Saturday, July 28, 2012

CAQ Tells House Panel PCAOB Has Improved Audit Quality since Enactment of Sarbanes-Oxley

The activities of the PCAOB, particularly its inspections and standard-setting roles, have been a significant factor in the improvement of audit and financial reporting quality in the decade after the enactment of the Sarbanes-Oxley Act, the Center for Audit Quality told the House Capital Markets Subcommittee. Testifying for CAQ, Michael Gallagher, Chair of CAQ’s Professional Practice Executive Committee, and managing Partner of PwC’s audit quality functions, said that PCAOB inspections promote audit quality in a number of ways. For example, they reinforce accountability for audit quality at all levels of an audit firm, including leadership. The inspections also highlight opportunities for audit firms to improve, including identifying areas on an engagement where more or different audit procedures should be performed. The inspections also help identify areas in which additional training, audit guidance, skills, or communications may be needed.

The CAQ official, who is also a member of the PCAOB’s Standing Advisory Group, noted that the Board's inspection activities are not limited to the U.S. The PCAOB has made significant progress over the past several years reaching inspection agreements with audit regulators in other jurisdictions. These efforts are ongoing, he observed, and US regulators are seeking to obtain better alignment in those cases where US and local laws conflict. International inspections promote investor protection, he emphasized, particularly in light of the ever increasing complexity and global scale of business. Many jurisdictions have adopted similar independent auditor oversight models.

In CAQ’s view, standard-setting can also have a significant impact on audit quality. The PCAOB publishes its standard setting agenda, and solicits feedback, in part, through its Standing Advisory Group, which comprises investors, public company executives, audit committee members, auditors, and other stakeholders. Also, CAQ works closely with the PCAOB and its staff on new and emerging auditing issues, with a focus on promoting standards that enhance financial reporting and audit quality.

More specifically, the collective impact of PCAOB and SEC actions, and other factors, has led to a general decline in compliance costs associated with the internal control provisions of Sarbanes-Oxley.       The PCAOB’s original auditing standard on internal control, issued in 2004, was widely viewed as being too rules-based and costly, as audit hours, audit fees, and companies' associated internal costs increased significantly. The PCAOB recognized these concerns and responded by issuing a revised standard in 2007 that was intended to promote a more risk-based audit and was less prescriptive, thereby allowing the use of more auditor judgment. While focused on maintaining audit quality, noted CAQ, that standard generally resulted in reductions to the nature and extent of audit procedures, and a corresponding reduction in audit hours and fees.

The PCAOB also published staff guidance on its revised standard for audits of smaller public companies to facilitate more efficient and effective audits of internal control over financial reporting for smaller, less complex public companies. In addition, the PCAOB conducted nation-wide forums for auditors of smaller audit firms to help address implementation issues associated with its revised standard. Similarly, the SEC issued guidance for companies to use in their assessment of internal controls that improved management assessments, which has contributed to an increase in auditor efficiency.

Other factors driving down costs are that auditors have made continued progress in integrating their audits of internal control over financial reporting with their financial statement audits. Similarly, management’s processes and activities that support a public company's required assertion about internal control over financial reporting have become more integrated with their day-to-day activities and related financial reporting, in part due to investments to update information technology systems.