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Comments Mixed on Auditing Standard No. 5

Big Four accounting firm Deloitte & Touche LLP has urged the SEC to approve Auditing Standard No. 5 as soon as reasonably practicable. Deloitte said the largest component of section 404 costs is internal issuer costs and third party costs other than auditor fees. Accordingly, the greatest impact on costs will be determined by how management performs its assessment, in the firm's view. Deloitte believes the efficiencies that can be achieved will vary with the facts and circumstances of each company and will depend on the state of the internal controls over financial reporting that are in place.

Deloitte expressed concern about the focus on conducting a more efficient audit. Audit quality should not be compromised for the sake of audit efficiency, Deloitte explained. The firm said the PCAOB faces a significant challenge in achieving the balance between audit quality and audit effectiveness. The Board's consistent message to auditors on this point is critical, in the firm's view.

Ernst & Young LLP wrote that it strongly supports AS5 and the related independence rule and conforming amendments. The firm believes the standard will be particularly helpful to the auditors of issuers that have not yet implemented section 404. E&Y urged the PCAOB, during the inspection process, to respect the range of possible judgments that auditing firms and auditors may make under the principles-based standard. The inspector's judgment must not usurp the auditor's as long as the principles have been complied with, according to the firm.

PricewaterhouseCoopers supports the prompt approval of AS5, but noted that the cost savings will depend on many factors, including the extent to which a top-down, risk-based approach was previously implemented. BDO Seidman, LLP also wrote in support of AS5, the related independence rule and the conforming amendments.

The Institute of Internal Auditors wrote that auditors need more guidance with respect to materiality. IIA said the definition should include a time period for assessing the reasonable possibility of a material weakness, and believes it should be forward-looking to the likelihood of an undetected error in the financial statements filed with the SEC in the next year.

The Institute of Chartered Accountants in England and Wales continues to have concerns about the new regime for implementing section 404. ICAEW urged the SEC and the PCAOB to resist the temptation to provide more guidance and interpretation, especially with respect to any monetary criteria in the definitions of material weakness and significant deficiency. ICAEW also believes the U.S. is out of step in mandating an audit of the effectiveness of internal control over financial reporting. The U.S. appears to be alone in pursuing that mandate, according to ICAEW, and it could present a major barrier to the convergence of auditing standards around the world.

The Institute of Management Accountants urged a further delay of AS5 for at least one year for smaller public companies to allow more time to get it right. IMA also believes that Congress should intervene and rewrite sections 103(a) and 404(b) of the Sarbanes-Oxley Act. Otherwise, the SEC's guidance will continue to be trumped by the PCAOB's AS5, resulting in the continuation of the high costs and inefficiencies, in IMA's view. IMA also called on Congress to require the SEC and the PCAOB to develop a plan to measure the performance under the new guidance in reducing the frequency of materially wrong auditor-certified financial statements.

The comment period closed July 12.

Jacquelyn Lumb