The Future of Audit and Assurance Services

Barry MELANCONPresident and CEO,American Institute of Certified Public AccountantsUnited States

The Future of Audit & The Future of Audit & Assurance ServicesAssurance Services

What went wrong – The What went wrong – The current corporate culture and current corporate culture and

reporting modelreporting model Simple greed or arrogance Market pressure on short term earnings Lack of transparency or timely disclosures

in the reporting model Lack of mandated disclosures on

managements accounting policies Too many rules leading to connect the dots

accounting

The AICPA’s RoleThe AICPA’s Role

AICPA has a role as a standard-setter AICPA has a role as a liaison between market

institutions and corporations AICPA has a research role AICPA has an educational role AICPA has a role to play in advancing the level of

financial reporting AICPA has a role in promoting strong corporate

governance and internal controls

Getting the Right AnswerGetting the Right Answer

We are at a serious juncture in the history of our financial markets and our profession

Anyone who deceives investors must be held accountable

Regulators should have all the resources they need to police the capital markets and enforce the law

Investors must have information that is accurate, clear, timely and relevant

The reputation of the CPA profession must be restored and our proud heritage honored

A Revitalized Accounting A Revitalized Accounting CultureCulture

What is needed is not just legislation but a revitalized accounting culture

Build upon the profession’s traditional values– A rigorous commitment to integrity– A passion for getting it right– A commitment to rules and a zeal for

applying them– Zero tolerance for those who break them

A Strong, Unified A Strong, Unified Profession Profession

Demands Unified SolutionsDemands Unified Solutions Our challenge and opportunity is found in

our diversity We must avoid creating fragmented

solutions for a fragmented profession. Leadership must stay focused on the long-

term strategy and outcome: – Increasing confidence in the capital markets

and in the CPA profession itself.

Honoring our heritage and Honoring our heritage and moving forwardmoving forward

We need to reaffirm our basic commitment to professionalism

Auditors must be willing to say NO– Every day, auditors everywhere are telling a

corporate exec what must be disclosed, why a transaction can’t be treated in a certain fashion and why certain activity must be reflected on the balance sheet

– “Trust, but verify,” this is the true spirit of the profession

What saying NO meansWhat saying NO means

Rejecting unsound corporate accounting practices

Reducing the risk of deceit and fraud through diligent inquiry

Ensuring that audited statements are not just accurate, but illuminating

Questioning management, challenging management

When justified – rejecting management’s accounting decisions

How the U.S. Auditing How the U.S. Auditing Standards Board Standards Board

is Respondingis Responding

Sarbanes/Oxley ProjectsSarbanes/Oxley Projects

Internal control task force– Focus on reporting on internal controls over

financial reporting as part of the annual audit Audit committee task force

– Focus on relationship and communications

Sarbanes/Oxley ProjectsSarbanes/Oxley Projects

Omnibus task force– Documentation retention– Concurring partner review– Foreign affiliate issues– Representation and attorney letter amendments

Q.C. Task Force– Focus on inspection/monitoring guidance– Audit partner rotation– Objectivity issues

Recently Issued StandardsRecently Issued Standards

SAS No. 95, Generally Accepted Auditing Standards

SAS No. 96, Audit Documentation SSAE No. 11, Attest Documentation SAS 97, Reports on the Application of

Accounting Principles SAS 98, Omnibus 2002 SAS 99, Consideration of Fraud in a Financial

Statement Audit

Other ASB’s Agenda Other ASB’s Agenda ItemsItems

Risk Assessments Fair Value SAS No. 71(Quarterly Reviews of SEC

Entities) Joint Task Force on Quality Control Horizons II

Horizons II Task ForceHorizons II Task Force

Strategic group looking at direction of ASB and auditing standards over next 3 – 5 years

Will continue to include convergence with international auditing standards

Explore expanding auditor’s communication Explore whether “reasonable assurance” is the

proper level of assurance with respect to the auditor’s responsibility to plan and detect material errors.

AICPA Fraud InitiativesAICPA Fraud Initiatives

Working with Corporate Working with Corporate AmericaAmerica

AICPA to convene anti-fraud summit with corporate leaders, accountants and market professionals

Will partner with corporations to design and establish anti-fraud controls and programs.

Will created enhanced attestation standards for CPAs to report on corporate anti-fraud programs

Corporate GovernanceCorporate Governance

AICPA calls for revision of auditing standards to provide public notice of internal control weaknesses

Reportable conditions to include: – One person as Chair and as CEO– Audit committee that is not fulfilling its

mission.– It may include lack of mandatory anti-fraud

education, or lack of a Code of Conduct

ResearchResearch

AICPA to sponsor academic research into the who, what, when, where & why of fraud

AICPA will establish an Institute for Fraud Studies with the University of Texas and Association of Certified Fraud Examiners

Education & TrainingEducation & Training

AICPA will develop training programs to prevent fraud

AICPA to work with academia on anti-fraud curricula and materials

AICPA calling for members to more anti-fraud CPE

AICPA urges stock exchanges to mandate anti-fraud education for corporate managers and directors

Overview of Other Overview of Other Significant Professional Significant Professional

DevelopmentsDevelopments

Foundation for the Foundation for the FutureFuture

Must work to protect the public interest under the current reporting models

Must work to develop approaches and programs to respond to marketplace demands for assurance under “New Economic” models

ConvergenceConvergence

Blurring of Boundaries between– Auditing of Financial Statements

– Assurance– Attestation on financial and non-financial items

Need for on-line real time assurance

What it takes to get What it takes to get Real Time Assurance.Real Time Assurance.

Reliable systems A common method of disseminating information

on the internet Reporting on subsets of financial data as well as

non financial data, industry specific rather than one size fits all, common global approach

Corporate accountability including management integrity, solid enterprise risk management

Understandable disclosures including the ability to ‘drill down” into expanded discussion if the user desires to do so

Continuous Assurance

Issues we’re grappling with: Subject matter: systems or data? Cost effectiveness of continuous monitoring

procedures Reporting: contemporaneous or very

frequent or exception reporting?

XBRLXBRL

Extensible Business Reporting Language 4th International Conference held in Berlin

in March “The Road to Better Business Information--

Making the case for XBRL”– A white paper by Microsoft,

PricewaterhouseCoopers and NASDAQ XBRL GL was released

XBRLXBRL

With its promise of real-time financial reporting, the AICPA-founded XBRL moves to center stage in business world

The Federal Deposit Insurance Corporation, Moody’s, Microsoft, Reuters, NASDAQ and Deutsche Bank, among many others, announce they are using XBRL in their financial disclosures

More than 150 international companies and organizations now belong to consortium that is developing XML-based business reporting standards

PrivacyPrivacy

Developing framework of privacy practices and criteria

Developing educational campaign to educate public and B&I members

Study on Privacy was released and generated much media coverage– AICPA, Ernst & Young and Privacy and

American Business Research Study Congressional activity

Sustainability Reporting

Sustainability reports typically cover the following matters:

Environmental matters such as data on emissions of certain pollutants and initiatives to reduce those emissions

Social responsibility matters such as occupational health and safety, payment of a living wage and compliance with collective bargaining agreements

Conclusion -- Moving Conclusion -- Moving ForwardForward

Core values and traditional areas. Building on what we do best and what the

public needs us to do. Wrestle with such key issues as reporting

measures, transparency, fraud responsibility, dependency, etc.

Address state issues Enhance the public’s perception of our

profession

Questions?Questions?