PCAOB November 17 2009 Martin F Baumann Chief

PCAOB November 17, 2009 Martin F. Baumann Chief Auditor, Office of the Chief Auditor

Caveat The views I express are my own and do not necessarily reflect the views of the Board, individual Board members, or other members of the Board’s staff. 2 2

Overview of PCAOB 3 p Created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect investors and the public interest by promoting informative, fair, and independent audit reports. p The Act required that auditors of U. S. public companies be subject to external and independent oversight for the first time in history. Previously, the profession was selfregulated.

Overview of PCAOB p p 4 PCAOB Key Areas of Responsibility n Registration n Inspections n Enforcement n Standards The SEC has oversight authority over the PCAOB, including the approval of the Board’s rules, standards, and budget

Standards-setting p The Sarbanes-Oxley Act gave the Board the authority to establish: n n p The Act specifically directed the Board to establish the following auditing standards: n n n 5 Auditing and related attestation standards Quality control standards Ethics standards Independence standards Audit Documentation Engagement Quality Review Internal Control over Financial Reporting

Reporting on Internal Control Over Financial Reporting 6 p A significant factor in US audit requirements p A pervasive difference between audits conducted under the standards of the PCAOB and under audits conducted under the standards of the IAASB p Has improved audit quality and the reliability of financial reporting

Excerpts from Statements on Benefits of Internal Control Reporting [I]nvestors have greatly benefited from reporting about the effectiveness of ICFR and that such reporting … and the related requirement for an auditor’s attestation report has … enhanced the reliability of financial statements … (Deloitte & Touche) p We believe this heightened focus on the production of reliable financial reporting, predicated on effective internal control, is very positive … (Pw. C) p We strongly agree with the Board’s observations that auditing and reporting on ICFR has produced significant benefits and protections to investors … (Ernst & Young) p We believe that internal control pursuant to Section 404 has made … a significant contribution toward improving financial reporting, corporate governance and audit quality (KPMG) p 7

Standards of the PCAOB p Interim standards n n p Adopted by the Board in April 2003; standards remain in effect to the extent not superseded or amended by the Board Auditing, attestation, quality control, ethics, and independence standards and related rules PCAOB issued standards, rules, and guidance n n Auditing standards No. 1 – 7 PCAOB rules related to standards n n n 8 Rule 3101 – Certain Terms Used in Auditing and Related Professional Practice Standards Rules 3501 to 3526 – ethics and independence Staff questions and answers Staff audit practice alerts No. 1 – 4 Staff guidance for auditors of smaller companies on AS No. 5

Standards-setting Process Internal coordination with Divisions of Inspections and Enforcement p PCAOB Standing Advisory Group p Work with other standards-setters and organizations, e. g. , IAASB, IESBA p Development of a new auditing standard p n n n 9 Use International Standard on Auditing as a starting point Explain areas of necessary departure (i. e. , internal control) Publicly issue analysis of significant differences between the Board’s standard(s) and IAASB and ASB standard(s)

PCAOB November 17, 2009 Martin F. Baumann Chief Auditor, Office of the Chief Auditor