subject: Auditing the Auditors [print this page] Auditing the Auditors Auditing the Auditors
Since the 1930's users of financial statements have relied on auditors to examine the books and records of a company and express their opinion on whether the financial statements are a fair representation of the company's financial position, results of operations and cash flows. But who audits the auditors? Until 2003 it was the auditors. Now, the oversight comes from a quasi-governmental entity called Public Company Accounting Oversight Board (PCAOB) a non-profit entity that reports to the Securities and Exchange Commission. Following the unexpected financial collapse of corporate giants Enron and WorldCom this new entity was created to oversee the auditors and hold them accountable for their actions. The PCAOB with its 717 staff in 13 offices and satellite locations throughout the country spends over $200 million a year in the effort to oversee audit firms and enforce the Board's auditing standards. In 2010 its scope was increased to include the registration and oversight of audits and auditors of brokers and dealers in addition to public companies.
PCAOB's funding comes from a combination of accounting support fees (93%), registration fees and annual fees (7%). The accounting support fees are paid by public companies whose monthly U.S. equity market capitalization is more than $25 million and investment companies with average monthly net asset value or U.S. equity market capitalization of more than $250 billion.Registration fees and annual fees are paid by the auditors.
According to the PCAOB "The Sarbanes-Oxley Act requires accounting firms to register with the PCAOB in order to prepare, issue, or participate in audit reports of issuers, brokers, and dealers." In order to register, an auditing firm must do so on the web site of the PCAOB. The registration Form 1 requests basic information about the firm such as name, address, contact person, and goes further to ask the names and contact information of each client(past, present, future), whether there are disagreements with the client, the fees collected from the clients and the percentage of the firm's business allocated to audit, accounting service, non-audit service. An application fee must be paid. The amount of the fee is based on a sliding scale from $500-$390,000 depending on how many issuer audit clients the firm has.
Each registrant, or auditor, must file an annual report due by June 30 of the applicable year and submit the annual fee payable by July 31. That fee, ranging from $500-$100,000, is based on a combination of the number of clients and accounting personnel the firm has. The annual report asks the number of personnel and accountants the firm has, the addresses of their offices, whether there was an acquisition of another firm, the proportion of the firms fees that are generated by audit, accounting services, non-audit clients, and other. The client list with contact information is required.
A registrant, or auditor, with more than 100 clients can expect to be inspected each year. Registrants with fewer than 100 clients are audited on a three year rotating schedule. Through 2009 the PCAOB conducted 1300 inspections of firms' systems quality control and reviewed more than 6000 audits. During the inspections the firms must cooperate by providing the books and records and/or testimony as requested by the PCAOB's auditors. Sanctions for non-compliance range from monetary penalties, suspension or barring individuals from working on the audits of public companies or a revocation of the firm's registration. Additionally, violators are listed on the PCAOB website.
The primary way an auditor communicates to users of the financial statements is through the opinion report. The report of an independent registered public accounting firm states that the auditor conducted the engagement "in accordance with the Standards of the Public Company Accounting Oversight Board." Those standards are based on the Generally Accepted Auditing Standards (GAAS) developed over time and published by the Financial Accounting Standards Board as of April 16, 2003. The PCAOB uses them as a starting point and as issues are identified by their staff they issue new pronouncements that add to or supersede the GAAS. Thus far the PCAOB has published 15 of their own auditing standards. Auditors must keep abreast of the new pronouncements, rules and regulations.
The standard setting process adopted by PCAOB is similar to that used by the AICPA with initial concept papers, public exposure drafts, public comment, and board discussion. Where it differs is that the Securities and Exchange Commission must then approve the pronouncement. Current issues up for consideration are whether the auditor's report should be enhanced and how the challenges presented by estimation and valuation should be addressed. Interested parties are encouraged to visit www.pcaob.org to follow the discussions.
