to the PRC, with oversight by the POB and SEC access. A
full scope peer review continues to be required on a triennial basis, with a
report available to the public. 8.4) The POB should conduct oversight of
The POB will conduct on- site oversight of the POB the annual limited
procedures
Tier B firms? annual reviews. engagement discussed in recommendation 8.3
above. (Task Force Recommendation 3c.)
8.5) The triennial peer review for Tier B Under the pilot test program, the
PRC is
PRC firms should be integrated with the testing different approaches to
integrating reviewed firm's internal inspection
peer review and the reviewed firm?s internal program in that year and focus
on inspection program. emerging issues and higher- risk areas, while relying
on the internal inspection to review routine and compliance areas. The
reviewed firm's internal inspection
program should become an integral part of the peer review in that the peer
reviewer should review and approve the inspection review procedures, review
materials and questionnaires, and office and engagement selections made for
the inspection program, and form joint teams of internal inspectors and peer
reviewers for certain reviewed offices. (Task Force Recommendation 3d.)
9) The peer review 9.1) The review materials and In addition to the matters
described above, the
PRC process should place
questionnaires should be revised to pilot test program includes using
greater emphasis on generate more qualitative, subjective, and
supplemental checklists at the firm level and assessing auditor
judgmental considerations and findings by for some engagement reviews that
address performance (versus
peer reviewers. Peer reviewers should certain emerging/ high- risk areas
identified by evaluating
also conduct focus group sessions with the PRC, and conducting focus group
documentation) to professional personnel at various levels in
sessions in some offices being reviewed that determine compliance the
organization in order to obtain candid include separate groups of seniors
and with quality control feedback regarding critical matters
managers. systems and
pertaining to the accounting and auditing professional practice. (Task Force
Recommendation standards. (Exhibit 4, 3e.) page 5)
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
9.2) The SECPS should emphasize the See actions described in response to
findings
SECPS types of issues described in the Panel?s 6, 8, and 9 that are being
pilot tested during report that affect audit quality, including
2001. the more judgmental and less objective issues, such as the "tone at
the top." (Paragraph 6.40)
9.3) The SECPS should increase the The pilot test program includes placing
SECPS emphasis on which professionals perform increased emphasis on
interviewing members various aspects of the audit, including who of the
engagement teams whose audits are makes the risk assessments, and whether
being reviewed. they have the necessary knowledge and skills. (Paragraph
6.40)
9.4) The SECPS should require The peer review process has historically
SECPS additional qualitative evaluations of the included qualitative
evaluations of the information obtained during peer reviews
information obtained during peer reviews, (e. g., assess whether
management?s such as review of working papers for representations and
responses to
corroboration of management?s inquiries were adequately corroborated;
representations. However, one of the assess adequacy of the training
materials objectives of the pilot test, through more in distributed and
available to all depth interviews of the engagement team, is professionals).
(Paragraph 6. 40)
to enable the peer reviewers to be in a better position to assess this
element of the audit rather than just relying on reviewing working papers.
See actions described in recommendation 8.2 above that are being
pilot tested during 2001. 9.5) The SECPS should develop specific
See actions described above to finding 6. SECPS performance measures to be
included in the peer review report that relate to the
quality of the firm's practice/ effectiveness of audits. (Paragraph 6.40)
9.6) The SECPS should include in a peer For the most part, peer reviewers
don?t include
SECPS review the business aspects of the
the business aspects of the reviewed firm?s reviewed firm's practice that
are closely practice in a peer review. However, there are related to the
firm's professional practice.
elements of this in current peer reviews, for (Paragraph 6.40)
example, when a peer reviewer considers whether sufficient time was devoted
to the audit or specific audit areas. This was then expanded with the pilot
by way of the focus group sessions (see recommendation 9.1 above) because
many of the topics relate to operational issues such as sufficiency of
staffing, time being devoted to audit areas, emphasis on achieving time
budgets, emphasis on training, etc. that are important
matters to consider by the peer reviewer.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
9.7) The SECPS should require a review According to the AICPA, this
recommendation SECPS
of the peer- reviewed firm?s review of cannot be implemented because it is
directed
selected financial reports/ filings of foreign at foreign registrants who
are not clients of the registrants that are audited by the firm?s SECPS
member firms (i. e., U. S. firms). reviewed foreign- associated firms and
for However, the PRC has approved changes to which the reviewed firm reviews
the filing the peer review standards and the related in accordance with the
membership peer review guidance materials to test a firm's requirements of
the SECPS. The peer
compliance with the SECPS membership reviews should include interviewing the
requirement pertaining to an SECPS member "filing reviewers." (Paragraph
6.40)
firm with foreign associated firms that audit SEC clients.
10) Measures to 10.1) The PRC should limit the peer The PRC will revise the
peer review standards PRC
enhance peer reviewer review team captains for the reviews of
to limit the team captains of Tier B firms to two independence and
Tier B firms to two consecutive reviews of consecutive triennial peer
reviews.
objectivity should be the same firm and a total of three implemented.
(Exhibit consecutive reviews as an engagement 4, page 7)
team member. (Task Force Recommendation 4a. i.)
11) The current 11.1) The PRC should require the peer The PRC will revise
the peer review standards PRC
protocols among the review captains for the reviews of Tier B
to require the team captains of Tier B firms to PRC, POB, SEC, and
firms to participate in a meeting (exit participate in a meeting with SEC
and POB
peer reviewers should conference) with the SEC staff and POB
staff to discuss significant matters considered be enhanced. (Exhibit
staff when the SEC staff reviews the firm's by the SEC staff during its
oversight of the
4, page 7) peer review working papers to discuss
peer review process. significant matters considered by the SEC staff during
their oversight. (Task Force Recommendation 4a. ii.)
11.2) The PRC should prepare an annual See actions described in
recommendation 6.3
PRC report for the profession, standard- setters,
above that are being pilot tested during 2001. regulators, and others that
describes significant matters noted during peer reviews conducted during the
year to facilitate timely identification of matters that require the
attention of these groups. (Task Force Recommendation 4b.)
11.3) The PRC should determine a more The PRC has established a standing
task PRC
formal means of identifying emerging force to, among other things, identify
on a issues and higher- risk areas in a timely
yearly basis the emerging/ high- risk issues to manner, and providing
frequent updates
be addressed by peer reviewers in the or supplements to the review materials
upcoming peer review cycle. The task force and questionnaires used to
perform peer
will also be responsible for updating the peer reviews. (Task Force
Recommendation
review guidance materials accordingly. In 4c.) addition, the Chair of the
PRC will be a member of the POB?s newly formed Coordinating Task Force.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
11.4) The PRC should study the cost vs. This recommendation will be
considered by PRC benefit of more frequent peer reviewer
the PRC after completion of the pilot test and involvement for Tier A firms
in order to
standards revisions described above that will improve the effectiveness of
the peer
be applicable mostly to Tier B firms. review process for these firms. (Task
Force Recommendation 4d.)
