Like accounting standards, auditing standards have "grown like topsy" over the past few decades. To help practitioners come to grips with this expanding and increasingly complex body of literature, the Auditing Standards Board (ASB) of the American Institute of CPAs (AICPA) recently crafted a layered-approach to understanding generally accepted auditing standards (GAAS). But critics still aren't satisfied - some say the limits of GAAS are as hard to understand as the layers. Lawmakers on Capitol Hill seek to cure these ills by creating a single board to oversee all the rules that govern the conduct of audits for public companies.
The Layers of GAAS
The layers of GAAS can be found in Statement on Auditing Standards No. 95 (SAS95). This SAS was issued in response to a request from the now-disbanded Public Oversight Board (POB), and it was summarized in the April issue of ASB's newsletter, "In Our Opinion." SAS95 clarifies that GAAS consists of three levels:
- Auditing standards. The first layer has the maximum level of authority. An audit conducted in accordance with GAAS must comply with all the literature in this category that applies to the engagement. This layer includes the standards and SASs issued by the ASB. It excludes the requirements that relate to audits, but are not set by the ASB. Examples include Government Auditing Standards and rules made by the U.S. Securities and Exchange Commission (SEC).
- Interpretive publications. The second layer has a lesser level of authority. Auditors who depart from the recommendations should be prepared to explain how they complied. This layer includes interpretive publications issued by the ASB. It excludes interpretations made by other parts of the AICPA, such as the Ethics Committee, or by outside entities, such as the courts.
- Other auditing publications. The third layer has no authoritative status. It includes all types of useful resources that are not specifically included in the first two layers, but still help auditors understand and apply provisions of the SASs. Examples include certain AICPA literature specifically designated as auditing publications and similar literature from sources other than the AICPA, (e.g., state CPA societies). It excludes authoritative AICPA publications not specifically designated as auditing publications, (e.g., standards on ethics, independence and attestation).
The Limits of GAAS
The limits of GAAS can be confusing due to the interaction of GAAS with other authoritative literature. For example, a recent court case involved a finding by the SEC that a firm had violated GAAS because it did not comply with rules about independence issued by the AICPA. Chuck Landes, director of AICPA's Audit & Attest Team, explains, "When it comes to independence, we [the ASB] have a standard that requires an auditor to be independent. But we do not set the independence criteria. Auditors must look to other sources to determine if an auditor is sufficiently independent to comply with GAAS."
Because there are so many types of standards and so many boards involved, the current system of standard-setting has been likened to a series of silos. The silo-thinking approach troubled the POB, whose charter was to oversee the issuance and interpretation of auditing and independence standards.
The Road to Reform
In its March 19, 2002 white paper on "The Road to Reform," the POB wrote, "Standards promulgated by the current ASB have not provided guidance that is sufficiently specific and definitive." Not everyone agrees, and those who do acknowledge the criticism can't be laid entirely on ASB's shoulders. For example, the ASB received kind words in the February 15, 2002 status report of POB staff on "The Recommendations of the Panel on Audit Effectiveness." Still, faced with a litigious society, a crisis of confidence in the accounting profession, and a mosaic of overlapping concerns, some reformists are determined to knock down the silos and appoint a new broader-minded board to tackle all types of audit-related standards. Even though the POB was disbanded as of May 1, 2002, other reformists have still rallied around its parting battle cry, "It is time to consolidate all standard-setting bodies under one roof" and funded independently of the AICPA.