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New world order: as the PCAOB takes shape, the AICPA's role is blurred.

The early Greek philosopher Heraclitus said it best: "The only constant is change." And probably no organization knows that more than the ATOPA.

As the Sarbanes-Oxley Act alters the landscape of the accounting profession, the national voice of the profession--the AICPA--is undergoing some changes of its own. To what degree remains unknown, but with the creation of the Public Company Accounting Oversight Board, it's clear that things aren't what they used to be.


As the PCAOB gathers steam--just take a look at its recent decision to take from the AICPA its power to set auditing standards--some in the profession are wondering how the AICPA will fit into this new world order and how diminished its power will become.

"We have a lot of areas which will be evolving in a transition mode as the PCAOB gets up and gets its legs," says AICPA Chairman Bill Ezzell. "It's a matter of evolution and not revolution, as everybody gets a better understanding of how this will actually work."

Since the PCAOB is still fleshing out key issues, much remains to be seen, Ezzell cautioned. But some changes are evident.

"The whole concept of an SEC practice section, in time, will have to evolve slightly," Ezzell says, since firms will now be registering with the PCAOB.

With a minimum membership fee of $800, the SEC practice section has been a constant revenue stream for the AICPA.

Ezzell adds that aside from a "slightly different role" for the audit standard setting process, "peer review would be the biggest change initially. And we're going to be moving all our ethics cases in the public company arena over to the PCAOB."

While the AICPA still plans to publish guidance and interpretations of auditing standards for its members, "... in part, that may change slightly," Ezzell says, without elaborating.

There's also the question of whether continuing education requirements in the accounting and auditing areas will change, and if a new entity is making the rules, will it--and not the AICPA--also explain those rules?

I don't think that was what was contemplated by the statute," Ezzell says, but the PCAOB "... could put forth some recommendations for change there."


Sen. Mike Enzi, R-Wyo., has a unique perspective on the formation and intent of the Sarbanes-Oxley Act.

As the Senate's only accountant, a senior member of the Senate Banking Committee and the ranking member of the Securities and Investments Subcommittee, Enzi was brought into the legislative process early on by Sen. Paul Sarbanes, D-Md.

Enzi helped guide the legislation "with an eye toward protecting small businesses and small accounting firms ... holding lawyers and accountants equally responsible for breaking the code of ethics and to change the implication that not all nonaudited services should be presumed illegal," he says.

Enzi characterized the formation of the PCAOB as the cornerstone of the legislation, pointing out that while the SEC always had the authority to set accounting standards, this authority was in part ceded to the FASB.

"It's envisioned the PCAOB will have the same type of relationship with the AICPA," Enzi says, when it comes to auditing standards. The formation of the PCAOB, he says, was focused on issues of enforcement rather than rewriting auditing standards.

That focus shifted, however, when the PCAOB took one of its first acts and said it would set auditing standards.

"The AICPA lost its ability to set standards because corporate America lost its confidence in the ability of the Institute to police its own industry," Enzi says. "I do believe that the environment at the time highlighted a number of problems inherent with the current oversight structure of the accounting industry."

So, how does he see the AICPA fitting into the standard setting process?

"I hope to continue to see the AICPA actively contribute their ideas and proposals to the PCAOB," Enzi says. "Congress envisioned in the Sarbanes-Oxley bill that the AICPA would be one of a number of expert organizations knighted by the PCAOB to provided expertise to the process."


The AICPA indeed is hopeful of being knighted. "We certainly will be involved in commenting and providing input through whatever appropriate means to the PCAOB," Ezzell says. "It will be up to them to decide how to use it."

Many in the profession feel that the AICPA's historical expertise in standards setting is too big for the PCAOB to ignore.

"There may be benefits to having a more objective standard setter, whose allegiances perhaps are more closely aligned with the investing public, rather than the practice community," says Bill Holder, CPA, a part-time member of the Governmental Accounting Standards Board and an accounting professor at the University of Southern California.

"But you would be hard-pressed to find a deeper reservoir of knowledge, skill and expertise to address and resolve challenges that arise in practice, than those represented by the AICPA," he says. If the PCAOB were to close itself from those resources, he says, 'that has to adversely affect the standards setting process."


