Standing Advisory Group Discusses Engagement Quality Review, Fair Value and Going Concern

The PCAOB's Standing Advisory Group met in Washington, D.C. on April 2 to discuss engagement quality reviews, audit confirmations, emerging issues and going concern. The SAG has 11 new members since its last meeting. Jennifer Rand, the PCAOB's acting chief auditor since the departure of Thomas Ray, moderated the discussion.

The Board has sought the SAG members' advice on engagement quality reviews on two separate occasions in the past, in June 2004 and in October 2005. The Board proposed a standard in February 2008 to replace the existing standard used by the auditing profession. Last month, the Board reproposed the standard for a second round of public comment. The comment period ended April 20.

A couple of the SAG members raised concerns about the impact of the prohibition on an engagement partner from serving as a reviewer for at least two years. Gaylen Hansen, an audit partner with Ehrhardt Keefe Steiner & Hottman PC, said the prohibition may be difficult for small firms with limited resources and suggested that one year may suffice. Bernard Jarvis, with the Joint Center for Political and Economic Studies, agreed that a break is necessary, and that one year should be sufficient.

Joseph Carcello, a professor at University of Tennessee, cautioned about serving in both roles with only a year's break in-between. He noted that public companies contain three years of financial statements, so reviewers may end up reviewing the financial statements they were responsible for auditing.

Wayne Kolins, a partner at BDO Seidman, LLP, would like to see guidance on differences of opinion between the engagement auditor and the reviewer. Greg Jonas, the managing director at Moody's Investors Services, suggested more information about the timing of the review. Practices differ dramatically, he said, and the standard provides no guidance. Jonas said the standard should address the importance of timing and of the concurring partners getting into the process as early as possible to ensure a substantive review.

Many of the members agreed that the revisions to the standard were improved by the replacement of the "knows or should have known" language with a standard of due care in providing the concurring approval for the issuance of the audit report. The original proposal stated that a reviewer must not provide concurring approval if he or she knows or should have know that the engagement team failed to obtain sufficient competent evidence in accordance with the PCAOB's standards, reached an inappropriate overall conclusion on the engagement, issued a report that is not appropriate in the circumstances or is not independent of the client.

However, Vincent Colman, a partner with PricewaterhouseCooper, questioned whether the revised standard actually represented any change since the staff suggested that the requirement was the same. An observer from the SEC agreed that it would be helpful to clarify the due professional care requirement.

Randy Fletchall of Ernst & Young advised that due professional care is understood by the profession. He said it is not the same as the "know or should have known" standard.