Latest Issue of Audit Conduct News – New EU Rules

Our Fall 2015 Newsletter is devoted solely to the new independence rules in the EU framework, which update the 2006 Statutory Audit Directive and create a new regulation that applies to statutory audits of “public interest entities”.  Rules applicable under the new reg. include limits on audit firm terms, tightened restrictions on nonaudit services, and a new nonaudit fee cap, among other things.  The Newsletter provides a recap of the more significant elements – which may impact US affiliates of EU companies (and vice versa) — and provides suggestions for firms’ consideration as they look to implement the new rules in their practices.

DOL Letter to Plan Admins: Selecting an Independent Auditor

Stressing requirements to be independent and competent (among other things), the letter provides good, basic info for persons charged with hiring a firm to audit their employee benefit plan(s) in accordance with the ERISA law.

Highlights of AICPA PEEC Meeting on 10/29/15

Topics the AICPA’s PEEC (Professional Ethics Executive Committee) discussed at its most
recent meeting included: nonpaying clients, written disclosures for commissions, cloud
services, and whether CPAs should plan ahead to ensure proper distribution of their clients’
files when they die, among others. Highlights of the discussions appear below.

Objective: To review significant differences between state board rules and the AICPA Code and make recommendations about issues where the PEEC should reconsider an interpretation.

The rule on withholding member work product when a client has not paid for the work was a special focus; about 60 percent of state boards agree with the AICPA’s Code, which allows a member to withhold work product the client has not paid for– while a few large states disagree. The ones that disagree, disagree strongly. Given that the majority of the boards trend towards acceptance of the practice, the task force recommended not re-addressing the guidance in the AICPA Code. The PEEC unanimously agreed with the task force’s recommendation to take no action at this time.


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The PCAOB’s excellent guidance on professional skepticism

Issued almost three years ago, the PCAOB’s Maintaining and Applying Professional Skepticism in Audits, provides salient guidance on avoiding the barriers that can crimp professional skepticism on audits, the critical touch points in the audit process, and ways to overcome — at times — unconscious bias.  The Alert is, in part, a back-to-basics reminder that the auditor’s objective is to obtain sufficient evidence “to determine whether the financial statements are materially mistated rather than merely looking for evidence that supports management’s assertions.”

If you’ve never read the Alert, or you read it back in 2012 when it was issued, you may want to take a (re-)look; it contains excellent food for thought and can help inform your firm’s efforts to enhance the quality of audits and other attest services.

And now a word about scope creep…

Good article in CPA Trendlines by Jody Padar (The Radical CPA) on scope creep; I like the advice – not only in terms of revenue generation but also risk management. And, if you’re providing any type of attest service, this is critical.  Spelling out your services – what you will and won’t be providing a client – is also key.  Only thing I would add to the same engagement letter (for a firm that must be independent) is language to reflect the client’s agreement to assign competent management to oversee the nonaudit service and take responsibility for all management decisions.

Ramifications for independence?

Could FASB revisions to the concept of “materiality” (as described in this article) help “unblur” some lines?

AICPA independence rules often reference the FASB literature on key concepts such as control and significant influence.  Materiality – while used in financial interest, affiliate, business relationship, and other rules – has  long been undefined by standards-setters, with the understanding that CPAs make materiality judgments all the time.

Time will tell whether this will be a help –



As a specialist myself, this make a lot of sense.

Journal of Accountancy article provides some great advice on becoming a niche CPA firm, enhancing the quality of your services, and reducing costs and regulatory/litigation risk.  Specialization also reduces the burden on you and your people to keep up with myriad technical standards and remain competent.

If you’re keeping up with the profession, you know there’s a movement underfoot to improve audit quality. Both the DOL and the PCAOB have cited concerns about audits of benefit plans and broker/dealers, respectively, and the AICPA has released a 6-point plan for improving audit quality.

Technical standards overload and the accompanying risks are here to stay most likely. Here’s a way to address those issues.


Open for Business !

My first blog since coming back.

A lot has happened (and not happened…) since 2011; the PCAOB floated the idea of mandatory audit firm rotation (that didn’t happen but something close is about to happen in the EU). The SEC levied steep fines on firms for independence violations for situations ranging from lobbying on behalf of clients to business relationships with client directors or trustees.  The most recent case created a precedent for sanctioning entities beyond the firm, apparently, for their participation in creating or allowing the violation to happen.

In continuing its inspections of broker/dealer auditors, the PCAOB has cited a stubbornly high rate of independence infractions these past few years – mainly for firms keeping client books or getting indemnified for their audits.  (In the meanwhile, the firms became subject to additional independence requirements of the PCAOB).  The PCAOB has sanctioned several firms for these offenses.  The Board keeps imploring firms to clean up their act, and I suspect these enforcement actions are their way of sending a not-so-subtle wake-up call to the profession.

On a brighter note, the AICPA released its long-awaited Ethics Codification, a total revamp of the Code of Conduct, which fully integrates the conceptual framework approach, is more intuitive, and better organized.  Something good for the profession.

More to come, I’m sure.