On April 12, 2016, the PCAOB released proposed amendments to the auditing standards on an audit firm’s use of other audit firms and proposed a new standard, Dividing Responsibility for the Audit with Another Accounting Firm. The proposals seek to enhance the transparency of firms’ use of other audit firms, especially by firms domiciled outside the US (e.g. extent to which the other firm contributed to the audit), and also prescribes responsibilities to the lead auditor regarding, for example, planning, supervision, evaluation, communication and workpaper access. Comments on the proposals are due July 29, 2016.
In his speech, “Issues for the Academic Community to Consider,” PCAOB member Steven Harris relays concerns he has heard re: auditor independence as chair of the Board’s Investor Advisory Group. Investors also wondering what happened to recommendations of the U.S. Treasury’s Advisory Committee on the Auditing Profession (ACAP) 2008 report ….
KPMG released an update today on the status of EU member states’ adoption of “individualized” versions of the new EU audit rules in its “Defining Issues” publication. Rules include those on mandatory firm rotation and nonaudit services restrictions. Many more countries have not yet adopted the rules, which allow significant tailoring and go into effect June 17, 2016. The seven (7) nations that have have adopted the rules have unfortunately moved in different directions. According to a KPMG survey cited in the publication, a third of the largest 125 EU companies have put their audits out to bid and 75 percent of those have resulted in an auditor change. In addition, other countries, e.g. India and Brazil, either have or are considering similar audit reforms as the EU according to the article.
A PCAOB report released 4/5/16 examined firms’ implementation of new PCAOB audit committee communication standard AS1301 – indicates firms have implemented and most (but not all) audit teams have properly applied. The PCAOB also observed noncompliance / lack of understanding by some auditors with existing independence rule 3526 to communicate with the audit committee about independence.
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The Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is one of the Directorates-General and specialised services that make up the European Commission.DG FISMA is responsible for initiating and implementing policy in the area of Banking and Finance.
Column in February 2016 The Tax Adviser (written by Gerard H. Schreiber, Jr CPA and edited by Thomas J. Purcell III, CPA JD) advises tax practitioners about the intersection of due diligence and quality control in a tax practice. The article explains how these two practice concerns overlap time wise — from before tax returns are prepared through delivery of those returns and beyond — and should not be treated as separate issues / events. Links to the various ethical requirements for tax practice and when and how to integrate these and other important quality control elements into a high quality tax practice are also addressed.
In the Spring Newsletter: how auditors may help their clients implement new accounting standards under the independence rules and a quick update on things to consider when auditing affiliates of EU companies subject to new firm rotation/tendering rules.
The AICPA’s Professional Ethics Executive Committee (PEEC) held an open meeting on Feb 4, 2016, discussing (among other topics) the definition of client, cloud computing services, and compliance with standards. Highlights of the discussions appear below.
Definition of client:
A task force charged with re-assessing the current definition of “client” and its use in the Code presented a draft definition to the PEEC. The proposed definition removes the entity to which the member’s services relate from the current definition, and would include only the party engaging the member, i.e. any person or entity, other than the member’s employer, that engages a member or a member’s firm to perform professional services. A newly proposed term, “attest entity,” would replace “attest client” and include the entity to which attest services relate but exclude the engaging entity, if they were separate entities (e.g., Company A hires the member to perform an audit of Company B, thus Company B is the attest entity).
The task force also reviewed all instances in the Code in which the terms “client” and “attest entity” (as proposed) would be used, making over 260 recommendations. The PEEC discussed use of the terms in the commission and contingent fee rules (which are separate from the independence rule), asking the task force to reconsider the application to the contingent fee rule and agreeing by straw poll to keep the commission rule as simple as possible. The task force agreed to reconsider PEEC’s feedback and asked members to provide any additional comments on the remaining recommendations within ten (10) days.
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Long-awaited lease accounting standards from the FASB and IASB will impact independence decisions. For example, the AICPA’s Code currently permits most operating leases – they just need to be made at arm’s length and kept current. Under the new accounting standards, leases held by firms and covered members, e.g. persons on the attest team, many nonaudit services providers, and those managing the firm’s assurance practice (among others), will be subject to additional restrictions potentially when these leases are brought onto the company’s balance sheet. (See the attached article about the organizations’ development of the standards.) That said, the AICPA has a project on its 3-year agenda to revise the independence standard on leases in light of these developments.
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In its most recently adopted budget and strategic plan, the PCAOB, among many other objectives related to independence and audit quality, included a goal to study firms’ business models to determine whether those models pose risks to audit quality. Based on their findings, the Board may consider policy options to mitigate the risks. The Board will also report on the evolution and structure of the firms’ services and whether the multidisciplinary model has a negative effect on independence and audit quality. In monitoring approaches to enhancing independence, objectivity and professional skepticism, the Board will also closely follow developments in the EU, which adopted a mandatory firm rotation requirement that goes into effect in 2016.
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