State of the Audit Profession Virginia Accounting Auditing

State of the Audit Profession Virginia Accounting & Auditing Conference Presented by Chuck Landes, CPA

Agenda ► ► ► How did we get to where we are today? The provisions and implications of Sarbanes-Oxley The cascade effect – what’s the next front? Honoring our heritage and moving forward Overview of significant assurance initiatives

What went wrong – corporate culture and reporting model ► Simple greed or arrogance ► Market pressure on short term earnings ► Lack of transparency or timely disclosures in the reporting model ► Lack of mandated disclosures on management’s accounting policies ► Too many rules leading to connect the dots accounting and auditing

What went wrong – the work of auditors ► Some auditors did not step up to their responsibilities ► Some auditors assumed good intent on part of management ► Inherent weaknesses in our disciplinary and monitoring processes ► Auditor dependency on fees from major clients

What was the response of Congress?

The Sarbanes - Oxley Act: Oversight Board ► New Public Company Accounting Oversight Board (PCAOB) ► Requires 2 CPAs (but only 2) to serve ► Power to set auditing rules, inspect firms and discipline wrongdoers ► Funding from accounting firms and registrants

The Sarbanes - Oxley Act: Standards Setting ► PCAOB has authority to “adopt, amend, modify, repeal or reject” standards ► Includes provisions for SEC oversight, governance and funding of FASB

The Sarbanes - Oxley Act: Independence/Scope of Services ► Proscribes eight specific services to public company audit clients ► Gives PCAOB authority to prohibit others ► Other nonaudit services not banned must be pre-approved by audit committee

The Sarbanes - Oxley Act: Banned Services ► Bookkeeping ► Information systems design and implementation ► Appraisals or valuation services ► Actuarial services ► Internal audits Broker/dealer and investment banking services ► Legal or expert services related to audit services ► Management and human resources services ► Other services as determined by the board ►

The Sarbanes - Oxley Act: Liability Concerns ► Statute of limitations extended to 5 years from occurrence or 2 from discovery ► No specific language on non-preclusive effect

The Sarbanes - Oxley Act: Report on Internal Controls ► Requires auditor report on internal controls assertions ► Must be part of audit - not separate engagement

The Sarbanes - Oxley Act: Corporate Governance ► Mandates audit committee oversight of audits ► Requires CEO/CFO certification of reports ► Prison terms of up to 10 years for senior executives

The Sarbanes - Oxley Act: Workpaper Retention ► Auditors to retain documents in support of report for 7 years. ► 5 yr retention requirement under “criminal fraud accountability”

Sarbanes/Oxley Projects ► Internal control task force § Focus on reporting on internal controls over financial reporting as part of the annual audit ► Audit committee task force § Focus on relationship and communications

Sarbanes/Oxley Projects ► Omnibus task force § Documentation retention § Concurring partner review § Foreign affiliate issues § Representation and attorney letter amendments ► Q. C. Task Force § Focus on inspection/monitoring guidance § Audit partner rotation § Objectivity issues

Possible Cascade at Federal Level ► DOL rules for ERISA Audits ► Banking Regulators ► Future Action from the GAO ► Public Interest Entity – A concept that may be coming

Senate’s Attempt to Address State Issue ► The bill says that state regulators: “Should make an independent determination of the proper standards applicable” in supervising nonregistered accounting firms. ► Standards applied by the Board “should not be presumed to be applicable” for small and medium sized firms

Overview of the Potential Impact ► New rules could require mandatory rotation of all partners on audit engagements. ► New auditor responsibility for “testing” issuers’ compliance with laws and reporting on “potential” violations. ► The new Board could have the authority to enforce securities laws, duplicating SEC’s powers. ► State legislative/regulatory proposals could “pile on” and/or conflict with Federal laws.

Honoring our Heritage and Moving Forward…. .

