PCAOB Latest Developments

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PCAOB Latest Developments
NARUC Staff Subcommittee on Accounting and
Finance September 20, 2005

• Kayla J. Gillan, Member
• Public Company Accounting Oversight Board

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Agenda

• PCAOB Update
• Accounting Issues
• Generally, as identified through PCAOB
  Inspections
• Specific to Utility Companies

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Caveat

• The opinions I express are my own,
• and do not represent the views
• of the PCAOB, its members
• or its staff

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PCAOB Update

• Refresher Created by Title 1 of Sarbanes-Oxley
• Who we are
• Private sector regulator for auditor of companies
  whose equity is publicly traded in the US
• Subject to the oversight of the SEC
• Appoints Members of the PCAOB Board
• Annual Budget
• Rules of the PCAOB
• Forum for appeal
• Mission
• Oversee the audits of public companies, to
  protect the interests of investors and further
  the public interest in the preparation of
  informative, accurate and independent audit
  reports
• Four broad responsibilities
• Registration, Inspection, Enforcement,
  Standard-Settings

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Funding Source?

• Public Companies with public equity pay our bills
  Accounting Support Fee based on relative
  market cap
• 2005 Budget 137.1mm spread across 9,600
  companies
• Highest - 2.294mm Lowest - 200
• Top 100 companies paid almost 50
• Almost 75 of companies billed paid 5,000
  about 45 paid lt 1,000
• Companies with lt 25mm market cap 0 fee
• Utility Companies 514 companies (5) billed
  paid 10 mm (7)

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Registration

• Registration is voluntary, but only firms that
  are registered with the PCAOB may conduct audits
  of public companies
• No company may file its 10-K or 10-KSB without
  using a PCAOB-registered firm
• As of September 14, 2005
• 1,540 registered firms
• US 936 (but 490 play no role in public company
  audits)
• Non U.S. 604
• Registration subjects firms to PCAOB jurisdiction

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Inspections

• Required by SOX
• Purpose
• To assess the compliance of the firm with the
  Act, the rules of the Board and the Commission,
  and professional standards -GAAP included
• Frequency
• Firms with gt100 clients annually
• Firms with 100 clients triennially (beginning
  the year after the year of registration)
• But 490 play no role in public company audits,
  and thus are not subject to PCAOB inspection

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Inspections

• Two Phase process Review of firm policies,
  methodologies Engagement reviews.
• Review of an audit engagement is a review of both
  the auditors procedures and the clients
  financial statements.
• Any public companys financial statements may be
  scrutinized may make referrals to the SEC and
  other appropriate regulatory or enforcement
  agencies.
• Since inception, reviewed components of the
  audits of over 50 Utility Companies
• As part of reviewing audit engagements, we also
  look at how the auditor is fulfilling its
  responsibilities to the audit committee.
• May talk to Audit Committee Chair.

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Inspection Reports

• SOX section 104(g) requires the PCAOB to prepare
  a report on each inspection
• Public and non- portions of report
• But companies may be able to gain access to
  non-public portions from their auditor
• As of 9/14/05, 79 reports posted on website
• Quality control deficiencies private for 12-month
  period
• Opportunity to cure
• Remain confidential forever if remedied

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Enforcement

• PCAOB investigations may often examine both the
  public companys financial reporting and its
  auditors work.
• The PCAOB may refer findings in an investigation
  to other authorities.
• PCAOB disciplinary proceedings may have indirect
  consequences for public companies.

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Standard Setting

• The Sarbanes-Oxley Act directs the Board to
  establish
• Auditing and related attestation standards.
• Quality control standards.
• Ethical standards.
• The Board may also establish independence
  standards relating to the preparation of audit
  reports, including prohibiting new categories of
  non-audit services.
• Board uses an open process
• Standing Advisory Group (SAG)
• Ad Hoc Task Forces
• Roundtables on selected issues

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Standard Setting

• The Board has issued three new auditing
  standards
• PCAOB Auditing Standard No. 1 Reference to the
  Boards Standards in Audit Reports.
• PCAOB Auditing Standard No. 2 Audit of Internal
  Control.
• PCAOB Auditing Standard No. 3 Audit
  Documentation.
• On July 26, 2005, the Board Adopted Rules on
  Independence and Tax Services (Rules Sent to SEC
  for Approval)
• Also, on July 26, Board Adopted a Remediation
  Standard (Standard Sent to SEC for Approval)

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Accounting Auditing Issues From PCAOB
Inspections

• Audit of fair values
• Related party issues
• Prohibited loans
• Revenue recognition
• Auditing of expenses
• Independence
• Going concern/ development stage designation

• Control of issuer use of reports
• Understanding of contractual arrangements/
  substance of transactions
• Principal auditor

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Potential Accounting Auditing Issues Relevant
to Utility Companies

• General
• Derivatives and hedge accounting
• DB pension plans and post-retirement benefits
• Asset Impairment
• Leasing
• Power
• Hybrids securities
• Water
• Revenue Recognition

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Potential Accounting Auditing Issues Relevant
to Utility Companies

• Telecom
• Asset retirement obligations
• Goodwill and other intangibles
• Dispositions
• Round tripping
• Capitalizing line costs
• Business combinations
• Depreciation expenses

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