PCAOB
Historical Perspective
St. Louis University
Presented by:
Jim Castellano, CPA
Chairman, RubinBrown LLP
March 2, 2010
Challenges to the Profession
How did we get there?
Enron announces bankruptcy (12/2/2001)
Andersen discloses document shredding (1/10/02)
SEC news conference and proposals (1/17/02)
CPA profession supports SEC reforms (1/17/02)
AICPA Chairman testifies before House Commerce
Sub-Committee (2/14/02) and Senate Banking
Committee (3/14/02)
How did we get here?
Indictment of Andersen (3/14/02)
Arthur Andersen found guilty of obstruction (6/15/02)
WorldCom restatement (6/26/02)
WorldCom declares bankruptcy (7/21/02)
Sarbanes/Oxley Act of 2002 enacted (7/30/02)
What went wrong?
Corporate culture and reporting model
Simple greed or arrogance.
Market pressure on short term earnings.
Failures in corporate management.
Failures in corporate governance.
Too many rules leading to “connect the
dots accounting.”
Some analysts biased.
What went wrong?
The work of auditors
Some auditors did not step up to their
responsibilities to serve the public interest.
Inadequate emphasis on fraud detection –
“Expectation Gap.”
Possibly failure to implement audit approach or
simply an inadequate audit approach.
Possible auditor dependence on fees from major
clients.
Global Financial Crisis
What Went Wrong?
Fannie Mae and Freddie Mac pushed by Congress
into making imprudent loans
Consumers take on extraordinary debt
House speculators and “flippers”
Failure of bond rating agencies
Insufficient regulation of new debt instruments
Federal Reserve monetary policy
Bankers originating mortgages with unworthy
borrowers, then selling them to investors
Credit default swaps sold to hedge investor risk
Imprudent investors
Wall Street's Latest Downfall: Madoff Charged with Fraud
FBI makes first arrest in Stanford fraud case
Restoring Confidence Post Enron
Sarbanes/Oxley Act of 2002
Public Company Accounting Oversight
Board created
Accounting firms registered with PCAOB
Inspections of firms
US auditing standards set by PCAOB
Scope of service restrictions
Section 404
PCAOB
Five-member Board:
Only two can be CPAs
Daniel Goelzer, Acting Chairman
Staff
Budget
2010 - $183 million
2009 - $158 million
2008 - $130 million
Responsibilities
Accounting Firm Registrations
Firms registered
2405 total firms registered as of 2-16-2010
Including approximately 1,000 foreign firms
Inspections
Scope of inspections
Inspection reports
Inspections
Inspection shall include at least the following
components
Selected audit engagements
Evaluation of the sufficiency of the firm’s quality
control system
Testing of the audit, supervisory and quality
control procedures
Limitations on public disclosure
US Auditing Standards
PCAOB sets standards for public companies
Initially adopted all existing GAAS
PCAOB standards 1-7
Implications for standard setting
PCAOB Standing Advisory Group
Scope of Service Restrictions
Prohibited services
Audit Committee approval requirement
Implications for the profession and
marketplace
Section 404
Requirement for internal control
assessment by the issuer and report by
external auditor
Audit standard – AS 5
Impact on Companies and the
Accounting Profession
Increased value of the audit:
Audit Committees interested in the scope of
the audit first, cost of the audit second
Quality counts – no longer “cross-selling”
Looking to the Future
Value of auditing services continues to increase, but
continuous innovations needed
International business capabilities increasingly important
IFRS will be the standard
Demand for accountants remains high
Quality counts and will be rewarded:
People, Quality, Growth, Profit
Thank you!
Questions?