11.5) The PRC should establish a more The PRC has established a standing
task
PRC formal means for continuously pursuing
force to, among other things, be responsible better approaches to performing
peer
for continuously reviewing the current peer reviews. (Task Force
Recommendation
review process and identifying better 4e.)
approaches for performing and reporting on peer reviews.
11.6) The SECPS should make clear to According to the AICPA, this
recommendation SECPS
peer review team captains and reviewers cannot be implemented since the PRC,
not that the POB, not the firm being reviewed,
the POB, is responsible for maintaining and is the primary client.
(Paragraph 6.40) administering the SECPS peer review program. The POB
charter gives the POB
responsibility for overseeing the activities of the PRC. The POB does not
serve in a management capacity.
12) Greater depth is 12.1) The POB should perform an in The POB expanded its
oversight of the peer
POB needed by the POB in
depth review of its current approaches to review program to include visiting
more offices
overseeing the overseeing the performance of peer
of the largest firms that are being reviewed (5 performance of peer reviews
(including reviewing the scope of
offices vs. 3 or 4 offices) and will be spending reviews. (Exhibit 4,
the reviews, evaluation, and resolution of more time at those offices (5
days - 2 at the
page 7) issues identified during the review, and
beginning of the review and 3 days at the end communications of the results
of the
-vs. 3 days at the end of the review). Under review) with the goal of
identifying ways of
the pilot program being tested in the 2001- gaining more timely (i. e.,
oversight of the
2002 peer review year, each of the 13 largest work of the peer reviewers as
it is being
firms will undergo continuous review which will performed) and deeper
involvement (i. e.,
involve some level of peer review procedures participation with a peer
reviewer in some
every year (versus the previous triennial interviews of audit engagement
team
review requirement). The POB will conduct members) by the staff and Board.
(Task
on- site oversight on all 13 firms? reviews on a Force Recommendation 5a.)
real- time basis. See action taken to recommendation 12.3 below for what the
POB?s oversight will cover.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
12.2) The POB should consider The POB hired five recently retired partners
POB establishing a process for obtaining
who held important quality control functions in additional expertise to
assist the POB their former firms to assist the POB in staff, when
necessary, in formulating the conducting oversight of the SECPS, including
staff's views on significant matters that
oversight of the peer reviews of the largest occasionally arise during the
performance
firms on a real- time basis. of peer reviews (i. e., to assist in evaluating
matters where significant differences of professional judgment exist between
the
peer reviewers, reviewed firm, and/ or POB staff). (Task Force
Recommendation 5b.)
12.3) The POB should expand its The fiscal 2002 budget contemplates POB
oversight throughout the peer reviews of expending 4000 hours for peer
review the largest firms on a "real- time" basis. oversight compared with
3000 hours spent
The expanded oversight should cover, at a overseeing the 2000- 2001 peer
review minimum, reviewing the qualifications of
program. The POB has developed a the peer review firm and the review team
document ?SEC Practice Section Oversight? captain; attending all important
meetings,
that specifies its oversight objectives and focus groups, and interviews
with firm procedures with respect to the SECPS. The personnel; reviewing the
draft peer review POB will continue to oversee the planning of reports
before they are provided to others;
peer reviews, the reviews of functional areas and overseeing the planning of
the review,
at both the national and practice offices, the and the review of the
internal inspection reviews of the firms? internal inspection program; the
practice office and National programs, and the wrap- up of the reviews.
office reviews; the debriefing of However, the POB staff now will have more
engagement reviewers at the conclusion timely involvement on a real time
basis in the of the reviews; and resolution of issues
resolution of issues arising during the reviews. that arise during the
reviews. (Paragraph The POB will continue to review the 6.41)
qualifications of the peer review firms and the review team captains, and
when it believes appropriate, make suggestions for changes.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
13) The Statements 13.1) The ASB, in collaboration with the
The ASB has established a standing Quality SECPS and ASB
on Quality Control PRC and QCIC, should review the quality Control Standards
Task Force with
Standards (that control standards and make them more representatives from
the ASB, QCIC, PRC, provide that firms have specific and definitive for
firms with public
and the AICPA Peer Review Board. The task a system of quality
clients, especially for the largest firms. force has preliminarily concluded
that: control) lack specificity. (Task Force Recommendation 6; and
Statements on Auditing Standards (SASs), (Exhibit 4, page 8)
paragraph 6.42) Statements on Standards for Attestation
Engagements (SSAEs), and Statements on Standards for Accounting and Review
Services (SSARSs) should be amended to
clarify the relationship between these standards and the Statements on
Quality Control Standards (SQCS).
Guide for Establishing and Maintaining a System of Quality Control for a CPA
Firm?s Accounting and Auditing Practice (Guide)
should be revised to reflect (1) recently issued SQCSs and (2) the POB
Panel?s recommendation that the SQCSs be more
specific and definitive. (Because the SQCSs cover the entire spectrum of
attest services that are applicable to firms of all sizes, the task force
believes the POB recommendation can best be addressed and implemented
through more specificity to the Guide rather
than the standards themselves.) Through the process of updating the Guide,
the task force will also consider whether any
guidance should be elevated from the Guide to a standard. 13.2) The ASB,
PRC, and QCIC should
A standing Quality Control Standards Task SECPS and ASB establish a
mechanism for on- going Force has been established to monitor quality
monitoring of the standards to keep them
control standards and keep them current. current. (Paragraph 6.42)
14) The training 14.1) The PRC should establish a Members of the PRC and
SECPS staff are
PRC courses and approach
standing task force that will oversee the now participating in the
activities of the to training peer review peer review training programs to
ensure
Education and Communications Task Force of captains and teams
that the training programs and methods of the AICPA Peer Review Program.
That Task
should be improved. delivering them meet the needs of the
Force is responsible for developing and (Exhibit 4, page 10) peer review
program. (Task Force
overseeing appropriate peer review training Recommendation 7a.)
programs.
Issue: Peer Review Actions Taken as of September 2001 (as Findings From
Panel Recommendations Contained in Panel Reported by the POB, AICPA, SEC,
and
Recommendations Report Report
NASBA) Directed to
14.2) The PRC should develop a system The PRC implemented a more formal
process PRC
for evaluating the performance of team for evaluating and monitoring the
performance
captains. The results of such evaluations of peer review team captains that
includes the
should be summarized on a periodic basis completion of a written evaluation
for each
to identify team captains who are not team captain whose performance on a
peer
performing at an acceptable level so that review was deemed to be
ineffective or
appropriate actions can be considered by unsatisfactory. POB staff provides
input to the PRC. (Task Force Recommendation these evaluations. The results
are periodically 7b.) summarized for consideration by the PRC so that
appropriate actions can be taken.
