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PCAOB Historical Perspective

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)

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PCAOB Historical Perspective

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  1. PCAOBHistorical Perspective St. Louis University Presented by: Jim Castellano, CPA Chairman, RubinBrown LLP March 2, 2010

  2. Challenges to the Profession

  3. 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)

  4. 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)

  5. 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.

  6. 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.

  7. Global Financial Crisis

  8. 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

  9. Wall Street's Latest Downfall: Madoff Charged with Fraud FBI makes first arrest in Stanford fraud case

  10. 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

  11. 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

  12. Accounting Firm Registrations • Firms registered • 2405 total firms registered as of 2-16-2010 • Including approximately 1,000 foreign firms

  13. Inspections • Scope of inspections • Inspection reports

  14. 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

  15. 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

  16. Scope of Service Restrictions • Prohibited services • Audit Committee approval requirement • Implications for the profession and marketplace

  17. Section 404 • Requirement for internal control assessment by the issuer and report by external auditor • Audit standard – AS 5

  18. 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”

  19. 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

  20. Thank you!Questions?

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