- The Auditing
Standard No 7, and the new PCAOB staff questions and answers
about the Auditing Standard No 7.
- The news
about the auditors/whistleblowers in Boeing
- Significant Enforcement
Actions: SEC v. General Electric
Welcome to the March 2010 edition of the Sarbanes
Oxley Compliance Professionals Association (SOXCPA)
newsletter
Dear
Member,
Today we will
remember
the Auditing
Standard No 7...
...
and will learn about the new PCAOB staff questions and answers
about the
Auditing Standard No 7.
We will discuss
the news about Boeing and whistleblowers...
...
and we will have a look at an enforcement action - SEC v. General
Electric
Enjoy.
E-book: 100 Job Descriptions in Risk and Compliance Management
Free Download, no registration needed
Contents
1.
Risk
Professionals
2.
Compliance Professionals
3.
Sarbanes Oxley Professionals
4.
Basel ii Professionals
5.
Solvency ii Professionals
6.
Hedge Funds Professionals
7. Members of the
Board of Directors
Auditing Standard No. 7
Engagement Quality Review
Applicability of Standard
1.
An engagement quality review and
concurring approval of issuance are required for each audit
engagement and for each engagement to review interim financial
information conducted pursuant to the standards of the Public
Company Accounting Oversight Board ("PCAOB").
Objective
2. The objective of
the engagement quality reviewer is to perform an
evaluation of the significant judgments made by the engagement
team and the related conclusions reached in forming the overall
conclusion on the engagement and in preparing the
engagement report, if a report is to be issued, in order to
determine whether to provide concurring approval of issuance.
Qualifications of an Engagement Quality
Reviewer
3. The engagement quality reviewer must be an
associated person of a registered public accounting firm.
An engagement quality reviewer from the firm that issues the
engagement report (or communicates an engagement conclusion, if no
report is issued) must be a partner or another individual in an
equivalent position.
The engagement quality reviewer may also be an individual from
outside the firm.
4. As described below, an engagement
quality reviewer must have competence,
independence, integrity, and objectivity.
Note: The
firm's quality control policies and procedures should include
provisions to provide the firm with reasonable assurance that the
engagement quality reviewer has sufficient competence,
independence, integrity, and objectivity to perform the engagement
quality review in accordance with the standards of the PCAOB.
Competence
5. The engagement
quality reviewer must
possess the level of
knowledge and competence related to accounting, auditing, and
financial reporting required to serve as the engagement partner on
the engagement under review.
Independence , Integrity, and
Objectivity
6. The engagement quality reviewer must be
independent of the company, perform the engagement quality review
with integrity, and maintain objectivity in performing the review.
Note: The reviewer may use assistants in performing the
engagement quality review.
Personnel assisting the engagement quality reviewer also must be
independent, perform the assigned procedures with integrity, and
maintain objectivity in performing the review.
7. To
maintain objectivity, the engagement quality reviewer and others
who assist the reviewer should not make decisions on behalf of the
engagement team or assume any of the responsibilities of the
engagement team.
The engagement partner remains responsible for the engagement and
its performance, notwithstanding the involvement of the engagement
quality reviewer and others who assist the reviewer.
8.
The person who served as the engagement partner during either of
the two audits preceding the audit subject to the engagement
quality review may not be the engagement quality reviewer.
Registered firms that qualify for the exemption under Rule
2-01(c)(6)(ii) of Regulation S-X, 17 C.F.R. § 210.2-01(c)(6)(ii),
are exempt from the requirement in this paragraph.
Engagement Quality Review for an Audit
Engagement Quality Review Process
9. In an
audit engagement, the engagement quality reviewer should
evaluate the significant judgments
made by the engagement team and the related conclusions reached in
forming the overall conclusion on the engagement and in preparing
the engagement report.
To evaluate such judgments and conclusions, the engagement quality
reviewer should, to the extent necessary to satisfy the
requirements of paragraphs 10 and 11:
(1) hold discussions with the engagement
partner and other members of the engagement team, and
(2) review documentation.
10. In an audit, the
engagement quality reviewer should:
Evaluate the significant judgments that relate to engagement
planning, including –
- The consideration of the firm's recent engagement experience
with the company and risks identified in connection with the
firm's client acceptance and retention process,
- The consideration of the company's business, recent
significant activities, and related financial reporting issues and
risks, and
- The judgments made about materiality and the effect of those
judgments on the engagement strategy.
Evaluate the
engagement team's assessment of, and audit responses to –
- Significant risks identified by the engagement team, including
fraud risks, and
- Other significant risks identified by the engagement quality
reviewer through performance of the procedures required by this
standard.
Note: A significant risk is a risk of
material misstatement that is important enough to require special
audit consideration.
