Tags: PCAOB | SAG | board | regulation

PCAOB Group Meets on Regulatory Agenda

By    |   Friday, 21 November 2014 09:36 AM

On Nov. 20, the Standing Advisory Group (SAG) of the Public Company Accounting Oversight Board (PCAOB, but for some reason frequently pronounced "PCOB," leaving out the most important word, Accounting) held the first session of two half-day meetings, principally to discuss the regulatory agenda for the coming year.

Readers might recall that the PCAOB was created by the Sarbanes-Oxley Act of 2002 to impose stricter and more formal regulation on the accounting and auditing profession. In this writer's view, by diverting attention to accounting and auditing, the legislation essentially left Wall Street off the hook for the scandals associated with the dot-bomb bust of the turn of this century. The most positive feature of the Act was that it extended regulation of internal controls beyond the financial sector to all large public companies.

Although the PCAOB falls under the jurisdiction of the Securities and Exchange Commission (SEC), the meeting was held in a hotel, reflecting its standing as a private-sector organization. Accordingly, in 2011 the chairman received a salary of $672,676, and the other members received $546,891, while the SEC chairman received $165,300 in 2012.

The SAG is a group chaired by the PCAOB's Chief Auditor whose members are appointed for three-year terms to advise the Board. Its activities fall under the umbrella of the Federal Advisory Committee Act, which provides that the agency the group advises has to pay some attention to what it says. Prominent and influential public citizens don't like to waste time.

The most intriguing item on the agenda for next year will be the re-proposal of a regulation on Critical Audit Matters, which would expand the scope of the audit report to cover items deemed to be of interest to investors. The premises of this proposal are that the audit report has not been changed for roughly 75 years and that investors want a more comprehensive report. Another moving force is the fact that authorities in the U.K. and EU are moving in this direction. Leaders of the PCAOB do not want to be seen as lagging their counterparts abroad.

A related matter is the Board's project to develop Audit Quality Indicators (AQIs) to track the performance of firms and disclose the results with respect to audit components of greatest perceived interest to users of audit reports. This was identified as a priority project for the Board in 2013. In response to a question from a SAG member, PCAOB Chief Auditor Martin Baumann stated that a concept release will be issued by the end of 2014 or early 2015.

Saving the best for last, by far the most provocative issue on the agenda will be revisions in the practice with respect to assessments of whether the audited company is a Going Concern. This is the most sensitive issue of all for investors, and any downgrade in the going concern standing of a company is almost certain to shake the market for its stock. This is all the more controversial because the project focuses directly on improving practice in the wake of the 2008 episode of the financial crisis. However, proponents have yet to address the effect of "too big to fail" policy on this issue.

A highlight of the meeting was an impromptu debate between one of the presenters at the meeting, James Cox, a professor at Duke's Law School, who cited a landmark case to support his view that the standard of "fairly presents" should be "carved in stone," and another SAG member, Tom Selling, CEO of Grove Technologies in Phoenix, who derided the phrase as "a vestigial appendage," citing a debate over an accounting standard by Financial Accounting Standards Board as his authority. This debate promises to become more heated once the Board issues a consultative paper next year.

(Archived video and related materials can be found here.)

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On Nov. 20, the Standing Advisory Group (SAG) of the Public Company Accounting Oversight Board (PCAOB) held the first session of two half-day meetings, principally to discuss the regulatory agenda for the coming year.
PCAOB, SAG, board, regulation
Friday, 21 November 2014 09:36 AM
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