Volume 4, Issue 6

June 2010

I. CAQ, Other Groups Oppose Assaults on Independent Standard-Setting and Sarbanes-Oxley Act

The Center for Audit Quality (CAQ) was among seven organizations that urged U.S. Senators to refrain from taking actions that would impact the independence of accounting standard setting. Joining CAQ Executive Director Cindy Fornelli in signing the May 7 letter were officials of the CFA Institute, Financial Executives International, the Investment Company Institute, the Council of Institutional Investors (CII), the American Institute of Certified Public Accountants (AICPA) and the U.S. Chamber of Commerce. The groups wrote, “As the Senate considers reforms to the U.S. financial system as part of the Restoring American Financial Stability Act of 2010, we are concerned with any amendment that would legislate accounting standards, including Brown amendment SA 3853 regarding ‘Financial Reporting.’”

Two weeks later, Fornelli and CII General Counsel Jeff Mahoney collaborated on a second letter to Senators. Their May 20 text urged the Senate’s leadership to resist efforts to exempt smaller public companies from Section 404(b) of the Sarbanes-Oxley Act (SOX), which requires an independent audit of a public company's assessment of its internal controls. “We dispute the suggestion that Section 404(b) compliance can be eased without placing investors in smaller public companies at a distinct disadvantage to investors in larger public companies,” the two wrote. “To wit, a study by the Committee of Sponsoring Organizations of the Treadway Commission determined that between 1998 and 2007 the median assets of companies experiencing fraudulent events rose to approximately $100 million. This should give pause to anyone of the opinion that smaller public companies are immune to the fraudulent financial activity Section 404(b) seeks to deter.”

Neither Senator Sherrod Brown’s standard-setting amendment nor the 404(b) amendments offered by Senators David Vitter and Kay Bailey Hutchison were included in the Senate measure. However, House and Senate conferees now must reconcile differences in the House and Senate versions of the legislation. In particular, the House-passed bill calls for a permanent exemption from SOX Section 404(b) compliance for companies with market capitalization of up to $75 million.

II. Webcast Focuses on PCAOB Staff Perspectives on Smaller Firm Matters

The CAQ’s latest Webcast was an opportunity to hear insights from Public Company Accounting Oversight Board (PCAOB) staff on issues of importance to smaller public company auditing firms.

Joining Cindy Fornelli (center) for the CAQ’s May 18 Webcast on smaller public company audit firm matters were (left to right): Deputy Chief Auditor Jennifer Rand; Deputy Director, Inspections, George Botic; Deputy Chief Economist Jana Hranaiova; and Associate Director, Office of Research and Analysis, Brian Wolohan, all with the PCAOB.

Moderated by Cindy Fornelli, the May 18 Webcast was streamed to more than 300 locations nationwide. The two-hour program featured representatives from the PCAOB’s Office of the Chief Auditor, Division of Inspections and Office of Research and Analysis who shared their perspectives on several emerging topics for smaller firms, including: economic trends and related risks; common inspections issues for smaller firms; and recent standard-setting activities.

The CAQ has expressed its support for efforts to continue to strengthen the communications between auditors and audit committees “given the important role audit committees play in protecting the interests of investors.” In a May 28 comment letter submitted to the PCAOB regarding their “Proposed Auditing Standard Related to an Auditor's Communications with Audit Committees,” CAQ Executive Director Cindy Fornelli stated, “We support the Board’s objective of enhancing interim standards by reflecting improvements in the communication between firms and audit committees since the enactment of [the Sarbanes-Oxley Act], centralizing all required communications with audit committees within one standard, and considering the requirements of relevant standards of the International Auditing and Assurance Standards Board and the AICPA’s Auditing Standards Board in development of the standard.”

However, the CAQ’s comment letter provided a number of observations that are intended to enhance the PCAOB’s proposal. Some of the more significant comments included modifications to the objective of the standard, suggested actions the PCAOB could take to enhance the effectiveness of communications between audit committees and auditors (for example, working collaboratively with organizations such as the National Association of Corporate Directors ) and modifications to emphasize management’s responsibility for communications with the audit committee. In addition to these observations, the CAQ provided a number of other comments in an attachment to the letter.