July 2003

Book Review:

PCAOB Reporter: Coverage of Audit Standards and Board Actions

Published by CCH Washington Service Bureau;
24 issues per year; $300; online subscriptions and site licenses available. For more information or to order, call 800-955-5219 or 202-312-6600.

Reviewed by Burgman E. Connolly

PCAOB Reporter is a new semimonthly newsletter by CCH that covers the auditing standards and other actions by the PCAOB. The Public Company Accounting Oversight Board (PCAOB), created by Congress with the passage of the Sarbanes-Oxley Act, has the authority to set auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports by auditors of public companies under the supervision of the SEC.

As expected, the first issue was filled with discussions about the PCAOB’s organization and other administrative matters. But PCAOB Reporter also contains valuable information about the activities of the PCAOB and the SEC aimed at protecting investors and restoring confidence in financial statements of public companies in the U.S.

Regulating Accounting Services

One of the early issues included an informative summary of the significant events occurring since the Sarbanes-Oxley Act was enacted last July, starting with the aborted appointment of William Webster as PCAOB chair and continuing to the SEC Roundtable in March 2003 on the registration and oversight of accounting firms that audit companies listed on U.S. exchanges and associations. This issue of the Reporter included a letter from Senators Chris Dodd (D-CT) and Jon Corzine (D-NJ) to the SEC urging the Commission not to exempt foreign accounting firms from PCAOB oversight. The letter detailed the senators’ reasons for that position.

Protecting Investors

Turning to actions by the PCAOB aimed at protecting investors, in April the SEC adopted new mandatory audit committee requirements for public companies whose shares are listed on a national securities exchange (or association). Described by Chief Accountant William Donaldson as “the cornerstone of the corporate-governance provisions of the Sarbanes-Oxley Act,” the new rules will require audit committees of public companies to be responsible for appointing, compensating, retaining, and overseeing the company’s outside auditors. Auditors must report directly to the committee, and the committee must establish procedures for handling complaints about accounting, internal control, and auditing matters, as well as have the authority to hire independent advisers as needed. Furthermore, all audit committee members must be independent of the company and its subsidiaries and affiliates, and must not accept any fees outside of the compensation earned as board committee members.

Another important action discussed in PCAOB Reporter that demonstrates the board’s strong commitment to the highest quality of auditing standards was the SEC’s response to the AICPA Auditing Standards Board’s (ASB) March 2003 exposure draft (ED) on a new auditing standard on internal control issued as the first step of implementing section 404 of the Sarbanes-Oxley Act. Acting SEC Chief Accountant Jackson Day promptly responded with a letter to the AICPA expressing his concern with the draft, pointing out that setting auditing standards for public companies is the responsibility of the PCAOB. The AICPA developed the ED in response to a requirement under the Sarbanes-Oxley Act that public companies include in annual reports management’s assessment of the effectiveness of the company’s internal controls and procedures for financial reporting, and that the company’s outside auditor attest to the assertion. Jackson Day’s response explained that once the PCAOB is organized and able to carry out its mission, it will approve adoption of existing or transitional auditing standards.

General Matters

Finally, PCAOB Reporter described a number of administrative actions taken by the PCAOB and the SEC in an effort to get the Board up and running. One such action was the PCAOB’s proposed plan to fund its operating costs through the public companies it was created to monitor. Other administrative and organizational action include the SEC’s announced description of criteria for selecting the new PCAOB chair, the credentials of candidates vying for the positions, and an explanation for the high compensation to be paid to the chair and commissioners of the PCAOB.

PCAOB Reporter contains information I consider to be of vital importance to independent auditors and corporate managers of public companies, and to foreign auditors that audit U.S. corporations or affiliates, as well as foreign corporations whose securities are traded in U.S. markets. PCAOB Reporter is an excellent and up-to-date source of information about the Sarbanes-Oxley Act and the PCAOB.

Burgman E. Connolly, CPA, a principal of Rosen Seymour Shapss Martin & Co. LLP in New York City, is a member of the NYSSCPA’s SEC Practice Committee and Peer Review Committee.

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