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Audit Firms Support AS5, While Others Find Faults

KPMG LLP has encouraged the SEC to expedite its approval of the PCAOB's Auditing Standard No. 5 and the related independence rule and conforming amendments. Expedited approval will assist auditors that wish to implement the provisions prior to the effective date. KPMG said that it has prepared for early implementation of the new standard and continues to conduct training on the AS5 concepts.

KPMG asked the SEC to provide a transition period for rule 3525 regarding the audit committee's pre-approval of nonaudit services. The rule, once approved by the SEC, would apply to internal control-related services that were provided during the years ending November 15, 2007. KPMG noted that some of these services will already have been pre-approved by audit committees prior to the date the final rule is approved. In order to make clear that these services do not require reapproval, KPMG asked the SEC not to apply rule 3525 for services pre-approved prior to 60 days after the date the final rule is approved.

Grant Thornton believes the PCAOB appropriately responded to the concerns raised by auditors, issuers and others in its revised standard.

XenoPort, Inc., a small, publicly held biopharmaceutical company, reported its surprise to learn that the auditing profession expects small reductions in the level of their efforts and their associated fees. Based on what the company is hearing, the internal control audit will not be reduced to a level deemed cost-effective.

Alamo Group said that no amount of internal control auditing can compensate for an unreliable management team. The company believes the continuing focus on auditing instead of management accountability is misplaced. Alamo also believes that the cost of compliance with AS5 will continue to be unacceptably high for all registrants, and disproportionately so for small companies.

The Hundred Group of Finance Directors, which includes the finance directors of Britain's largest companies, believes the most cost-effective measure would be requiring auditors to give an opinion only on management's own evaluation process and not provide the additional assessment of the effectiveness of internal control over financial reporting. Since the second opinion is being retained, the group urged the SEC to continue to seek feedback on the extent to which AS5 reduces the costs and burdens of compliance.

The group also urged PCAOB inspectors to ensure that audit firms interpret and apply AS5 in a consistent manner. If the expected benefits fail to materialize, the group urged the SEC and the PCAOB to reassess AS5 and whether it should be further amended or clarified.

The Organization for International Investment, which represents the interests of over 150 U.S. subsidiaries of companies based abroad, believes that further guidance is needed in the areas of risk assessment and the auditor's ability to use the work of others. The organization also said the materiality standard should be modified to reflect the standard used in MD&A disclosures. The excess costs of compliance with the SEC's internal control rules are among the main impediments to foreign companies choosing to list their securities in the U.S., according to the organization.

The comment period closed July 12.

Jacquelyn Lumb