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BA 427 – Assurance and Attestation Services
Lecture 12The New Regulatory Environment
1933 - 19341929 1979 2002
The stock
market crash
The Great Depressio
n
Sarbanes-Oxley
Foreign Corrupt
Practices Act
World War II
The Cold War
The Securities Acts of 1933
and 1934
The Information Revolution
Regulatory Time-Line
October2000
Reg. FD
2000 Oct – Dec 2001
2002
Sarbanes-Oxley
Act
Enron stock price
collapses
Terrorist Attacks on the World Trade Center
New Auditor Independence
Rules
Bush is elected President in
contested election
Regulatory Time-Line
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The Telecommunications Industry The industry lost $2 trillion in
shareholder value. 400,000 employees lost their jobs Global Crossing was the fourth
largest bankruptcy in U.S. history.
50% of employee 401(k) assets were tied up in Enron Stock.
Within weeks, 4000 employees lost their jobs.
Many employees also lost most of their retirement savings.
Enron
Lecture 12 – The New Regulatory Environment Sarbanes-Oxley, Title I The PCAOB
Sarbanes-Oxley, Title I “There is established the Public
Company Accounting Oversight Board” To oversee the audit of public
companies and related matters To protect the interests of investors To further the public interest in the
preparation of informative, accurate, and independent audit reports
Sarbanes-Oxley, Title I The Board shall be a nonprofit corporation. The Board shall not be an agency or
establishment of the U.S. Government. No member or person employed by the
Board shall be deemed to be an employee of the Federal Government.
The PCAOB is overseen by the SEC PCAOB rules and standards are filed with the
SEC, and only become effective when approved by the SEC.
Sarbanes-Oxley, Title I The Duties of the Board:
Register public accounting firms that prepare public company audits.
Establish or adopt auditing, quality control, ethics, independence, and other standards relating to the preparation of public company audit reports.
Conduct inspections of registered public accounting firms.
Conduct investigations and disciplinary proceedings of public accounting firms.
Sarbanes-Oxley, Title I The Membership of the Board
Five members Appointed from “among prominent
individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of … financial disclosures … and the obligations of accountants with respect to the preparation and issuance of audit reports ….”
Sarbanes-Oxley, Title I The Membership of the Board
Two and only two members shall be or have been CPAs.
The PCAOB Chair cannot have practiced as a CPA within the past five years.
Each member shall serve on a full-time basis, for no more than two 5-year terms.
The SEC appoints the Board, in consultation with the Chair of the Federal Reserve Board of Governors and Secretary of the Treasury.
Sarbanes-Oxley, Title I, Section 102
PCAOB Registration of Accounting Firms Any auditor preparing or issuing an audit
report for a public company must be registered with the PCAOB.
As part of the registration application, accounting firms must submit to the Board: The names of all public company clients The annual audit and nonaudit fees from each
client. Other financial information pertaining to the
firm.
Sarbanes-Oxley, Title I, Section 102
PCAOB Registration of Accounting Firms As part of the registration application,
accounting firms must submit to the Board: A statement of the firm’s quality control policies. A list of all accountants associated with the firm
who participate in public company audits. Information relating to criminal, civil, or
administrative actions or disciplinary proceedings pending against the firm or any member of the firm.
Information about accounting disagreements with any public company clients.
Sarbanes-Oxley, Title I, Section 102
PCAOB Registration of Accounting Firms Each registered public accounting firm shall
submit an annual report to the Board to update the information contained in its application.
The Board may make any and all of the information in these applications available to the public, although proprietary information shall not be made public.
Sarbanes-Oxley, Title I, Section 103
Auditing, Quality Control, and Independence Standards and Rules: The PCAOB has responsibility for three areas
of standard setting: Auditing Standards Quality Control Standards Ethics Standards
Sarbanes-Oxley, Title I, Section 103
Auditing, Quality Control, and Independence Standards and Rules: SOX requires the PCAOB rules to include the
following auditing standards: Audit work papers must be maintained for
7 years; There must be a concurring or second
partner review; Section 404 reporting requirements
Sarbanes-Oxley, Title I, Section 103
Auditing, Quality Control, and Independence Standards and Rules: SOX requires the PCAOB rules to include the
following quality control standards: Monitoring of professional ethics and
independence Consultation on accounting and auditing
questions. Supervision of audit work.