15) A market- driven 15.1) The PRC should discontinue setting
Effective April 1, 2001, the PRC discontinued PRC fee arrangement
rates for peer reviews conducted by allowing CARTs to be formed. between a
Committee CARTs. Fees for participating in a CART Appointed Review review
should be established by the firm Team (CART) and a being reviewed and the
members of the firm would result in review team. (Task Force
more qualified Recommendation 7c.)
reviewers. (Exhibit 4, page 10)
16) Peer review is only 16.1) The SEC should mandate that all The costs
versus the benefits of mandating SEC required for SECPS
firms that audit SEC registrants be that all firms that audit SEC
registrants join a
member firms. (Exhibit enrolled in a peer review program that
peer review program would have to be 4, page 2)
includes public oversight. With respect to considered in deciding whether to
implement
foreign- based CPA firms, the requirement this recommendation. A previous
SEC
should extend to the peer review proposal to mandate such involvement was
programs/ processes in their foreign
never adopted due, in part, to such concerns. locations. (Paragraph 6.43)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
17) The disciplinary 17.1) The following procedures should be The SECPS
membership requirement
SECPS, AICPA, the system is perceived
followed when civil litigation or a criminal or (Procedures in Connection
with an Alleged POB, and audit firms
to be slow and public regulatory investigation contains
Audit Failure) which became effective ineffective. allegations of an audit
failure:
January 1, 2001, requires SECPS member (Paragraphs 6.15 and
(1) Devote more resources to the QCIC to firms to have quality control
policies and 6.52)
speed up the process. (2) A firm should procedures in place, so that, in the
event of
conduct an internal review of the subject litigation alleging deficiencies
in the conduct
engagement to evaluate performance of the of an audit of financial
statements of a
senior engagement personnel. The firm present or former SEC client, the
firms will should respond to a standard question from
report that matter to the QCIC and follow the QCIC and POB staff, regarding
whether other applicable procedures of the QCIC. the firm had conducted such
a review. (3)
These procedures call for the member firm The Ethics Division should inform
the firm to conduct a review of the engagement that that its consideration
of the matter was is the subject of the litigation in order to being
deferred. (4) Upon notification by the
evaluate the performance of senior Ethics Division regarding deferral, the
firm engagement personnel with respect to should select one of the following
three
specific issues contained in the complaint options to apply to the
engagement partner
against the firm or individuals. The QCIC during the period of deferral, if
the partner
will inquire whether the firm reviewed timely was still with the firm: (A)
Terminate or retire
other public company audits that such senior the partner; (B) Remove the
partner from all
audit personnel completed within the public company audit engagements until
the
preceding 12 months. The QCIC will review Ethics Division's process is
complete; (C) the matter, and for each case that is closed Perform an
additional second partner review by QCIC, the AICPA?s Professional Ethics of
all public company audit engagements
Division is advised of those cases for which completed by the partner in the
12 months it is believed there may be engagement prior to the deferral. The
firm would report personnel issues of significance. The Ethics the results
of such review to both the QCIC
Division will assess whether or not the and the POB, and subject the partner
to performance- specific issues warrant additional oversight on all public
company
investigation. If the Ethics Division audit engagements for at least one
year and
determines an investigation is appropriate, it thereafter subject the
partner to those
will inform the member firm of that and also additional oversight procedures
that are that the investigation of the matter will be determined necessary.
(5) The process deferred until the litigation is resolved. Once implemented
by SECPS member firms the member firm and the audit engagement when they
choose Option C should be partner involved have been notified by the subject
to peer review and oversight by the Ethics Division that the matter is being
POB. At least one engagement to which
deferred, then the firm must select one of the Option C is being applied
should be a
following options to apply to the engagement mandatory selection in the
firm?s peer
partner during the period of deferral, if that review and annual inspection
program. If individual is still associated with the firm: (A) the POB
disagrees with a member firm?s terminate or retire the individual from the
selection or method of applying Option C, it member firm, (B) remove the
individual from
should promptly make its views known to the performing or supervising audits
of public firm, SECPS committee representatives,
companies until the Ethics Division's ethics and the SEC through its normal
enforcement process is completed, or (C)
(Continued From Previous Page)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
communication channels, and to the public subject the individual to
additional,
through its annual report and other prescribed oversight on all public
company
publications. (6) The POB should report on audit engagements in which she/
he is these activities in its Annual Report on an involved for at least 1
year. Additional aggregate no- name basis. (7) SECPS
oversight, for the purpose of this member firms should apply one of the
membership requirement, is defined to foregoing options to a professional
that joins
mean for at least 1 year, the individual will a member firm while subject to
one of the perform such audits subject to oversight by a options at his or
her former firm. (8) The
senior technical partner appointed by the Ethics Division should refer
matters to the
member firm?s Managing Partner/ CEO. The QCIC that involve financial
reporting of an
senior technical partner oversight of such SEC registrant in which the SECPS
member
engagements, at a minimum, will meet the firm has not been made a party, and
the
SECPS?s concurring partner review Ethics Division would otherwise open an
membership requirement, which in these investigation. (9) If the matter ends
without
circumstances, will include timely the firm having been made a party, the
involvement in significant planning activities, QCIC would keep the case
closed. If the
the determination of risk assessments, and firm becomes a party at a later
date, the the designs of tests of controls and QCIC reporting requirement
should be substantive audit procedures. Thereafter, reduced to 15 days for
the matter. (10)
the individual must remain under the Once the Ethics Division referral is
lifted, the
additional oversight that the firm?s Managing Ethics Division should
expedite its Partner/ CEO determines, in light of that investigation of the
matter. The AICPA
person?s evaluation of the individual?s should allocate additional resources
to both performance, is necessary to protect the QCIC and the Ethics
Division to enable both public interest. Implementation of the option bodies
to perform their responsibilities
chosen is subject to review through the peer promptly and effectively.
(Paragraph 6.56)
review process and by the POB. If the individual leaves the firm and joins
another SECPS firm, the successor firm must select one of the three options.
The Ethics Division and the QCIC staff recognize that it is in the
public interest to cooperate with each other to minimize duplication of
efforts, and are in constant communication regarding matters
that may or may not involve litigation against an auditor of an SEC
registrant. The Ethics Division and QCIC handle those matters that do not
involve litigation on a case- by- case basis. Once the Ethics Division
deferral is lifted, the Ethics Division expedites its investigation of the
matter. The AICPA has allocated additional resources to both QCIC and the
Ethics Division to enable both bodies to perform its responsibilities
promptly and effectively. The POB will work with the PRC to develop peer
review procedures to assure that (a) the firm has
procedures in place to reasonably assure its compliance with the options
chosen, and
(Continued From Previous Page)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
(b) the peer review and inspection programs include the review of at least
one engagement to which Option C was applied. POB is in the process of
establishing a system to accumulate PEEC?s deferrals and the options chosen
by the firms to apply to the engagement partner during the PEEC?s deferral
period. The POB intends to report options chosen by the firms for those
deferrals by the PEEC on an aggregate ?noname? basis. The POB also oversees
each QCIC case.
