Volume 5, Issue 2

February 2011

I. “The Art of Skepticism”: CAQ’s Anti-Fraud Report is Focus of NACD Directorship Magazine Guest Article

The application of skepticism – a questioning mindset and an attitude of informed objectivity – may be an audit committee member‘s most important tool in discharging his or her responsibility for risk management and financial reporting, according to an article by CAQ Executive Director Cindy Fornelli and Senior Director of External Relations Angela Desmond in the latest edition of NACD Directorship magazine (“The Art of Skepticism,” February/March 2011).

“Bringing skepticism into the boardroom may be as simple as changing how audit committee members communicate: the mere mention of the word ‘fraud’ can be enough to stall a conversation or elicit a defensive response. Board and audit committee members may be able to better understand fraud risks within the company by broadening their focus a bit,” Fornelli and Desmond wrote. “To that end, the CAQ’s [anti-fraud] report includes a list of 10 questions to help guide audit committee members.”

According to Fornelli and Desmond, “Getting accustomed to asking probing questions, as part of a more skeptical attitude regarding companies’ financial reporting activities, can enhance our collective fraud deterrence and detection efforts. Be guided by the words of British poet Edward Hodnett, who wrote, ‘If you do not ask the right questions, you do not get the right answers.’”

In other anti-fraud initiative news, The Fraud Examiner, a newsletter of the Association of Certified Fraud Examiners, recently featured a two-part interview with Cindy Fornelli in which she explained that financial reporting fraud is an issue that requires continuous improvement on the part of auditors and others in the financial reporting supply chain.

II. CAQ Comments on Interim PCAOB Rule on Broker-Dealer Audits

The CAQ on February 15 submitted a comment letter to the PCAOB on the Board’s proposal for an interim inspection program for audits of broker-dealers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the PCAOB oversight authority of broker-dealers, including promulgating standards, conducting inspections, and undertaking investigations and disciplinary proceedings. Because Dodd-Frank does not prescribe a specific inspections program for firms that audit broker-dealers, the CAQ wrote that, “the Board’s approach of proposing a temporary rule for an interim program of inspection related to audits of brokers and dealers is an appropriate and reasonable approach,” to provide an opportunity to assess audit firms’ adherence to professional standards as well as inform the PCAOB’s approach to a permanent inspection program. The letter also encourages the PCAOB “to focus a significant portion of its efforts on audits of brokers and dealers that are considered to be of greater significance to investors and other users.”

In addition, the comment letter seeks more clarity on how interim inspections will be conducted and recommends that progress reports on the interim program include observations by different types of brokers and dealers whose audits were inspected. It also asks the PCAOB to provide in the final temporary inspection rules the procedure for communicating and seeking a response to draft findings from an inspected firm, as well as the protocol for including findings from the interim program in firm-specific inspection reports.