ba 427 – assurance and attestation services lecture 12 the new regulatory environment

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

1981 – 1989: The Reagan Years

0

500

1000

1500

2000

2500

3000

Dow Jones

1981 – 1989: The Reagan Years

0

500

1000

1500

2000

2500

3000

1993 – 2001: The Clinton Years

0

2000

4000

6000

8000

10000

12000

14000

Dow Jones

The New Investor Class

01020304050607080

millions

1983 1999

Americanswho ownstock

Dow Jones prices1986 – 2004

0

2000

4000

6000

8000

10000

12000

14000

Dow JonesA

ug

2000

Sep

t 2002

S & P 500 prices1986 – 2004

0

200

400

600

800

1000

1200

1400

1600

S & P 500

Au

g

2000

NASDAQ prices1986 – 2004

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

NASDAQFeb

2000

Xerox1998 – 2002

0

10

20

30

40

50

60

70

Tyco1999 – 2002

0

10

20

30

40

50

60

70

Tyco

Kodak1998 – 2002

0

10

20

30

40

50

60

70

80

Kodak

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.


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.


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.


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


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



following quality control standards: Monitoring of professional ethics and

independence Consultation on accounting and auditing

questions. Supervision of audit work.



following quality control standards: Hiring, professional development, and

advancement of personnel; Acceptance and continuation of

engagements; Internal inspections


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.


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.


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.


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.



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.



Censure Required additional professional

education or training


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.

ba 427 – assurance and attestation services lecture 12 the new regulatory environment

Documents

title ithe board

audit of public companies

title ithe pcaobsarbanesoxley

public company audits

title ithe membership

title ithe duties

title ithere

pcaob chair