A Revitalized Accounting Culture ►What is needed is not just legislation but a revitalized accounting culture ►Build upon the profession’s traditional values § A rigorous commitment to integrity § A passion for getting it right § A commitment to rules and a zeal for applying them § Zero tolerance for those who break them

Getting the Right Answer ► We are at a serious juncture in the history of our financial markets and our profession ► Anyone who deceives investors must be held accountable ► Regulators should have all the resources they need to police the capital markets and enforce the law ► Investors must have information that is accurate, clear, timely and relevant ► The reputation of the CPA profession must be restored and our proud heritage honored

Honoring our heritage and moving forward ► We need to reaffirm our basic commitment to professionalism ► Auditors must be willing to say NO § Every day, auditors everywhere are telling a corporate exec what must be disclosed, why a transaction can’t be treated in a certain fashion and why certain activity must be reflected on the balance sheet § “Trust, but verify, ” this is the true spirit of the profession

What saying NO means ► Rejecting unsound corporate accounting practices ► Reducing the risk of deceit and fraud through diligent inquiry ► Ensuring that audited statements are not just accurate, but illuminating ► Questioning management, challenging management ► When justified – rejecting management’s accounting decisions

Overview of Other Significant Professional Developments

Recently Issued Standards ► SAS No. 95, Generally Accepted Auditing Standards ► SAS No. 96, Audit Documentation ► SSAE No. 11, Attest Documentation ► SAS 97, Reports on the Application of Accounting Principles ► SAS 98, Omnibus 2002

The ASB’s Current Agenda ► Fraud ► Risk Assessments ► Fair Value ► SAS No. 71(Quarterly Reviews of SEC Entities) ► Joint Task Force on Quality Control ► Sarbanes/Oxley related projects ► Horizons II

Horizons II Task Force ► Strategic group looking at direction of ASB and auditing standards over next 3 – 5 years ► Will continue to include convergence with international auditing standards ► Explore expanding auditor’s communication ► Explore whether “reasonable assurance” is the proper level of assurance with respect to the auditor’s responsibility to plan and detect material errors.

Where do we go from here?

Working with Corporate America ► AICPA to convene anti-fraud summit with corporate leaders, accountants and market professionals ► Will partner with corporations to design and establish anti-fraud controls and programs. ► Will created enhanced attestation standards for CPAs to report on corporate anti-fraud programs

Research ► AICPA to sponsor academic research into the who, what, when, where & why of fraud ► AICPA will establish an Institute for Fraud Studies with the University of Texas and Association of Certified Fraud Examiners

Education & Training ► AICPA will develop training programs to prevent fraud ► AICPA to work with academia on anti-fraud curricula and materials ► AICPA calling for members to more antifraud CPE ► AICPA urges stock exchanges to mandate anti-fraud education for corporate managers and directors

Advancing Financial Reporting ► AICPA to initiate a dialogue on differentiating reporting needs of private vs. public companies ► Will work with FASB on more timely and better quality reporting – particularly for off balance sheet, intangibles & liquidity ► AICPA is co-sponsoring Value Measurement & Reporting Collaborative ► AICPA supports more disclosure of accounting policies and estimates and reporting in Management’s Discussion and Analysis

Corporate Governance ► AICPA calls for revision of auditing standards to provide public notice of internal control weaknesses ► Reportable conditions to include: § One person as Chair and as CEO § Audit committee that is not fulfilling its mission. § It may include lack of mandatory anti-fraud education, or lack of a Code of Conduct

Conclusion -- Moving Forward ► Core values and traditional areas. ► Building on what we do best and what the public needs us to do. ► Wrestle with such key issues as reporting measures, transparency, fraud responsibility, dependency, etc. ► Address state issues ► Enhance the public’s perception of our profession

What the AICPA Will Do ► Continue to communicate with you ► Work to keep the profession together ► Work to assist with the implementation of this new regulatory structure ► Provide you with the assistance to deal with the Legislative/Regulatory issues in your State

Questions?