Evaluate the significant judgments made about
(1) the materiality and disposition of corrected and uncorrected
identified misstatements and
(2) the severity and disposition of identified control
deficiencies.
Review the engagement team's evaluation of the firm's
independence in relation to the engagement.
Review the engagement completion document 4/ and confirm with
the engagement partner that there are no significant unresolved
matters.
Review the financial statements, management's report on
internal control, and the related engagement report.
Read other information in documents containing the financial
statements to be filed with the Securities and Exchange Commission
("SEC") and evaluate whether the engagement team has taken
appropriate action with respect to any material inconsistencies
with the financial statements or material misstatements of fact of
which the engagement quality reviewer is aware.
Based on the procedures required by this standard, evaluate
whether appropriate consultations have taken place on difficult or
contentious matters. Review the documentation, including
conclusions, of such consultations.
Based on the procedures required by this standard, evaluate
whether appropriate matters have been communicated, or identified
for communication, to the audit committee, management, and other
parties, such as regulatory bodies.
Evaluation of Engagement Documentation
11. In an audit, the engagement quality reviewer should
valuate whether the engagement documentation that he or she
reviewed when performing the procedures required by paragraph 10 -
Indicates that the engagement team responded appropriately to
significant risks, and
Supports the conclusions reached by
the engagement team with respect to the matters reviewed.
Concurring Approval of Issuance
12. In an audit, the engagement quality reviewer may
provide concurring approval of issuance only if, after performing
with due professional care the review required by this standard,
he or she is not aware of a significant engagement deficiency.
Note: A significant engagement
deficiency in an audit exists when
(1) the engagement team failed to obtain sufficient appropriate
evidence in accordance with the standards of the PCAOB,
(2) the engagement team reached an inappropriate overall
conclusion on the subject matter of the engagement,
(3) the engagement report is not appropriate in the circumstances,
or
(4) the firm is not independent of its client.
13. In an
audit, the firm may grant permission to the client to use the
engagement report only after the engagement quality reviewer
provides concurring approval of issuance.
Engagement Quality Review for a Review
of Interim Financial Information
Engagement Quality Review
Process
14. In an
engagement to review interim financial information, the engagement
quality reviewer should evaluate the
significant judgments made by the engagement team and the
related conclusions reached in forming the overall conclusion on
the engagement and in preparing the engagement report, if a report
is to be issued.
To evaluate such judgments and conclusions, the engagement quality
reviewer should, to the extent necessary to satisfy the
requirements of paragraphs 15 and 16:
(1) hold discussions with the engagement partner and other members
of the engagement team, and
(2) review documentation.
15. In a review of interim
financial information, the engagement
quality reviewer should:
Evaluate the significant judgments that relate to engagement
planning, including the consideration of - - The firm's recent
engagement experience with the company and risks identified in
connection with the firm's client acceptance and retention
process,
- The company's business, recent significant activities, and
related financial reporting issues and risks, and
- The nature of identified risks of material misstatement due
to fraud.
Evaluate the significant judgments made about
(1) the materiality and disposition of corrected and uncorrected
identified misstatements and
(2) any material modifications that should be made to the
disclosures about changes in internal control over financial
reporting.
Perform the procedures described in paragraphs 10.d
and 10.e.
Review the interim financial information for all periods
presented and for the immediately preceding interim period,
management's disclosure for the period under review, if any, about
changes in internal control over financial reporting, and the
related engagement report, if a report is to be issued.
Read other information in documents containing interim
financial information to be filed with the SEC 8/ and evaluate
whether the engagement team has taken appropriate action with
respect to material inconsistencies with the interim financial
information or material misstatements of fact of which the
engagement quality reviewer is aware.
Perform the procedures in paragraphs 10.h and 10.i
Evaluation of Engagement Documentation
16. In a review of interim financial information, the
engagement quality reviewer should evaluate whether the engagement
documentation that he or she reviewed when performing the
procedures required by paragraph 15 supports the conclusions
reached by the engagement team with respect to the matters
reviewed.
Concurring Approval of Issuance
17. In a review of interim financial information, the
engagement quality reviewer may provide concurring approval of
issuance only if, after performing with due professional care the
review required by this standard, he or she is not aware of a
significant engagement deficiency.
Note:
A significant engagement deficiency
in a review of interim financial information exists when
(1) the engagement team failed to perform interim review
procedures necessary in the circumstances of the engagement,
(2) the engagement team reached an
inappropriate overall conclusion on the subject matter of
the engagement,
(3) the engagement report is not appropriate in the circumstances,
or
(4) the firm is not independent of its client.
