Question

PCAOB Rules

Rule 3520—Auditor Independence

Rule 3521—Contingent Fees

Rule 3522—Tax Transactions

Rule 3523—Tax Services for Persons in Financial Reporting Oversight Roles

Rule 3526 establishes guidelines when an accounting firm should discuss with the audit committee of the client information with respect to any relationships between the firm and the entity that might bear on auditor independence. Under the rule, a registered public accounting firm must do the following:

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   Prior to accepting an initial engagement, pursuant to the standards of the PCAOB, 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 the potential effects of the relationships on the independence of the firm, should it be appointed as the entity’s auditor.

3. Document the substance of its discussion with the audit committee.

These requirements would also apply annually subsequent to being engaged as the auditor. An additional requirement annually is to affirm to the audit committee of the issuer of the communication that the registered public accounting firm is still independent in compliance with Rule 3520.

Answer the following question:

1. Which of the rules above does the most in your opinion to prevent investment fraud? Explain why?

Answer 1

Rule 3520 describes the Independence of auditors and its associated persons throughout the audit and professional engagement period. It taught about not only an obligation to satisfy the independence criteria applicable to the engagement set out in the rules and standards of the PCAOB, but also an obligation to satisfy all other independence criteria applicable to the engagement, including the independence criteria set out in the rules and regulations of the Commission under the federal securities laws.

Rule 3521 describes that if auditors receives, directly or indirectly, a contingent fee or commission for any services or products provided by them to its audit client during the audit and professional engagement period, auditors will not considered as an independent.

Rule 3522 describes that auditors will not be considered as an independent if they provides any non-audit services to its audit client in respect of tax treatment of following transactions:

(a) Confidential Transactions - that is a confidential transaction; or

(b) Aggressive Tax Position Transactions - that was initially recommended, directly or indirectly, by the registered public accounting firm and a significant purpose of which is tax avoidance, unless the proposed tax treatment is at least more likely than not to be allowable under applicable tax laws.

Rule 3523 describes that auditors will not be considered as an independent if they the firm, or any affiliate of the firm, during the professional engagement period provides any tax service to a person in a financial reporting oversight role at the issuer audit client, or an immediate family member of such person, unless -

(a) the person is in a financial reporting oversight role at the issuer audit client only because he or she serves as a member of the board of directors or similar management or governing body of the audit client;

(b) the person is in a financial reporting oversight role at the issuer audit client only because of the person's relationship to an affiliate of the entity being audited -

(1) whose financial statements are not material to the consolidated financial statements of the entity being audited; or

(2) whose financial statements are audited by an auditor other than the firm or an associated person of the firm; or

(c) the person was not in a financial reporting oversight role at the issuer audit client before a hiring, promotion, or other change in employment event and the tax services are -

(1) provided pursuant to an engagement in process before the hiring, promotion, or other change in employment event; and

(2) completed on or before 180 days after the hiring or promotion event.

Rule 3526 describes about 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 potential audit client, 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 potential audit client 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 potential audit client's auditor; and

(3) document the substance of its discussion with the audit committee of the potential audit client.

(b) at least annually with respect to each of its audit clients -

(1) describe, in writing, to the audit committee of the audit client, 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 audit client 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 audit client, 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 audit client.

In our opinion communication with audit committee concerning independence is most effective rule to prevent investment frauds because prior to accepting an initial engagement pursuant to the standards of the PCAOB, auditor needs to:-

(1) describe, in writing, all relationships between the auditor and its potential audit client.

(2) discuss about potential effects of the relationships with its audit client described in subsection (a)(1) on the independence of the registered public accounting firm; and

(3) document the substance of its discussion with the audit committee of the potential audit client.

(b) at least annually with respect to each of its audit clients -

(1) describe all relationships between auditors 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 audit client 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 audit client, 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 audit client.

So, Rule 3526 keep a check on independency of auditor as auditor communicates all types of relation with its client to audit committee. Audit Committee will take immediate action as and when independency of auditors sacrificed.