17.2) The POB and SECPS should review New membership requirement concerning
POB, SECPS, and
the results of implementing the Panel's disciplinary procedures became
effective for
SEC recommendations concerning the
cases reported to the QCIC in 2001. The disciplinary process over a 2- to 3-
year
QCIC, SECPS Executive Committee, and period to determine their
effectiveness. If POB will continually monitor the the POB determines that
these effectiveness of the requirement.
recommendations have not satisfactory protected the public, the POB, in
cooperation with the SEC, should seek legislation to achieve the protections
necessary to the make the disciplinary process more effective. (Paragraph
6.57)
17.3) The POB should leverage the The POB leverages knowledge it gains from
POB
knowledge it gains in its oversight of the its oversight of PRC, QCIC, as
well as its
disciplinary process recommended by the liaison with PEEC, through its
Coordinating Panel, to determine whether changes in Task Force. This task
force will determine professional standards or further guidance
whether a need for changes in professional is needed and communicate these
findings standards has been or should be to the appropriate standard-
setters or communicated to standard- setters or other
authoritative bodies. (Paragraph 6. 58) authoritative bodies, or the PITF if
appropriate.
18) Some state No recommendation made.
boards have not been effective in disciplining
substandard conduct because of limited budgets and the lack of effective
means to investigate
allegations and impose discipline. (Paragraph 6.50)
(Continued From Previous Page)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
19) The AICPA's No recommendation made.
Ethics Division cannot issue subpoenas (has to
rely on the cooperation of the individual being investigated) or compel
testimony (cannot talk to the plaintiff or client company involved).
(Paragraphs 6.11 and 6.51)
20) The AICPA's No recommendation made.
Ethics Division investigations and QCIC files are not privileged and are
subject to subpoena.
(Paragraphs 6.48 and 6.54)
21) The AICPA's No recommendation made.
Ethics Division can impose only limited sanctions. Their disciplinary
authority extends only to a CPAs membership rights in the AICPA or a state
society of
CPA's (state boards are the only agencies that can revoke a CPA license).
(Paragraphs 6.6, 6.49, and 6.51)
(Continued From Previous Page)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
22) The AICPA's 22.1) The Ethics Division takes all
The Ethics Division has received additional AICPA
Ethics Division's necessary actions to ensure timely
resources in order to process investigations disciplinary processing of
investigations involving audits
involving audits of SEC registrants in a proceedings are not
of SEC registrants when the civil litigation timely manner and has developed
timely (they are and public regulatory investigations have aggressive
timelines to process the cases deferred while
been concluded. The Ethics Division should once litigation or regulatory
investigations
litigation or regulatory establish reasonable time frames for these have
been concluded. The PEEC has
proceedings are in matters and report the status of all such appointed a
Statistical Reporting Task Force process).
matters to the POB semiannually. and a Disciplinary Task Force with the
(Paragraphs 6.11,
(Paragraph 6.31) objectives of improving statistical reporting 6.51, and
6.52)
and making the information reported more descriptive and informative. A
representative of the POB attends the meetings of the
Statistical Reporting Task Force. 23) The AICPA's
No recommendation made. The PEEC has appointed a Statistical Ethics
Division's
Reporting Task Force and a Disciplinary proceedings are
Task Force with the objectives of improving confidential, and thus
statistical reporting and making the the public cannot information reported
more descriptive and determine what went
informative. A representative of the POB wrong when a
attends the Statistical Reporting Task Force sanction is imposed,
meetings. and in some cases whether a sanction was imposed.
Similarly, the QCIC's corrective actions it imposes on firms are not made
public.
(Paragraph 6.51) 24) The SEC has
24.1) The SEC should allocate additional SEC officials stated that
encouraging SEC limited resources to
resources to its enforcement activities companies to engage in cooperative
pursue cases against
directed at allegations of failed audits. measures such as self- policing
prior to the auditors. (Paragraphs
(Paragraph 6.59) discovery of misconduct, self- reporting of 6.5 and 6.50)
misconduct when discovered, remediation, and cooperating with law
enforcement authorities will allow the SEC to maximize the use of its
enforcement staff and to
concentrate on bringing prompt corrective action in the most egregious
cases.
(Continued From Previous Page)
Issue: Disciplinary Process Actions Taken as of September 2001 (as Findings
From Recommendations Contained in Panel Reported by the POB, AICPA, SEC, and
Recommendations Panel Report Report
NASBA) Directed to
24.2) The SEC should periodically The SEC does not plan to taken any
SEC undertake similar studies (such as the study
additional actions to implement this of AAERs in Appendix F to the Panel's
recommendation. While SEC officials stated report) and disseminate the
results. that they believe a continuing analysis of (Paragraph 6.60)
AAERs is important, they believe that significant AAERs are currently being
analyzed and digested on a real- time basis
by a number of organizations, including the press, the accounting
profession, accounting and auditing standard- setters, academia,
and others. The incremental benefits of an additional annual or biennial
study by SEC staff, therefore, may not be sufficient to justify the
resources it would take to complete such a study.
24.3) The SEC should document The SEC does not plan to taken any
SEC information on the auditors' work in every
additional actions to implement this enforcement investigation involving
recommendation. The SEC stated that its materially misstated financial
statements, Division of Enforcement has for many years not just those in
which the auditor is named
reviewed the conduct of auditors in in the AAER. (Paragraph 6.60)
essentially every investigation related to materially misstated financial
statements. When appropriate, the division recommends enforcement or
disciplinary action against an auditor. In circumstances where the SEC
concludes that a disciplinary action is not appropriate, SEC officials
stated that it is unclear to them what benefit accrues from a public airing
of the SEC?s determination.
Appendi x III
Comments From the Public Oversight Board Attachments A and B to this letter
are not included in this report. However, they are available on the Public
Oversight Board?s web site (http:// www. publicoversight board. org).
Comments From the American Institute of
Appendi x IV Certified Public Accountants
Comments From the National Association of
Appendi x V State Boards of Accountancy
Accounting Profession: Oversight, Auditor
Appendi x VI
Independence, and Financial Reporting Issues Comptroller General of the
United States United States General Accounting Office Washington, DC 20548
May 3, 2002 The Honorable Paul S. Sarbanes Chairman, Committee on Banking,
Housing, and Urban Affairs United States Senate
Subject: Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
Dear Mr. Chairman: This letter responds to your recent request that we
provide our views regarding what steps the Congress should consider taking
to strengthen oversight of the accounting profession, auditor independence,
and selected financial reporting matters. The sudden and largely unexpected
bankruptcy of the Enron Corporation (Enron) and other large corporations?
financial reporting restatements have raised questions about the soundness
of the current self- regulatory and financial reporting systems and resulted
in substantial losses to employees, shareholders, and other investors. These
events have also raised a range of questions regarding how such dramatic and
unexpected events can happen and the role and capacities of various key
players under the existing systems.
