(The article featured below is a selection from PCAOB Reporter, which is available to subscribers of that publication.)

PCAOB Officials Speak at Conference on Accountants' Liability

PCAOB member Daniel Goelzer provided an update on the Board's activities at the May 15 ALI-ABA conference on accountants' liability. He reported that the Board's proposed policy statement on when the Board may rely on a foreign oversight body to conduct inspections has generated a lot of critical comments, both pro and con. The Board has announced that it will host a roundtable on June 25 to consider the views of interested parties.

Goelzer referred to a proposal by the Advisory Committee on Improvements to Financial Reporting that the SEC issue a statement of policy on how it evaluates the reasonableness of accounting judgments and the factors it will consider in making its evaluation. The Committee recommends that the PCAOB adopt a similar approach with respect to auditing judgments. If the SEC adopts a judgment framework as recommended by the Committee, the PCAOB would also have to revise its approach, he said.

Goelzer noted that a Treasury Department advisory committee has called on the Board to come up with indicators of audit quality such as the average years of experience within a given firm and staff turnover rates. Goelzer was skeptical about whether these issues would be indicative of audit quality, but if the recommendations are adopted, he said the Board would figure out the best approach.

Helen Munter, the PCAOB's regional director for inspections out of San Mateo, California, discussed the process for inspecting large firms. It is a continuous process which builds on previous inspections, she said. The staff will examine whether the firm has effectively remediated any previously identified deficiencies, for example. The staff will also look at how a firm identifies risk and monitors high risk clients, how it rewards high achieving audit partners and how it penalizes others.

The staff does not look at an entire individual issuer audit, but selects riskier areas on which to focus. The risk areas may be specific to certain firms or may include new accounting areas such as the recent adoption of the fair value standard. The staff will also look at judgment, according to Munter, not to second guess the auditors, but to determine what went into the auditors' assumptions.

The staff sometimes issues comment forms at the end of an inspection outlining its concerns or sometimes best practices, Munter advised. The engagement team can respond to those comments and the staff will consider the responses when drafting the inspection report. Any violations of the securities laws or any independence violations that are discovered during the inspection process are referred to the SEC. Goelzer noted that the staff has made 4,001 referrals to the SEC, the vast majority of which related to independence issues.

Claudius Modesti, the director of enforcement, reviewed the Board's recent case involving Deloitte which touched on the firm's failure to follow up on a partner's poor performance. The firm had concluded that the partner should be removed from public company audits, but he continued such engagements. Modesti said the staff will focus on matters such as auditor performance.

Many PCAOB cases will also be of interest to the SEC. Modesti said the staff communicates early on with the SEC to avoid duplication. The Board focuses on the auditors while the SEC focuses on issuers and third parties, he explained. Modesti responded to a question about why the public does not have access to full inspection reports and whether the missing information can be obtained under the Freedom of Information Act.

Modesti advised that the Board is prohibited by statute from publishing the part of the inspection reports relating to quality control deficiencies. The information cannot be obtained by submitting an FOIA request because the Board is not a government agency. Audit firms may release the information if they choose, but the Big Four firms have chosen not to do so.

Zoe-Vonna Palmrose, the SEC's deputy chief accountant for professional services, provided the keynote address at the conference. Palmrose reported that the staff is seeing a number of transparency issues involving disclosure about material weaknesses in management's assessment reports. Management is sometimes failing to disclose the cause of a material weakness and whether it has a pervasive impact on internal controls over financial reporting.

The staff will consider whether ineffective controls are adequately described and will look at the remediation effort that was undertaken in response to the discovery of a material weakness. The disclosure about remediation efforts often provides the staff with information about other material weaknesses that have not been disclosed, she said. In some instances, the auditor's report contains more information than management's report, she added, which may lead investors to conclude that the disclosures relate to different material weaknesses.

Palmrose said the staff has found filings by non-accelerated filers that contained no management report. In other cases, management has reported that its internal control over financial reporting is effective after disclosing material weaknesses. Management cannot disclose that its internal control is effective when one or more material weaknesses exist.