Question

Describe the PCAOB’s independence and ethics rules and briefly discuss whether they are different from the AICPA rules.

Answer 1

The Public Company Accounting Oversight Board ("PCAOB" or "Board") is adopting an ethics and independence rule, Rule 3526, Communication with Audit Committees Concerning Independence, that will supersede the Board's interim independence requirement, Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees ("ISB No. 1"), and two related interpretations. The Board is also adopting an amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, and further adjusting the implementation schedule for Rule 3523 as it applies to tax services provided during the audit period. Specifically, amended Rule 3523 will not prohibit tax services provided during the portion of the audit period that precedes the beginning of the professional engagement period. In order to maintain the status quo while the SEC considers this amendment, the Board has further delayed the implementation of the prohibition against pre-engagement period tax services to persons in financial reporting oversight roles in existing Rule 3523 until December 31, 2008. The amendment to Rule 3523 will become effective immediately upon approval by the SEC, and Rule 3526 will become effective on the later of September 30, 2008, or 30 days after the date the SEC approves the rule.

Communication with Audit Committees Concerning Independence

A registered public accounting firm must –

(a) prior to accepting an initial engagement pursuant to the standards of the

PCAOB –

(1) describe, in writing, to the audit committee of the issuer, all relationships between the registered public accounting firm or any affiliates of the firm and the potential audit client or persons in financial reporting oversight roles at the potential audit client that, as of the date of the communication, may reasonably be thought to bear on independence;  

(2) discuss with the audit committee of the issuer the potential effects of the relationships described in subsection (a)(1) on the independence of the registered public accounting firm, should it be appointed the issuer's auditor; and

(3) document the substance of its discussion with the audit committee
of the issuer.
(b) at least annually with respect to each of its issuer audit clients –
(1) describe, in writing, to the audit committee of the issuer, all
relationships between the registered public accounting firm or any affiliates of the firm
and the audit client or persons in financial reporting oversight roles at the audit client
that, as of the date of the communication, may reasonably be thought to bear on
independence;
(2) discuss with the audit committee of the issuer the potential effects
of the relationships described in subsection (b)(1) on the independence of the registered
public accounting firm;
(3) affirm to the audit committee of the issuer, in writing, that, as of the
date of the communication, the registered public accounting firm is independent in
compliance with Rule 3520; and
(4) document the substance of its discussion with the audit committee
of the issuer.

2)Accountants need not look any further than AICPA and PCAOB audits for proof of this time-tested dynamic -- and it pays to understand those important differences.

Of course, it’s quite the understatement to say that your friends at Embark aren’t well-versed in the intricacies of both the AICPA and PCAOB sides of the audit fence. Suffice it to say, we know our stuff. So on that note, we want to share a few insights on the two to give your team an informed perspective, helping you prepare for whatever an auditor might throw your way.

AICPA Audits

By far the older of the two, AICPA was founded in the 1940s to help auditors better perform their tasks, the more modern set of their self-regulatory audit standards taking root in the 1970s. The group has a diverse set of responsibilities that range in everything from preparing and grading the CPA examination and public financial education programs to -- the topic du jour -- setting audit standards for every size of company along with non-profits and government entities.

If you’re saying to yourself that those varied tasks seem like an awful lot for a single organization to handle, you’re right. You’d also be correct in surmising that an AICPA audit, given its auditor-friendly roots, has a distinctly less stringent focus. Simply put, it’s an audit opinion that concentrates on providing assurances to stakeholders that an organization’s financial statements are accurate, reliable, and free of material misstatements. Therefore, while the concurring partner is still meant to bolster the integrity of the process, their review is much lighter and non-evasive. An AICPA audit has a comparatively longer timeline and substantially lower in risk, where the PCAOB has absolutely no jurisdiction over the process.

PCAOB Audits

If an AICPA audit is the kinder, gentler side of the audit coin, then a PCAOB audit is the more intense and scrutinizing one. In fact, its very name and founding speak volumes -- the Public Company Accounting Oversight Board, founded in 2002 as a part of Sarbanes-Oxley. PCAOB was formed in direct response to the many accounting scandals from that era that, collectively, shook investor confidence and broke the public’s trust in many publicly traded companies. Given the dynamic nature of industry, PCAOB adopts a forward-looking perspective to keep pace with changes in the financial environment, helping to ensure ongoing investor protection.

Therefore, the focus of a PCAOB audit has a distinct bent towards a company’s stakeholders and providing the investing public with clarity, accuracy, and accountability. As such, a PCAOB audit will have two opinions, one for financial statements and the other, ICFR, regarding your control environment and effectiveness. The auditor will typically have a lower materiality threshold due to the public nature of the company and the involved risk. This corresponds with a lower scoping materiality as well.

What exactly does all of that mean, you ask? There’s a heightened sensitivity in a PCAOB audit relative to its AICPA counterpart due to the lower materiality that impacts every aspect of the audit. Similarly, PCAOB involves a far more in-depth, evasive role for the concurring partner along with the possibility of an audit review from the PCAOB.

That last point, while rarely spoken of and even then strictly in hushed tones, is a key difference between an AICPA and PCAOB audit -- the consequences when things go south for an auditor are dramatically higher for a PCAOB audit. Aside from the shadow of the PCAOB itself looming over the auditor like a shadow, firms also have extensive review processes in place, where a committee looks over every filing prior to issuance to look for consistency across the entire firm. This required consultation only exists for PCAOB audits, not AICPA. Obviously, along with inherently higher standards, a PCAOB audit is more stringent, meticulous, and casts a wider net due to the lower materiality, all with an accelerated timeline.