The issues surrounding the accounting profession?s current self- regulatory
system for auditors involves many players in a fragmented system that is not
well coordinated, involves certain conflicts of interest, lacks effective
communication, has a funding mechanism that is dependent upon voluntary
contributions from the accounting profession, and has a discipline system
that is largely perceived as being ineffective. (Enclosure 1 serves to
illustrate the complexity of the current system of regulation and oversight
and the stakeholders who rely on the system.)
Simply stated, the current self- regulatory system is broken and oversight
of the selfregulatory system by the Securities and Exchange Commission (SEC)
has not been effective in addressing these issues to adequately protect the
public interest. As a result, given the important role that independent
auditors play and various inherent problems in the current self- regulatory
system, direct government intervention is needed to statutorily create a new
body to oversee the accounting profession?s responsibilities for auditing
public companies. This step is necessary in order to increase the
effectiveness of the audit process and to rebuild public confidence. The new
body should be independent of the accounting profession, have significant
standards- setting, oversight, and disciplinary authority, be adequately
resourced to
GAO- 02- 742R Accounting Profession Issues
fulfill its responsibilities, and have sufficient operating flexibility to
attract and retain quality leadership and supporting staff.
On the other hand, the concerns relating to the timeliness, relevancy and
transparency of the financial reporting model may be best addressed through
the SEC working more closely with the Financial Accounting Standards Board
(FASB), assuring that the FASB has an adequate and independent source of
funding for its operations, and reporting periodically to the Congress in
connection with certain FASB matters. If such an approach is not successful
in achieving the expected improvements in the financial reporting model in a
timely and effective manner, the government can then take further action.
The areas of oversight of the accounting profession, auditor independence,
and financial reporting are important on their own, but they also represent
interrelated keystones to protecting the public?s interest. Failure in any
of these areas can place a strain on the entire system. Consequently,
potential actions should be guided by the fundamental principles of having
the right incentives for the key parties to do the right thing, adequate
transparency to provide reasonable assurance that the right thing will be
done, and full accountability if the right thing is not done. These three
fundamental principles represent a system of controls that should operate in
conjunction with a policy of placing special attention on areas of greatest
risk.
NEW BODY NEEDED TO REGULATE AND OVERSEE THE ACCOUNTING PROFESSION
Enron?s failure and a variety of other recent events have brought a direct
focus on the ineffectiveness of the current system of regulation and
oversight of the accounting profession. Independent auditors have a key role
to play in protecting shareholders and the public?s interest in our capital
market system. They hold a public trust and their actions or inactions can
have significant implications on investors, creditors and other users of
financial reports. In this regard, auditors must place additional emphasis
on whether financial statements are ?fairly presented in all material
respects? in addition to their traditional emphasis on whether such
financial statements are prepared ?in accordance with generally accepted
accounting principles.? Fair presentation requires providing reasonable
assurance that major value and risk elements are appropriately reflected in
the financial statements and related notes in an understandable fashion. It
also requires employing an ?economic substance? versus ?transaction form?
approach to important accounting and reporting issues.
Many proposals are before the Congress to establish a new body to regulate
and/ or oversee accounting firms that audit public companies. In our view,
the Congress should consider the following key factors or criteria in
establishing this new body, each of which is critical to its likely
effectiveness.
Page 2 GAO- 02- 742R Accounting Profession Issues
Functions of the New Body The new body should have direct responsibility and
authority for certain critical functions in connection with public
accounting firms and their members who audit public companies. These
include:
establishing professional standards (independence standards; quality
control standards, auditing standards, and attestation standards). The new
body should be authorized to issue professional standards. In that respect,
the new body should also be authorized to affirmatively adopt, at its
discretion, professional standards, in whole or in part, promulgated by
another standard- setting body. In the area of new standards, the new body
may choose to require auditor reporting on the effectiveness of internal
control over financial reporting in connection with audits of public
companies, which is currently not required under existing auditing
standards. It may also decide not to affirmatively adopt a standard
developed by another standard- setting body but instead issue a modified
version of the standard.
monitoring public accounting firms for compliance with applicable
professional standards. For efficiency, except for quality reviews of the
largest firms and those firms in which the nature of the audits they perform
pose a higher level of risk as determined by the new body, the new body
should be authorized to use contractors or accounting firms to perform
quality reviews in accordance with standards and processes set by the new
body. However, the new body should have final approval authority in
connection with any quality review engagements performed by any contractors
or accounting firms.
investigating and disciplining public accounting firms and/ or individual
auditors of public accounting firms who do not comply with applicable
professional standards. Investigations and disciplinary actions of the new
body should be in addition to existing investigatory and disciplinary
authority that already exists with the SEC and state boards of accountancy.
establishing various auditor rotation requirements for key public company
audit engagement personnel (i. e., primary and second partners, and
engagement managers). Related to this function, we believe the new body
should undertake a study and report to the Congress on the pros and cons of
any mandatory rotation of accounting firms that audit public companies
before taking any action with regard to establishing requirements for any
mandatory rotation of accounting firms.
Funding for the New Body The new body should have independent sources of
funding by virtue of mandatory, not voluntary, payments. Public accounting
firms and audit partners that audit financial statements, reports, or other
documents of public companies that are required to be filed with the SEC
should be required to register with the new body. The new body should have
the authority to set annual registration fees and fees for
Page 3 GAO- 02- 742R Accounting Profession Issues
services such as peer reviews of public accounting firms. The fees should be
set to recover full costs and sustain the operations of the new body.
Reporting Requirement of the New Body and GAO Access to Records
The new body should report annually to the Congress and the public on the
full range of its activities, including coordination with other standard-
setting bodies whose standards it so chooses to adopt, setting professional
standards, peer reviews of public accounting firms, and related disciplinary
activities. Such reporting also provides the opportunity for the Congress to
conduct oversight of the performance of the new body. The Congress also may
wish to have GAO review and report on the performance of the new body after
the first year of its operations and periodically thereafter. Accordingly,
we suggest that the Congress provide GAO not only access to the records of
the new body, but also access to the records of other entities that the new
body has chosen to rely on, such as other standard- setting bodies, and
contractors or public accounting firms that conduct quality reviews, to the
extent GAO considers necessary to assess the performance of the new body.
Structure of the New Body The new body should be created by statute and
should be independent of the accounting profession. To facilitate operating
independently, the new body?s board members should be highly qualified and
should have authority to set and approve its operating rules. The new body
should have independent decision- making authority; however, it should
coordinate and communicate its activities with other parties such as the
SEC, the various state boards of accountancy, other standard- setters, and
GAO, as appropriate. The new body should set its own human resource and
other administrative requirements and should be given appropriate
flexibility to provide compensation that is competitive to attract highly
competent board members and supporting staff. The new body should also have
adequate staff to effectively discharge its responsibilities.
Candidates for the new body?s board membership could be identified through a
nominating committee that could include the Chairman of the Federal Reserve,
Chairman of the SEC, the Secretary of the Treasury, and the Comptroller
General of the United States. This approach would help to assure the
qualifications and independence of all board members.
