Acting PCAOB Chair Daniel Goelzer was among the speakers at the Practising Law Institute’s securities regulation conference who addressed accounting developments of importance to the legal community. Goelzer advised that audit failures did not cause the financial crisis, nor could they have prevented the crisis. He suggested that issuers read the PCAOB’s report on auditing challenges related to the economic crisis since those challenges may also reflect financial reporting challenges.

Goelzer reviewed a staff audit alert which addressed using the work of others, with a particular focus on companies with operations in China and other countries in which the Board has been unable to conduct inspections. These companies often used small audit firms, some of which had little or no contact with the foreign operations. Goelzer said in many cases, the U.S. firm should not have been the principal auditor since that role requires the planning, supervision and review of the work papers for the audit of the foreign operations.

Wayne Carnall, the chief accountant in the SEC’s Division of Corporation Finance, said the SEC is aware of this matter and has questioned whether the foreign audit firms were capable and knowledgeable about U.S. GAAP.

Goelzer provided an update on the Board’s proposed standard on communications between auditors and audit committees. Additional comments were sought after a roundtable discussion of the proposed standard. Goelzer said the staff is likely to issue a reproposal of the standard for additional comments.

Linda Griggs with the firm Morgan, Lewis & Bockius LLP, said there were some problems with the proposal. Goelzer denied that the proposal attempted to influence the behavior of audit committees. Griggs said that Deloitte’s comment letter presented some good ideas. Robert Kueppers, the deputy CEO of Deloitte, said his firm suggested that the Board revisit the existing requirements and reconsider some of the new requirements that were proposed. The Board also received good input at the September 21 roundtable from seasoned audit committee chairs, in his view.

The Board adopted eight risk assessment standards which are currently pending before the SEC. Goelzer expects the SEC’s approval to be forthcoming so the standard will take effect for fiscal years ending on December 15.

The Dodd-Frank legislation authorized the Board to share inspection information with foreign oversight boards. Its inability to do so was an obstacle to conducting inspections in the European Union and elsewhere, Goelzer said. He added that the Board will no longer routinely process registration applications from firms in countries that deny the Board access for inspections. The Board concluded that it could no longer allow that list to expand without a resolution, given that a large pool of accounting firms in those jurisdictions is already registered with the Board.

The Dodd-Frank Act also gave the Board authority over the auditors of SEC-registered broker-dealers which will bring an additional 540 accounting firms to the roll of registered firms. Goelzer jokingly referred to the new registration system as “Bernie Madoff’s revenge.”

The panel reviewed the status for adopting international financial reporting standards. Kueppers said the SEC’s February 2010 release upped the game on its consideration of IFRS. The release replaced the previous roadmap, affirmed support for IFRS and will require some heavy lifting in the next four to six months, he said. The timing remains unchanged, according to Kueppers, with an anticipated acceptance date in 2015 or 2016.

Acting FASB Chair Leslie Seidman advised that under the memorandum of understanding with the International Accounting Standards Board, the two standard setters tried to identify the standards most in need of improvement. The two boards took a fresh look at their priorities and clarified the most important initiatives based on the SEC’s work plan. The most important areas include financial instruments, revenue recognition and fair value. The boards will work as thoughtfully and efficiently as possible, she said.

Seidman also addressed loss contingencies, an area in which investors have said there are too many surprises. Too little information is provided about litigation and environmental exposures until it is too late. Seidman said that FASB is waiting to see the results of the SEC’s “Dear CFO” letter that was sent in October to see if disclosure improves. It may be more of a compliance issue than a standard setting issue, she explained.

Carnall acknowledged that the SEC is focusing renewed attention on contingencies. Many companies provide lots of disclosure but little analysis about reasonable, possible losses, he said. Companies say they cannot estimate the costs with certainty or precision, but Carnall said that is not in the standard. As time goes on, companies should be able to estimate a range of potential loss, he said. The staff will be asking more questions, especially when a big charge is taken but nothing was disclosed in previous quarters.

Carnall reported that the next update to the staff financial reporting manual is December 7 to coincide with the AICPA’s conference on SEC and PCAOB developments. The manual contains 325 pages on reporting issues.

Carnall advised that the staff is improving the technology related to its comment process. The staff can track responses, many of which are very fact-specific to a particular company, so Carnall warned companies not to cut and paste from another response letter.