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Heads Up — A Summary of the June 24–25 Meeting of the PCAOB’s Standing Advisory Group

Volume 21, Issue 18


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 Introduction

At the June 24–25, 2014, PCAOB Standing Advisory Group (SAG) meeting, the PCAOB gave an update on recent developments, including an overview of its current and future standard-setting activities. In addition, the PCAOB and SAG discussed:1

  • Initiatives to improve audit quality, using root cause analysis, audit quality indicators, and quality control standards.
  • Cybersecurity issues and potential implications for financial reporting and auditing.
  • The new revenue recognition accounting standard and related audit considerations.
  • The new going-concern accounting standard and related audit considerations.

The next SAG meeting is scheduled for November 20–21, 2014.

 Recent PCAOB Developments

Chairman James Doty summarized recent PCAOB activities and policy initiatives that have been completed or are in progress, including:

  • The release on May 15, 2014, of staff guidance on economic analysis in PCAOB standard setting. Chairman Doty indicated that the staff would apply this guidance in a manner similar to the way the SEC’s economic guidance is applied. The PCAOB guidance gives the staff an “analytical framework” for determining the potential economic impact of proposed PCAOB standards that are presented for the Board’s consideration. Chairman Doty stated that there are currently 9 economists at the PCAOB and that the Board plans to double that number to 18 over the next year.
  • Deepening inspection analysis and reporting on results. As described in the PCAOB’s most recent strategic plan, the PCAOB is interested in improving the “timeliness, content and readability of inspection reports and general reports . . . to improve the usefulness of reports.” Chairman Doty envisions inspection reports that are more substantive and meaningful to a larger group of stakeholders without being more technical.
  • Continued efforts to develop cross-border arrangements for the PCAOB to conduct joint inspections outside the United States. According to Chairman Doty, internationally, the PCAOB oversees 240 non-U.S. based audit firms in 50 jurisdictions that issue reports on U.S. issuers, and the PCAOB is working closely with authorities in those countries to inspect audit work papers. The PCAOB has bilateral agreements with over 15 of those jurisdictions. Non-U.S. inspections are important because of the wide variety of audit regulators and the high rate of investment growth in these markets. On May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding (MoU) on enforcement cooperation with the China Securities Regulatory Commission and the Ministry of Finance.2 Chairman Doty said the PCAOB subsequently presented two inspection alternatives to Chinese representatives: (1) the PCAOB can go to China to perform inspections there with individuals from China or (2) China can send individuals and work papers outside the country. Chairman Doty expects there to be additional developments on this matter after July of this year.
  • Enforcement matters. The PCAOB has a robust enforcement program that consists of careful case selection and coordination with the SEC, including working with its newly created Financial Reporting and Audit Task Force and the Microcap Fraud Task Force. Chairman Doty recapped that since the last SAG meeting in November 2013, the PCAOB has settled 11 disciplinary orders, deregistered 7 audit firms, and barred or suspended 9 individuals for a range of misconduct, including misleading inspectors and providing false document trails.
  • Matters related to audits of brokers and dealers. On August 19, 2013, the PCAOB released its second report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers. Chairman Doty highlighted that the PCAOB inspected 60 audit firms and found that smaller audit firms tended to prepare the books and records for broker-dealers (22 of 60 audits), which is prohibited under SEC independence requirements. The PCAOB expects to issue its third required interim inspection report on broker-dealer audits in the next few weeks.
  • To help auditors with the transition to PCAOB standards,3 on June 26, 2014, the PCAOB released staff guidance for auditors of SEC-registered broker-dealers (see Deloitte’s October 28, 2013, journal entry). The guidance is intended to help such auditors plan and perform audits in accordance with PCAOB standards. It also discusses how an audit can be scaled under PCAOB standards depending on the size and complexity of the broker-dealer. (For more information, see Deloitte’s October 28, 2013, Banking & Securities Spotlight.)
  • Enhanced outreach to audit committees. Chairman Doty reiterated the importance of this priority. The PCAOB’s strategic plan includes two goals for 2014 related to this endeavor: (1) enhance interaction with audit committees (e.g., by developing materials with information on PCAOB activities and hosting forums to engage in a dialogue) and (2) enhance the usefulness of the PCAOB’s Web site for dissemination of information about registered firms.
  • Standard-setting activities. Chairman Doty described this year as an important one for standard setting. On June 10, 2014, the PCAOB issued its standard on related parties4 (the first PCAOB standard developed since the JOBS5 Act), which contains significantly more economic analysis than previous standards. (For more information, see Deloitte’s June 23, 2014, Heads Up.) He expressed strong hopes that the Board’s proposed audit transparency standard (requiring disclosure of the engagement partner and certain audit participants) will be issued by the end of the summer. (For more information, see Deloitte’s January 6, 2014, Heads Up). The section below provides more details about the Board’s standard-setting agenda.

For the full version of the Heads Up, see the attached PDF.

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1 PCAOB presentations and nonpublic breakout sessions were held on June 24. The PCAOB staff presented a summary of the nonpublic breakout discussions to the entire SAG on June 25.

2 The MoU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties.

3 In July 2013, the SEC amended Exchange Act Rule 17a-5 to require, among other things, that audits of broker-dealers be conducted in accordance with PCAOB standards. In October 2013, the PCAOB adopted an auditing standard and two attestation standards that apply to broker-dealer audits. In February 2014, the SEC issued an order approving the PCAOB’s new auditing and attestation standards for audits of broker-dealers. The SEC amendments and PCAOB standards are effective for fiscal years ending on or after June 1, 2014. Before the effective date, broker-dealer audits were performed under the AICPA’s generally accepted auditing standards.

4 PCAOB Release No. 2014-002, Auditing Standard No. 18 — Related Parties, Amendments to Certain PCAOB Auditing Standards Regarding Significant Unusual Transactions, and Other Amendments to PCAOB Auditing Standards.

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