The number of board members could be 5 or 7 and have stated terms, such as 5
years with a limited renewal option, and the members? initial terms should
be staggered to ensure some continuity. Ideally, the members of the board
should be presidential appointees who are confirmed by the Senate (PASs).
However, if the board members are not PASs, the board should be actively
overseen by and accountable to a body that is composed of PASs, such as the
SEC, in order to assure adequate accountability to the Congress and the
public. At a minimum, the chair and vice- chair should serve on a full- time
basis. None of the board members should be active
Page 4 GAO- 02- 742R Accounting Profession Issues
accounting profession practitioners, and a majority of board members should
not have been accounting profession practitioners within the recent past (e.
g., 3 years).
There are several alternative structures that the Congress could choose from
in establishing the new body, including creating (1) a new unit within the
SEC, (2) an independent government entity within the SEC, (3) an independent
government agency outside the SEC, or (4) a non- governmental private-
sector entity overseen by the SEC. Each of the above alternative structures
have various pros and cons that should be considered in order to assure the
credibility and effectiveness of the new body in protecting the public
interest. We believe that each of the alternative structures provides an
organizational foundation for managing and operating the new body that
potentially is workable. For the following reasons, we favor alternatives
two and three and believe they have a greater likelihood of success.
Under alternatives one and four, the new body?s functions (e. g.,
establishing professional standards, monitoring, and discipline) would be
subject to SEC approval in order to assure that all actions are in the
public?s interest and appropriate accountability to the Congress and the
public. This, however, would increase the SEC?s responsibility as well as
its workload, for the agency and the Commissioners, both of which are
already overloaded. Also, under alternatives one and four the new body?s
board members would not likely be PASs since under alternative one the SEC
Chair and other Commissioners are PASs, and since alternative four involves
a nongovernmental entity. Therefore, under alternatives one and four, the
new body would have less direct accountability to the Congress and the
public than a body with board members who are PASs. This limitation could be
mitigated to some extent by ensuring that regardless of the structure of the
new body that board members are selected from candidates provided by an
independent and appropriately qualified nominating committee as previously
discussed.
Although a structure that provides direct accountability to the Congress and
the public is important in our view, a more critical question regarding the
structure of alternatives one and four is whether the SEC has the capacity
to effectively take on such an additional workload. Clearly, the SEC has the
culture and potential to perform an active oversight role and this would be
in line with its current mission. But, does it realistically have the
capacity to do so? From a historical perspective, while the SEC has had
authority for over 70 years to regulate the public accounting profession
under the federal securities laws and regulations related to public
companies, it has largely relied on the public accounting profession to
regulate itself. It is now apparent that this model has not adequately
protected the public?s interest. Therefore, the SEC would need to institute
a new function within its organization, as called for in alternative one, or
a new oversight structure for a private- sector entity outside the SEC, as
called for in alternative four, both of which would require additional
resources and a significant increase in priority to more directly regulate
the accounting profession at a time when the SEC is already facing a range
of challenges in fulfilling its current responsibilities. Further, we
believe that the SEC also needs to increase the amount of time and attention
that it allocates to interacting with the FASB, the stock exchanges, and the
investment banking/ analyst community.
Page 5 GAO- 02- 742R Accounting Profession Issues
As we recently reported, 1 the SEC?s ability to fulfill its mission has
become increasingly strained due, in part, to significant imbalances between
the SEC?s workload (such as filings, complaints, inquiries, investigations,
examinations, and inspections) and staff resources. Although additional
resources could help the SEC do more, additional resources alone would not
help the SEC address its high staff turnover, which continues to be a major
challenge for the agency. About 40 percent of the SEC?s staff left the
agency between 1998 and 2001 and, as a result, the average level of
experience at the SEC has been declining. For example, in 2000, 76 percent
of the SEC?s examiners had been with the agency less than 3 years. However,
we also reported that the SEC has not made effective use of strategic
planning and information technology to leverage its limited resources. In
addition to putting more strain on the SEC?s capacity, alternatives one and
four would also likely be less efficient models for the new body to operate
under by requiring additional time and attention from the SEC.
Alternative two, which calls for the creation of an independent government
entity within the SEC, and alternative three, which calls for the creation
of an independent government agency outside the SEC, do not pose the same
capacity challenges for the SEC, especially at the Commissioner level, as
alternatives one and four. Also, alternatives two and three both meet each
of the critical factors outlined above for the structure of the new body. We
recognize there may be concern over adding more political appointments that
have to be Senate confirmed, as called for under alternatives two and three,
given the recent challenges of filling positions that are PASs. However,
having an independent entity overseen by PASs serves to significantly
enhance the entity?s accountability to the Congress and the public.
Of these two alternatives, we favor alternative two as having a greater
likelihood of success because the new body would be housed within the SEC
and, therefore, could receive administrative support from the SEC, including
human resources, payroll, and other administrative support. More
importantly, this alternative should better facilitate communication and
provide for maximum coordination with the SEC, while also allowing the new
body the independence to design its own policies and procedures and systems
as it deemed appropriate. In addition, alternative two would not require the
Congress to create a separate federal entity. Alternative two would also
facilitate a consolidation of the new entity under the SEC in future years
if such a consolidation was deemed to be both desirable and appropriate.
Therefore, we believe that alternative two has the greatest likelihood of
success in terms of potential effectiveness, efficiency, and accountability
of the new body. However, as previously stated, each of the alternative
structures has merit and can potentially work if properly designed and
implemented.
AUDITOR INDEPENDENCE
For over 70 years, the public accounting profession, through its independent
audit function, has played a critical role in enhancing a financial
reporting process that has
1 SEC Operations: Increased Workload Creates Challenges, (GAO- 02- 302,
March 5, 2002). Page 6 GAO- 02- 742R Accounting Profession Issues
supported the effective functioning of our domestic capital markets, which
are widely viewed as the best in the world. The public?s confidence in the
reliability of issuers? financial statements, which relies in large part on
the role of independent auditors, serves to encourage investment in
securities issued by public companies. This sense of confidence depends on
reasonable investors perceiving auditors as independent expert professionals
who have neither mutual, nor conflicts of, interests in connection with the
entities they are auditing. Accordingly, investors and other users expect
auditors to bring to the financial reporting process integrity,
independence, objectivity, and technical competence, and to prevent the
issuance of misleading financial statements.
Enron?s failure and certain other recent events have raised questions
concerning whether auditors are living up to the expectations of the
investing public; however, similar questions have been raised over a number
of years due to significant restatements of financial statements and certain
unexpected and costly business failures, such as the savings and loan
crisis. Issues debated over the years continue to focus on auditor
independence concerns and the auditor?s role and responsibilities. Public
accounting firms providing nonaudit services to their audit client is one of
the issues that has again surfaced by Enron?s failure and the large amount
of annual fees collected by Enron?s independent auditor for nonaudit
services.
