October 7, 2003

Upshot of Proposed Attestation Standards

Although the proposed attestation standards are not yet posted, the PCAOB has posted a briefing paper. Here are my ten cents on the proposed standards:

– Overall, the bulk of the proposed attestation standards were not a surprise, particularly the PCAOB’s “one-size-does-not-fit-all” philosophy.

– However, the devil is in the details of a bevy of novel definitions. In the proposal, the most critical definitions are that of “significant deficiency” (if it results in more than a remote likelihood of a misstatement of the company’s annual or interim financial statements that is more than inconsequential in amount) and “material weakness” (if, by itself or in combination with other internal control deficiencies, it results in more than a remote likelihood of a material misstatement in the company’s annual or interim financial statements). Hopefully, the proposing release will clarify terms such as “more than remote” and “inconsequential.”

– From the issuers’ perspective, the proposal would allow companies to be able to rely on others, which is a positive development – but the discretion given to auditors as to how much documentation is considered adequate might be considered a negative one from the corporate viewpoint (ie. more expensive).

– The concept of mandatory “walk-throughs” arguably brings the involvement of auditors to new heights. A “walk-through” is when auditors kick the tires to ensure that the controls actually were implemented and operate as they were designed to operate.

– The bottom line is how will auditors “evaluate the results and form an opinion” when they consider whether a particular deficiency is “significant” or “material.” Considering the fact that the Big 4 still are being sued for the misdeeds of their clients (for which they bear some responsibility, of course), they likely will remain quite conservative – which could result in a long road to hoe for companies.

Okay, I am back to the Annual ACCA Conference and I will let Kimberley take it from here…