(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

PCAOB Officials Review Developments At ALI-ABA Conference

With the fourth anniversary of the creation of the Public Company Accounting Oversight Board approaching, board member Daniel Goelzer reviewed the its progress at the American Law Institute-American Bar Association's recent Sarbanes-Oxley Institute. The PCAOB's inspection process is a powerful tool for improving the audit process, he said, and can change the way that audits are conducted. The standard-setting issue that has dominated the board's existence in Auditing Standard No. 2 regarding the audit of internal controls over financial reporting, which Mr. Goelzer said has had a revolutionary effect on both auditing and management.

The PCAOB will soon propose a standard on engagement quality, Mr. Goelzer reported. The other priorities on the board's agenda include risk assessment, related-party transactions, confirmations and the reliance on the work of specialists. The board relies on the inspection program to address auditing problems as long as the firm has acted in good faith, Mr. Goelzer said, but where the practices rise to a more serious violation, the enforcement process will take over.

The board announced five enforcement actions in 2005 and 2006, Mr. Goelzer said. Since contested proceedings remain confidential, he predicted that more enforcement actions will be seen in the coming months.

George Diacont, the PCAOB's director of registration and inspections, noted that many predicted that very few accounting firms would register with the PCAOB. Some predicted that no more than 300 or so firms would register since they would be subject to the PCAOB's inspection regime. Mr. Diacont said that approximately 1,700 firms have registered, nearly half of which are foreign firms. Very few firms have withdrawn from registration, he added.

Laura Phillips, the PCAOB's deputy chief auditor, reported that the staff is closing in on the revisions to Auditing Standard No. 2. She believes the audit process can be improved, but emphasized the importance of taking the time to get it right. Ms. Phillips also noted that it is not unusual for standards to be amended over time as practices improve. The staff is challenging every aspect of Auditing Standard No. 2, she said, with particular attention to any sections that may encourage work that will not benefit the audit.

The inspection staff is looking at how well firms are applying the May 2005 guidance on Auditing Standard No. 2, she said. The revisions to the standard will add to the rule text the guidance that has been most helpful. The PCAOB has told auditors not to wait to implement the improvements, she added. When asked about the timetable for the revisions, Ms. Phillips said the staff hopes to affect the 2007 audit process. The staff expects the same volume of comments on the revisions as it received on the original proposal, she said. Once the board adopts the revisions, they will require SEC approval. Mr. Goelzer predicted that the proposal would be out within the next 30 days. It must be out this fall to meet the desired timetable, he said.

Audit Committees

Amy Goodman, with Gibson, Dunn & Crutcher LLP, outlined ways in which the audit committees can meet their responsibilities. She suggested that committees prepare an agenda and a schedule for each year which includes items in the committee's charter. Committees must make time to focus on different risks and reporting issues, she said. They should identify the groups with whom to have an ongoing relationship, such as the outside auditor, and establish a rapport between the committee chair and the audit partner.

The committee should have a list of audit-related and non-audit items for approval, and should make sure that controls are in place to ensure that the items do not exceed the budget. The audit committee should be the "boss" of the internal audit function, she said.

Some audit committees find it useful to meet with the disclosure committee at least once a year. The audit committee may also wish to meet with the general counsel, particularly if the general counsel serves as the chief compliance officer. Many companies view "whistleblower" programs as part of their overall compliance program, she said. Audit committees may want to make sure that hot lines are in place and help determine how the complaints are handled. If there are allegations of financial impropriety, the audit committee should know about it.

Ms. Goodman said the audit committee should also coordinate with other committees, such as the executive compensation committee, particularly in light of the recent stock option backdating issues. Audit committees should consider outside expertise as needed, including educational and training advice which is particularly important for new directors.