Volume 4, Issue 7

July 2010

I. U.S. Supreme Court’s PCAOB Decision Leaves Sarbanes-Oxley Act “Fully Operative”

The U.S. Supreme Court on June 28 ruled that the Sarbanes-Oxley Act's (SOX) provisions making Public Company Accounting Oversight Board (PCAOB) members removable by the U.S. Securities and Exchange Commission (SEC) only for good cause were inconsistent with the Constitution's separation of powers. In striking that provision of SOX, the Court stated that the PCAOB may continue to function as before, but its members may be removed at will by the SEC. Moreover, in a victory for investors, the Court also found that the provision was severable from the remainder of SOX, leaving it “fully operative as a law.”

Some feared that the broad challenge to the validity of the PCAOB would result in the Court ruling that all of SOX was unconstitutional. “The Court, to its credit, refused to do so,” Center for Audit Quality (CAQ) Executive Director Cindy Fornelli wrote in a guest article for The Huffington Post (“The Supreme Court's PCAOB Decision: A Win for Investors,” June 28). “Rather, in a 5-4 decision the justices decided that PCAOB board members could be removed from their roles by the SEC ‘at will.’ In doing so, the Court clearly reaffirmed all other provisions of the law, including the ongoing role of the PCAOB itself.”

In a statement issued by the CAQ, Fornelli said, “The decision will prevent any disruption to the key activities of the PCAOB including setting auditing standards and the public company audit oversight process, critical factors in the continued strength and stability of our capital markets.”

II. CAQ Expands Commitment to Academic Research on Auditing by Funding Three News Research Studies

The CAQ has announced the funding of three independent, scholarly auditing-related research projects by the CAQ’s Research Advisory Board (RAB).

In response to a request for proposals in December 2009, the RAB received nearly 40 proposals that addressed such topics as audit quality, fraud deterrence and detection, professional judgment and professional skepticism. The RAB, which promotes credible and timely academic research on topics germane to the field of auditing, reviewed the proposals and selected the following projects for funding:

• “Can Earnings Quality Research Tell Us Anything about Audit Quality?” by Jere Francis and Paul Michas, University of Missouri
• “The Impact of Engagement Quality Control Review Practices on Concurring Partner Objectivity,” by Jennifer Mueller, James Long and Duane Brandon, Auburn University
• “The Effect of Prevention and Detection Interventions on Fraud Dynamics in Organizations,” by Jon Davis and Heather Pesch, University of Wisconsin.

“The CAQ is committed to expanding opportunities for active engagement between the academic community and the profession to increase the impact of audit research on audit practice,” said Cindy Fornelli, in announcing the funding on June 22. “Funding academic research on audit-related topics benefits audit quality and also provides increased opportunities for interaction between academics and practitioners,” she explained. “We are also proud to make these funding commitments to support the work of two PhD students (Michas and Pesch) and a new faculty member (Long).”

III. CAQ Launches New Auditing Library Resource for Financial Asset Transfers

As part of its ongoing effort to foster high quality performance by public company auditors, the CAQ recently added a new Web resource on accounting for transfers of financial assets and consolidations of variable interest entities.

Accounting for Transfers of Financial Assets and Consolidation of Variable Interest Entities highlights recent accounting standard updates that are designed to improve the relevance, representational faithfulness, and comparability of public company financial information. The resource, found in the CAQ’s online “Auditing Library,” includes relevant information from a variety of sources, including technical guidance from standard-setters, publications by the CAQ and its member firms, and webcasts, in one central location.