Some fear that if the AICPA's Auditing Standards Board, Accounting and Review Services Committee and Professional Ethics Committee cease to exist, "we'll have 54 different jurisdictions establishing auditing standards, review standards and compilations standards," says Mike Ueltzen, managing partner of Sacramento-based Ueltzen and Co. "And that is mind-boggling."

Ueltzen, whose firm specializes in forensic accounting and fraud detection, hopes the AICPA plays a strong role in setting standards for private companies.

"It may not be involved in setting the audit standards and the performance standards for publicly held audits, but it will for the majority of business conducted in the U.S.," Ueltzen says. "The AICPA has a very significant role to play in the standards setting process in the future."


The AICPA could play a lead role for privately held companies if the need for separate standards emerges. But that is contingent on the actions of the PCAOB.

"If the PCAOB focuses on a standard that has applicability only in a public company environment," Ezzell says, "there will be a need for standards to continue to be improved upon for private and non-public companies, and we will plan to continue to work in that environment."

For now, auditors of private entities remain subject to the pronouncements of the ASB. But auditing standards have been consistent for both public and private entities, which has provided a common understanding of the term "generally accepted auditing standards." In the future, depending on the PCAOB's rules and procedures, and the ASB response to those rules and procedures, this could change, possibly resulting in significant confusion among users of audit services, according to Stu Harden, CPA and a director in Hemming Morse Inc.'s litigation services group.

Going forward, Harden says, we could see various scenarios, including an independent ASB operating as before, with the PCAOB only adopting certain incremental rules for public entity auditors, creating the equivalent of a 'Yellow Book" (i.e. Government Auditing Standards) for public entities; the ASB abandoning its role as a standard setter, resulting in one set of standards developed by the PCAOB which would apply to all entity auditors; or the PCAOB creating its own separate rule-making body in addition to the ASB, resulting in two separate sets of standards.

"Of these options, the first would appear most logical given the need for the ASB to continue to set standards for auditors of nonpublic entities," Harden says, adding that there is precedence for this type of arrangement between the General Accounting Office and AICPA. "In that case, the ASB would not focus its pronouncements on the needs of public entities, and the PCAOB would review ASB pronouncements for adoption and needed supplement."

But separate standards for public and private companies is not something everyone is looking forward to. Sen. Enzi believes that public and private companies will eventually have to adhere to the same standards to close one very significant loophole.

"One concern Congress had with the new requirements under Sarbanes-Oxley was the unintended consequence of public companies delisting to avoid the new corporate governance and accountability requirements," he says.

While Enzi sees many positive signs coming from the PCAOB, he worries that Sarbanes-Oxley has taken on a life of its own.

"I remain concerned that the SEC and PCAOB are in some instances choosing to go beyond congressional intent," he says, without elaborating.


As more evidence of the AICPA's diminishing political clout, donations to its political action committee-known as the Effective Legislation Committee--have slipped from $1.38 million in 2000 to $881,235 in the 2002 election cycle. And it wasn't just because of a bad economy.

"I think there's some dissatisfaction among membership in terms of results that transpired last year," Ezzell says. "I suspect we' re seeing a little bit of backlash from the Sarbanes-Oxley vote last year."

There are some in the profession who make that dissatisfaction known. Mitch Freedman, a founding member of CPAs4 Reform, thinks there's been a disconnect between the AICPA and some of its members.

Citing recent actions of the AICPA--the XYZ credential, the CPA2Biz venture, the "sunsetting" of certain specialty credentials, the opposition to Arthur Levitt, John Biggs, and lobbying against Sarbanes-Oxley before it passed--Freedman feels the organization has lost touch with its membership.

"Is it a relevant representative of the profession? I know a lot of CPAs who are questioning that now," Freedman says. "I know CPAs who have supported the AICPA, but their feeling is that if the AICPA loses its ability to write auditing standards, then the expressions I've heard are, 'What are they good for?"'

But Ezzell says that one of the AICPA's main objectives this year is communicating with its members. "We want to get better at communicating what we're doing and how we're changing and how we're adapting to those changes," he says.

An initiative dubbed "Board Outreach" has "members of the board of directors out in the states at meetings to talk, but mainly to listen to the members and their issues. Sort of a town hall kind of thing," Ezzell says.