Auditors have the capability of performing a range of valuable services for
their clients, and providing certain nonaudit services can ultimately be
beneficial to investors and other interested parties. However, in some
circumstances, it is not appropriate for auditors to perform both audit and
certain nonaudit services for the same client. In these circumstances, the
auditor, the client, or both will have to make a choice as to which of these
services the auditor will provide. These concepts, which we strongly believe
are in the public?s interest, are reflected in the revisions to auditor
independence requirements for government audits, 2 which GAO recently issued
as part of Government Auditing Standards. 3 The new independence standard
has gone through an extensive deliberative process over several years,
including extensive public comments and input from my Advisory Council on
Government Auditing Standards. 4 The standard, among other things, toughens
the rules associated with providing nonaudit services and includes a
principle- based approach to addressing this issue, supplemented with
certain safeguards. The two overarching principles in the standard for
nonaudit services are that:
2 Government Auditing Standards: Amendment No. 3, Independence (GAO- 02-
388G, January 2002). 3 Government Auditing Standards was first published in
1972 and is commonly referred to as the ?Yellow Book,? and covers federal
entities and those organizations receiving federal funds. Various laws
require compliance with the standards in connection with audits of federal
entities and funds. Furthermore, many states and local governments and other
entities, both domestically and internationally, have voluntarily adopted
these standards.
4 The Advisory Council includes 20 experts in financial and performance
auditing and reporting drawn from all levels of government, academia,
private enterprise, and public accounting, who advise the Comptroller
General on Government Auditing Standards.
Page 7 GAO- 02- 742R Accounting Profession Issues
auditors should not perform management functions or make management
decisions, and
auditors should not audit their own work or provide nonaudit services in
situations where the amounts or services involved are significant or
material to the subject matter of the audit.
Both of the above principles should be applied using a substance over form
doctrine. Under the revised standard, auditors are allowed to perform
certain nonaudit services provided the services do not violate the above
principles; however, in most circumstances certain additional safeguards
would have to be met. For example, (1) personnel who perform allowable
nonaudit services would be precluded from performing any related audit work,
(2) the auditor?s work could not be reduced beyond the level that would be
appropriate if the nonaudit work were performed by another unrelated party,
and (3) certain documentation and quality assurance requirements must be
met. The new standard includes an express prohibition regarding auditors
providing certain bookkeeping or record keeping services and limits payroll
processing and certain other services, all of which are presently permitted
under current independence rules of the AICPA. However, our new standard
allows the auditor to provide routine advice and technical assistance on an
ongoing basis and without being subject to the additional safeguards.
The focus of these changes to the government auditing standards is to better
serve the public interest and to maintain a high degree of integrity,
objectivity, and independence for audits of government entities and entities
that receive federal funding. However, these standards apply only to audits
of federal entities and those organizations receiving federal funds, and not
to audits of public companies. In the transmittal letter issuing the new
independence standard, we expressed our hope that the AICPA would raise its
independence standards to those contained in this new standard in order to
eliminate any inconsistency between this standard and their current
standards. The AICPA?s recent statement before another congressional
committee that the AICPA will not oppose prohibitions on auditors providing
certain nonaudit services seems to be a step in the right direction. 5
The independence of public accountants is crucial to the credibility of
financial reporting and, in turn, the capital formation process. Auditor
independence standards require that the audit organization and the auditor
be independent both in fact and in appearance. These standards place
responsibility on the auditor and the audit organization to maintain
independence so that opinions, conclusions, judgments, and recommendations
will be impartial and will be viewed as being impartial by knowledgeable
third parties. Because independence standards are fundamental to the
independent audit function, as part of its mission, the new statutorily
created body, which we previously discussed, should be responsible for
setting independence standards for audits of public companies, as well as
have the
5 Testimony of AICPA Chairman before the House Energy and Commerce Committee
(Subcommittee on Communications, Trade and Consumer Protection), February
14, 2002.
Page 8 GAO- 02- 742R Accounting Profession Issues
authority to discipline members of the accounting profession that violate
such standards.
FINANCIAL REPORTING
Business financial reporting is critical in promoting an effective
allocation of capital among companies. Financial statements, which are at
the center of present- day business reporting, must be timely, relevant, and
reliable to be useful for decisionmaking. In our 1996 report on the
accounting profession, 6 we reported that the current financial reporting
model does not fully meet users? needs. More recently, we have noted that
the current reporting model is not well suited to identify and report on key
value and risk elements inherent in our 21 st Century knowledge- based
economy. The SEC is the primary federal agency currently involved in
accounting and auditing requirements for publicly traded companies but has
traditionally relied on the private sector for setting standards for
financial reporting and independent audits, retaining a largely oversight
role. Accordingly, the SEC has accepted rules set by the FASB- generally
accepted accounting principles (GAAP)- as the primary standard for
preparation of financial statements in the private sector.
We found that despite the continuing efforts of FASB and the SEC to enhance
financial reporting, changes in the business environment, such as the growth
in information technology, new types of relationships between companies, and
the increasing use of complex business transactions and financial
instruments, constantly threaten the relevance of financial statements and
pose a formidable challenge for standard setters. A basic limitation of the
model is that financial statements present the business entity?s financial
position and results of its operations largely on the basis of historical
costs, which do not fully meet the broad range of user needs for financial
information. 7 Enron?s failure and the inquiries that have followed have
raised many of the same issues about the adequacy of the current financial
reporting model, such as the need for additional transparency, clarity, more
timely information, and risk- oriented financial reporting.
Among other actions to address the Enron- specific accounting issues, the
SEC has requested that the FASB address the specific accounting rules
related to Enron?s special purpose entities and related party disclosures.
In addition, the SEC Chief Accountant has also raised concerns that the
current standard- setting process is too cumbersome and slow and that much
of the FASB?s guidance is rule- based and too
6 The Accounting Profession: Major Issues: Progress and Concerns (GAO/ AIMD-
96- 98, September 24, 1996). 7 The accounting and reporting model under
generally accepted accounting principles is actually a mixed- attribute
model. Although most transactions and balances are measured on the basis of
historical cost, which is the amount of cash or its equivalent originally
paid to acquire an asset, certain assets and liabilities are reported at
current values either in the financial statements or related notes. For
example, certain investments in debt and equity securities are currently
reported at fair value, receivables are reported at net realizable value,
and inventories are reported at the lower of cost or market value. Further,
certain industries such as brokerage houses and mutual funds prepare
financial statements on a fair value basis.
Page 9 GAO- 02- 742R Accounting Profession Issues
complex. He believes that (1) a principle- based standards will yield a less
complex financial reporting paradigm that is more responsive to emerging
issues, (2) the FASB needs to be more responsive to accounting standards
problems identified by the SEC, and (3) the SEC needs to give the FASB
freedom to address the problems, but the SEC needs to monitor projects on an
ongoing basis and, if they are languishing, determine why.
