PCAOB Drafts Rewrites to AS2; Senior Administrators Moving On

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Signs that the Public Company Accounting Oversight Board (PCAOB) is entering a new phase of its development came recently when the Board submitted a draft of changes to the Auditing Standard 2 (AS2) to the Securities and Exchange Commission (SEC) that are said to modify confusing definitions and eliminate the need for separate internal control and financial statements audits. The PCAOB also announced the coming departure of two administrative officers who were involved in setting up the oversight board from its inception in 2003.

Although the PCAOB has not yet made the informal draft of revisions public, CFO.com reports, it will be released for 60 days of public comment. The draft clarifies the definitions of “significant deficiency” and "material weakness” and explains that the materiality for an internal control audit and a financial statement audit are the same. AS2 does not mandate separate audits.

Paul Schneider, chief administrative officer of the PCAOB, will be stepping down at the end of the month to return to his career in working with start-up companies or in turnaround situations, CFO.com says. “Starting an organization from scratch is always exciting and often rewarding, but being involved with the start-up of the PCAOB has been an honor,” Mr. Schneider said. “The Board has become an effective regulator and standards-setter, and I am proud of what we have been able to accomplish.”

Before joining the PCAOB, Mr. Schneider was managing principal of Vector Recovery Group LLC, a turnaround management firm. He began his career as an accountant with Arthur Andersen & Company and is a certified public accountant in Florida, the PCAOB says.

Christi Harlan, public affairs director for the PCAOB, who left the organization last week, echoed Mr. Schneider's high praise for the PCAOB. “I joined the PCAOB to be part of a start-up venture with a clear mandate for public service,” Ms. Harlan said, according to the PCAOB announcement. “Although I am leaving to seek a new venture – or adventure – in public service, I know I may never again work with a group as talented and dedicated as my colleagues at the PCAOB. They have earned and deserve the trust of investors and the public.”

Ms. Harlan came to the PCAOB from the Senate Banking and Finance Committee, having worked for 20 years as a reporter for the Wall Street Journal.

In a statement of the PCAOB's planned activities for the coming year, prepared for a meeting of the Standards Advisory Group (SAG) held last week, Thomas Ray, the PCAOB's Chief Auditor said, “In addition to preparing a draft of a revised AS2, the staff has begun to facilitate the development of implementation guidance for auditors of smaller public companies, one of the items in the four-point plan. We also continue to support our colleagues in inspections as they inspect the firms' implementation of our auditing standard. I expect these activities to continue to require a considerable portion of our resources over the next twelve months.”

Three other priorities Ray highlighted for 2007 include:

“Principles of Reporting: In 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, which revised the accounting for and disclosure of accounting changes in financial statements. Last year, we discussed with the SAG the changes needed to the corresponding auditing literature to conform to Statement No. 154. The FASB also has proposed to incorporate the hierarchy of generally accepted accounting principles into a new accounting standard. This "GAAP hierarchy" currently resides in the auditing standards. Accordingly, we would propose to remove that hierarchy from the auditing standards as it no longer would be needed. We have made substantial progress on a project that will address both of these areas.

“Engagement Quality Review: . . . .We have taken time to more fully evaluate what we are learning in the inspections process about engagement quality reviews that are being conducted under the Board's interim concurring partner standard, and have made substantial progress on this project.

“Risk Assessment, including fraud risk assessment: . . . The International Auditing and Assurance Standards Board (IAASB), and the U.S. Auditing Standards Board recently revised their auditing standards to enhance the auditor's risk assessment process. We are evaluating the work of those two boards. In addition, over the past year, the staff has begun to evaluate how the auditor's fraud risk assessment should be integrated with the auditor's overall risk assessment, and we believe there may be an opportunity to clarify this relationship.”

Other projects for 2007 will include review of related parties, the use of specialists, and confirmations.

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