As for the PCAOB, its mission is clear: "The Sarbanes-Oxley Act put the entire standards setting responsibility on the board, whereas before it was a private sector activity," says Mary McCue, an interim spokeswoman for the PCAOB.

"The PCAOB is also responsible for registration, inspection and examination of auditing firms and ultimately enforcement, in very close cooperation with the SEC," she says.

And the board's firing shots echo that stoic independence. Douglas Carmichael, the board's chief auditor, is an outspoken critic of the AICPA, as well as the big auditing firms. Carmichael, an accounting professor at Baruch College, once served as vice president of auditing for the AICPA where he helped develop auditing standards in the early 1980s.

Still, Ezzell says the AICPA will proceed with respect. The PCAOB "will have to decide how they will use the input and information we supply," he says. "But we'll be extremely supportive to their process."

While the PCAOB begins its period of heavy lifting and filling out its infrastructure, its effect on the AICPA remains to be seen and, as Heraclitus said, "All is flux."



Auditors take note: The Sarbanes-Oxley Act not only changes the rules, but who makes them. The act established the Public Company Accounting Oversight Board and granted the board extraordinary powers. Sec. 103 of the act empowers the board to establish or adopt, by rule, "auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports for issuers' The board is required to "cooperate on an ongoing basis" with the Auditing Standards Board and other standard setters and "to the extent that it determines appropriate" adopt standards proposed by those groups.

However, the PCAOB has the authority to amend, modify, repeal and reject any standards suggested by the ASB or others.

Sec. 404 of the act requires that annual reports contain an "internal control report" which includes management's assessment of the effectiveness of internal control, and requires that the auditor attest to management's assessment as a part of the financial statement audit. The act's intent is that the auditor's attestation is not the subject of an engagement separate from the audit or the basis for increased charges or fees.


These provisions of the act came home to roost in March when the ASB issued a proposed Statement on Auditing Standards that would replace SAS No. 60, Communication of Internal Control Related Matters Noted in an Audit.

The proposed standard would make significant changes to the current standards by introducing the terms "internal control deficiency" and "significant deficiency" to replace the term "reportable condition;' and would provide a new definition of the term "material weakness;' which notes that any material misstatement in the financial statements that goes undetected by the entity is ordinarily indicative of a material weakness.

For those registrants required to have an audit of their internal control in addition to an audit of their financial statements (certain entities filing reports under Secs. 13(a) or 15(d) of the Exchange Act), the ASB also issued new proposed audit and attest guidance.

Shortly after the ASB issued these exposure drafts, Jackson Day, at that time the SEC's acting chief accountant, wrote a stinging letter of response. In his letter, Day noted that the proposals "create a misleading impression" that they would some day become binding on auditors. He added that before a new standard may take effect, it must be subject to the PCAOB's rule-making processes and to SEC publication for comment and approval.


Then in April, the PCAOB decided to formally strip the AICPA of its authority to set auditing standards for public company auditors, retaining that power for itself. According to Doug Carmichael, the PCAO B's new chief auditor, "auditing standards are now going to be set in the public interest"

He went on to say, "the public interest has not been the primary interest in the past, and from now on it will be."

The board has adopted existing auditing standards as an interim measure, but will begin reviewing them this year.

In addition to the proposed standards noted above, there are seven proposed SAS relating to audit risk, for which comments were to be received in April. Those proposed standards would also significantly change audit practice by requiring a more in-depth understanding of the entity, including the risks of material misstatement and what the entity is doing to mitigate them; a more rigorous assessment of risks; and improved linkage between assessed risks and audit procedures performed.

In light of the comments by Day and Carmichael, it is clear that these proposals may not be effective for audits of public companies if the PCAOB decides that they are inadequate.

Stuart Harden, CPA, CFE is a director in Hemming Morse lncs litigation services group. You can reach him at

Jerry Ascierto is CalCPA's associate editor. You can reach him at jerry.
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Title Annotation:American Institute of Certified Public Accountants; Public Company Accounting Oversight Board's responsibility for standards
Author:Ascierto, Jerry
Publication:California CPA
Geographic Code:1USA
Date:Jun 1, 2003
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