A brave new world: the future of audit standards: the pace and breadth of change in the CPA profession over the past 18 months has been unprecedented. However, the next issue on the horizon has the potential to reshape the very service that is exclusive to the profession--the audit.

Under Sarbanes-Oxley, the Public Company Accounting Oversight Board (PCAOB) has the authority to promulgate audit standards for auditors of public companies. Currently, the Board is working under existing audit standards set forth by the American Institute of CPAs (AICPA). But, PCAOB has clearly announced its intentions to create a new set of standards--its own set of standards--for public company audits in the near future.

More Questions than Answers

The issue at hand is not whether there will be new public company audit standards, but rather, how the profession will react to the PCAOB's new standards for SEC registrants. Will there be no change, which ultimately means two sets of standards? Will the Auditing Standards Board (ASB) move to change its standards to mirror the PCAOB's standards? Will both create a core audit with a menu of standards that can be applied based on issues such as industry, public or private ownership, or total revenues? A myriad of questions make this decision difficult. The diversity of stakeholders and interested parties further complicated the issue. Here are a few questions being raised:

* Is the same level of assurance necessary for organizations with such significant differences in resources, investor access to information, and financial statement sophistication?

* Are the users of the current audit satisfied with the current service? If so, why should it be changed?

* Will the general public or business leaders comprehend the rationale for two different sets of audit standards?

* Could private companies "afford" the cost of an audit under a new set of standards created initially for public companies with greater resources? If so, is there a cost benefit for public companies to pay for a more costly audit?

* Is the public interest served by two sets of audit standards?

* What legal issues are raised under a two-standard system when there is a business failure that operated under the "lesser" or "inferior" standard in a two standard system?

* What is the impact of two sets of standards on students, the education community, and the CPA credential exam?

"The whole process is in a state of change and is very fluid because it is impossible to answer some of those questions until we know exactly where the PCAOB will go with these standards," said Chuck Landes, CPA, and director of the AICPA's Audit and Attest Standards Team.

CPA Opinion

Though neither the AICPA nor PCAOB is advocating for two sets of standards, these questions and the uncertainty around audit standards for public companies create further tension in a profession already struggling to rebuild its image and respond to massive changes and new regulations. A Web poll by The Ohio Society of CPAs contrasted with sentiments from the spring series of town hall meetings further illustrates the concern and uncertainty over the potential impacts of two standards on the future of the profession. Respondents to the Web poll strongly supported two sets of standards. Sixty-one percent favored a dual system while 39 percent opposed them. However, attendees of the town halls primarily spoke out against a two-tiered system because of concerns about the confusion that would occur in the business community, legal issues that would arise, and the potential for the creation of an "inferior set of audit standards" in the eyes of the public.

The timing of this change could create concerns about the profession's credibility in the eyes of the general public. The high profile business failures making headlines over the past 18 months led many to question the audit and its attestation--regardless of whether those concerns were differentiated between standards and individual decisions.

"Few people, even the PCAOB's Charles Niemeier, says standards were not the issue, it was all about performance," Landes said.

This lack of understanding by the general public around many auditing issues further clouds the issue of two sets of audit standards. Philip Laube, CPA, controller and director of Financial Analysis, Muskingum College believes two sets of standards would cause confusion and lead to even more questioning of the assurance an audit provides.

"Would (two sets of standards) not imply that one audit offers less assurance than another?" Laube questioned.

CPAs aren't only concerned about the perceptions of the general public. The comprehension of the issue by business leaders is also in question. One Ohio Society member relayed a story about his experience explaining a fundamental auditing issue to a business professional who was also an attorney. He had to spend one hour explaining the difference between Generally Accepted Auditing Standards (GAAS) and Generally Accepted Government Auditing Standards (GAGAS) to the gentleman.

If the attorney took an hour to grasp the concept, "I can not believe that there is any hope that the audience could grasp two or more sets of auditing standards," the member, an audit partner, said.

Educators note specific challenges under a system of two sets of audit standards. One concern coming from educators is how two sets of standards could translate into the classroom. Effectively, educators could be learning right alongside their students.

"Will a whole new curriculum need to be instituted, or will 'Accounting for SEC Clients' be an area of specialization?" Jim Bronder, CPA, CFO, University of Northwestern Ohio, asked. "Do we now offer two different types of audit classes to account for each standard, or try to incorporate them into one?"

Will There be Two Sets of Standards?

The AICPA and its Audit Standards Board has NOT lost its ability to set standards for private company audits. Rather, the PCAOB has carved out the exclusive authority to set standards for auditors of public companies. In an economy where private companies and small businesses comprise a of majority the country's gross national product, the ultimate decision will have a tremendous economic impact. In a universe of more than 6,000 public accounting firms, fewer than 800 CPA firms practice in the SEC arena and less than 100 firms have more than 10 public company clients.

The AICPA will closely monitor and comment as necessary upon exposure drafts for new standards from the PCAOB. Both Institue and Ohio Society members can play a key role in providing technical expertise to the fledgling Board. But, this issue needs to be considered from the perspectives of all the effected parties--CPAs, the business community, investors, educators and students. The challenge is to weigh the benefits and drawbacks of a two-tiered system and strike a balance between measures to strengthen public company audits and investor confidence in the financial markets and the needs of the vast majority of small and closely-held businesses and those who serve them.

Still, it is highly likely--if not guaranteed--that there could be two different sets of standards for at least some period of time after the PCAOB exercises its power to set public company audit standards. Even if the ASB ultimately moves toward one set of standards that process could take time.

"As we are sitting here today their (PCAOB) standards are exactly the same as our (ASB) standards. But as we go into the future they will be issuing new standards, some of which we will probably adopt, some of which we will not adopt. We will go forward and issue new standards, some of which they will probably adopt, some of which they will not," Landes explained.

Individual audit standards will be released singly by both the PCAOB and AICPA--not as a complete set. PCAOB rule making requires a 21-day exposure. Each of the ASB standards could have comment periods of anywhere from 30-90 days. According to Landes, the typical exposure period for the ASB is no shorter than 60 days.

The PCAOB's first standard release is imminent. This will be the first point in time when standards will be different. The ASB is expecting to adopt the standard, auditing internal controls over financial reporting, but this process will take time.

Ultimately, whether there is one set of audit standards or two, neither scenario is a fix for human error--intentional or unintentional. Auditors are charged with executing an audit according to whatever the standards may be, and they should be trained to do so according to Richard J. Murdock, CPA, professor of Accountancy at The Ohio State University.

"Recent audit failures are not the result of poor auditing standards. Rather they are mostly the result of poor applications of auditing standards. Regardless of who creates a standard, the outcome is often disastrous if it is not properly applied."

According to Landes, the ASB's focus is strengthening the audit regardless of the actions of the PCAOB.

Jennifer Tisone Price is Vice president, communications for The Ohio Society. She can be reached at [e-mail] or 800.686.2727, ext. 347.