Sarbanes-Oxley, Title I, Section 103
Auditing, Quality Control, and Independence Standards and Rules: SOX requires the PCAOB rules to include the
following quality control standards: Hiring, professional development, and
advancement of personnel; Acceptance and continuation of
engagements; Internal inspections
Sarbanes-Oxley, Title I, Section 104
Inspections of Registered Public Accounting Firms Annual inspections of accounting firms with
more than 100 public company clients. Inspections every three years for firms with
fewer than 100 public company clients. These inspections involve reviewing selected
audit and review engagements of the firm, and an evaluating the firm’s quality control procedures.
Sarbanes-Oxley, Title I, Section 104
Inspections of Registered Public Accounting Firms The inspection reports are submitted to the
SEC and to the appropriate State regulatory authorities.
The inspection reports are made available, in appropriate detail, to the public, except that criticisms of the firm, and defects in the firm’s quality control procedures, shall not be disclosed if remedied by the firm with one year.
Sarbanes-Oxley, Title I, Section 105
Investigations and Disciplinary Proceedings The Board may investigate any act or
practice, or omission to act, by a firm or member of the firm, that may violate any provision of SOX, the rules of the Board, or the rules established by the SEC.
The Board can require testimony by employees of the firm and the client, and the submission of documentation.
Sarbanes-Oxley, Title I, Section 105
The Board has the authority to enforce the following sanctions:
Temporary suspension or permanent revocation of the firm’s registration with the Board.
Temporary suspension or permanent bar of an individual from working for any registered firm.
Sarbanes-Oxley, Title I, Section 105
The Board has the authority to enforce the following sanctions:
Fines of up to $100,000 for individuals and $2,000,000 for firms.
If the auditor’s conduct is intentional, reckless, or repeated, the fines can be $750,000 for individuals and $15,000,000 for firms.
Sarbanes-Oxley, Title I, Section 105
The Board has the authority to enforce the following sanctions:
Censure Required additional professional
education or training
Sarbanes-Oxley, Title I, Section 106
Foreign Public Accounting Firms Foreign public accounting firms that
audit SEC clients can be subject to the same PCAOB rules as domestic firms. The PCAOB can exempt foreign firms from
these rules.
Sarbanes-Oxley, Title I 107: The SEC has oversight and
enforcement authority over the PCAOB. 108: Determines the criteria by which
the SEC can delegate accounting standard setting to the FASB or similar private regulatory body.
109: Establishes funding for the PCAOB and for the FASB. (Hence, the source of the FASB’s funding has changed.)
The PCAOB One of the first pronouncements by the PCAOB
was to adopt existing GAAS and independence and ethics standards.
Hence, except for the new auditing and reporting requirements in SOX, there were no initial differences between auditing standards for public companies and private companies.
Over time, we will see whether the Auditing Standards Board and the PCAOB establish different standards in areas where SOX did not establish new requirements.
PCAOB 2005 Annual Report Registration of Accounting Firms:
Approved 244 applications in 2005 Total number of registered firms: 1,591 646 of these firms are based outside of the
U.S. 378 of the U.S. registered firms had no SEC
clients at the time they registered. In 2005, 13 firms were denied registration.
PCAOB 2005 Annual Report Inspection of Accounting Firms
In 2005, the PCAOB inspected 281 registered accounting firms.
PCAOB inspection teams are based in Atlanta, Chicago, Dallas, Denver, New York City, Orange County, San Francisco, and Washington D.C.
The inspections in 2005 included the examination of 365 audits performed by the nine largest accounting firms.
PCAOB 2005 Annual Report Inspection of Accounting Firms
Profile of the inspection teams for large accounting firms: Inspection team leaders have on average 23
years of relevant experience. All other team members averaged 14 years of
relevant experience. The Board issued 173 inspection reports in
2005 relating to 2004 and 2005 inspections. There are several hundred inspectors.
PCAOB 2005 Annual Report PCAOB Funding
Public companies are assessed fees to support the PCAOB
The amount of the fee depends on the company’s market capitalization
Companies with market capitalization less than $25 million are exempt.
About 9,500 companies paid a fee.
PCAOB 2005 Annual Report PCAOB Funding
14 public companies paid an annual fee in excess of $1 million
29 public companies paid an annual fee between $500,000 and $1 million
203 public companies paid an annual fee between $100,000 and $500,000
4,300 public companies paid an annual fee less than $1,000.
PCAOB 2005 Annual Report PCAOB Expenses
RegistrationandInspectionsEnforcement
Standards-setting
Research
Other
PCAOB 2005 Annual Report Enforcement and Investigations
The Board announced settled disciplinary proceedings against three registered firms and five associated persons in 2005.
In 2005, the Board’s Division of Enforcement and Investigations launched 17 formal investigations of registered firms and associated persons.