We generally agree with the SEC Chief Accountant?s assessment. We also
believe that the issues surrounding the financial reporting model can be
effectively addressed by the SEC, in conjunction with the FASB, without
statutorily changing the standardsetting process. However, we do believe
that a more active and ongoing interaction between the SEC and the FASB is
needed to facilitate a mutual understanding of priorities for standard-
setting, realistic goals for achieving expectations, and timely actions to
address issues that arise when expectations are not likely to be met. In
that regard, the SEC could be directed to:
reach agreement with the FASB on its standard- setting agenda, approach to
resolving accounting issues, and timing for completion of projects;
monitor the FASB?s progress on projects, including taking appropriate
actions to resolve issues when projects are not meeting expectations; and
report annually to the Congress on the FASB?s progress in setting
standards, along with any recommendations, and the FASB?s response to the
SEC?s recommendations.
The Congress may wish to have GAO evaluate and report to it one year after
enactment of legislation and periodically thereafter on the SEC?s
performance in working with the FASB to improve the timeliness and
effectiveness of the accounting standard- setting process. Accordingly, we
suggest that the Congress provide GAO access to the records of the FASB that
GAO considers necessary for it to evaluate the SEC?s performance in working
with the FASB.
The FASB receives about two- thirds of its funding from the sale of
publications with the remainder of its funding coming voluntarily from the
accounting profession, industry sources, and others. One of the
responsibilities of the FASB?s parent organization, the Financial Accounting
Foundation, is to raise funds for the FASB and its standard- setting process
to supplement the funding that comes from the FASB?s sale of publications.
Some have questioned whether this is the best arrangement to ensure the
independence of the standard- setting process. This issue has been raised by
the appropriateness of certain accounting standards related to
consolidations, that the FASB has been working on for some time, applicable
to Enron?s restatement of its financial statements as reported to the SEC by
Enron in its November 8, 2001, Form 8- K filing. However, the issue has
previously been raised when the FASB has addressed other controversial
accounting issues, such as accounting for stock options. We believe that the
FASB should have mandatory sources of funding to remove the appearance of
any independence issues related to funding FASB. Therefore, the Congress may
wish to task the SEC with studying this issue and
Page 10 GAO- 02- 742R Accounting Profession Issues
identifying alternative sources of mandatory funding to supplement the
FASB?s sale of publications, including the possibility of imposing fees on
registrants and/ or firms, and to report to the Congress on its findings and
actions taken to address the funding issue.
CLOSING COMMENTS The United States has the largest and most respected
capital markets in the world. Our capital markets have long enjoyed a
reputation of integrity that promotes investor confidence. This is critical
to our economy and the economies of other nations given the globalization of
commerce. However, this long- standing reputation is now being challenged by
some parties. The effectiveness of systems relating to independent audits
and financial reporting which represent key underpinnings of capital markets
and are critical to protecting the public?s interest, has been called into
question by the failure of Enron and certain other events and practices.
Although the human elements can override any system of controls, it is clear
that there are a range of actions that are critical to the effective
functioning of the system underlying capital markets that require attention.
In addition, a strong enforcement function with appropriate civil and
criminal sanctions is also needed to ensure effective accountability when
key players fail to properly perform their duties and responsibilities.
The accounting profession?s self- regulatory system has not effectively
fulfilled its responsibilities. In addition, the current model whereby the
SEC oversees various self- regulatory organizations in connection with
financial reporting and auditing has not worked well, especially in
connection with audits of public companies. Further, the SEC is not staffed
to take on a more direct role in regulating the accounting profession nor
has the SEC strategically managed its limited resources well. Therefore, we
strongly believe that a new independent body, created by statute to regulate
audits of public companies, is needed in order to better protect the
public?s interest. However, currently we do not believe that it is necessary
or appropriate for the government to assume direct responsibility for
financial reporting. We do, however, believe that the Congress should
provide the SEC with direction to address the issues concerning financial
reporting as we have previously discussed.
In summary, Enron?s recent sudden collapse, coupled with other recent
business failures and certain other activities, pose a range of serious
issues concerning the accounting profession and financial reporting that
should be addressed. The fundamental principles of having the right
incentives, adequate transparency, and full accountability provide a good
sounding board to evaluate proposals that are advanced. In the end, no
matter what improvements are made to strengthen the oversight and
independence of the accounting profession and enhance the relevancy and
transparency of financial reporting, bad actors will do bad things with bad
results. We must, however, strive to take steps to minimize the number of
such situations and to hold any violators of the system fully accountable
for their actions.
Page 11 GAO- 02- 742R Accounting Profession Issues
We would be pleased to meet with you or other members of the committee to
answer any questions that you may have or to provide further assistance.
Sincerely yours, David M. Walker Comptroller General of the United States
Enclosure Page 12 GAO- 02- 742R Accounting Profession Issues
ENCLOSURE 1 ENCLOSURE 1
Public Corporate
regulation Private sector regulation
governance Self- regulatory
Publicly traded organizations
NYSE exchange companies
e. g. NYSE
Boards of directors Public Interest
Broker dealers
Audit committees
Effective Financial and
NASD
Management
Capital Markets
NASDAQ responsibilities for
SEC - Financial reporting
Individual Investors - Internal controls
Financial reporting Compliance with
Institutional Investors
- Banks and Lenders (creditors)
Enforcement laws and regulations
Rating Agencies
Independence standards for auditors of SEC registrants - Code of ethics
SECPS POB
(Peer review)
Financial audits and
ASB Public
consulting services
Delegated AICPA
PEEC accounting
responsibility firms
FAF
FASB State boards of accountancy
Direct Responsibility Oversight Delegated Responsibility (194124)
Page 13 GAO- 02- 742R Accounting Profession Issues (194030)
a
GAO United States General Accounting Office
Page i GAO- 02- 411 Accounting Profession
Contents
Contents
Page ii GAO- 02- 411 Accounting Profession
Page 1 GAO- 02- 411 Accounting Profession United States General Accounting
Office
Washington, D. C. 20548 Comptroller General
of the United States A
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Appendix I
Appendix I POB Charter Provisions Responding to the Panel on Audit
Effectiveness? Recommendations
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Appendix I POB Charter Provisions Responding to the Panel on Audit
Effectiveness? Recommendations
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Appendix II
Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix II Actions Responding to Panel on Audit Effectivesness?
Recommendations
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Appendix III
Appendix III Comments From the Public Oversight Board
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Appendix III Comments From the Public Oversight Board
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Appendix III Comments From the Public Oversight Board
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Appendix III Comments From the Public Oversight Board
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Appendix III Comments From the Public Oversight Board
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Appendix IV
Appendix IV Comments From the American Institute of Certified Public
Accountants
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Appendix IV Comments From the American Institute of Certified Public
Accountants
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Appendix V
Appendix V Comments From the National Association of State Boards of
Accountancy
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Appendix V Comments From the National Association of State Boards of
Accountancy
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Appendix VI
Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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Appendix VI Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues
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United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300
Address Service Requested Presorted Standard
Postage & Fees Paid GAO Permit No. GI00
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