18. In a
review of interim financial information, the firm may grant
permission to the client to use the engagement report (or
communicate an engagement conclusion to its client, if no report
is issued) only after the engagement quality reviewer provides
concurring approval of issuance.
Documentation of an Engagement Quality
Review
19. Documentation of an engagement quality
review should contain sufficient information
to enable an experienced auditor, having no previous connection
with the engagement, to understand the procedures performed
by the engagement quality reviewer, and others who assisted the
reviewer, to comply with the provisions of this standard,
including information that identifies:
The engagement quality reviewer, and others who assisted the
reviewer,
The documents reviewed by the engagement quality reviewer, and
others who assisted the reviewer,
The date the engagement quality reviewer provided concurring
approval of issuance or, if no concurring approval of issuance was
provided, the reasons for not providing the approval.
20.
Documentation of an engagement quality review should be
included in the engagement documentation.
21. The requirements related to retention of and
subsequent changes to audit documentation in PCAOB Auditing
Standard No. 3, Audit Documentation, apply with respect to the
documentation of the engagement quality review.
AUDITING STANDARD NO. 7, ENGAGEMENT QUALITY
REVIEW
PCAOB STAFF QUESTION AND ANSWER
February 19, 2010
Staff questions and
answers set forth the staff's opinions on issues related to the
implementation of the standards of the Public Company Accounting
Oversight Board ("PCAOB" or "Board").
The staff publishes questions
and answers to help auditors implement, and
the Board's staff administer, the Board's standards.
The statements contained in
the staff questions and answers are not rules of the Board, nor
have they been approved by the
Board.
The following staff question
and answer related to Auditing Standard No. 7, Engagement Quality
Review was prepared by the Office of the Chief Auditor.
Additional questions should be
directed to Dima Andriyenko, Associate Chief Auditor
(202/207-9130; andriyenkod@pcaobus.org) or Greg Scates, Deputy
Chief Auditor (202/207-9114; scatesg@pcaobus.org).
Auditing
Standard No. 7
On January 15, 2010, the
U.S. Securities and Exchange Commission ("SEC") approved Auditing
Standard No. 7, Engagement Quality Review ("AS No. 7,"), which was
adopted by the PCAOB on July 28, 2009.
AS No. 7 supersedes the
Board's interim standard, applies equally to all registered firms,
and requires an engagement quality review
("EQR") and concurring approval of issuance for each audit
engagement and for each engagement to review interim financial
information conducted pursuant to the standards of the PCAOB.
In its order approving AS
No. 7, the SEC encouraged the PCAOB to provide further
implementation guidance on the documentation requirements of the
standard in light of comments the SEC received during its comment
period.
The following staff question
and answer provides implementation guidance.
Documentation of an EQR
QUESTION
Page 21 of the adopting
release provides the following example of the application of the
standard’s documentation requirements:
If a reviewer identified
a significant engagement deficiency to be addressed by the
engagement team, the engagement team should document its response
to the identified deficiency in accordance with Auditing Standard
No. 3, Audit Documentation.
Because
AS No. 7 does not require duplication of documentation prepared by
the engagement team, the engagement quality reviewer does
not have to separately document the engagement team’s
response.
Rather,
the EQR documentation should contain sufficient information to
enable an experienced auditor, having no previous connection
with the engagement, to understand, e.g., the significant
deficiency identified, how the reviewer communicated the
deficiency to the engagement team, why such matter was important,
and how the reviewer evaluated the engagement team's response.
Does
this example suggest that the standard requires documentation of
all of the interactions between the engagement quality reviewer
and the engagement team, including all of the interactions before
a matter is identified as a significant engagement
deficiency?
ANSWER
No. The example in the adopting release
illustrates how the documentation
requirements of AS No. 7 should be applied
once a reviewer concludes that a significant engagement deficiency
exists.
Paragraph 19 of AS No. 7 establishes a
requirement that “documentation of an engagement quality review
should contain sufficient information to enable an experienced
auditor, having no previous connection with the engagement, to
understand the procedures performed by the engagement quality
reviewer, and others who assisted the reviewer, to comply with the
provisions of this standard....”
News
Leaking information to
the media is not protected activity under the Sarbanes-Oxley Act
What happens if auditors find control
deficiencies and disclose their findings to the media?
They lose their job (and Sarbanes Oxley can
not help)
The facts:
Two auditors working for Boeing were
testing information technology controls, in order to audit
compliance with the Sarbanes-Oxley Act’s mandate that publicly
traded companies review their controls over financial reporting.
They made several complaints to supervisors
about perceived auditing deficiencies. After that, the auditors
provided information and documentation regarding the alleged
deficiencies to a reporter.
The auditors were fired soon after that.
The auditors claimed that they were fired in response to their
frequent complaints to their supervisors regarding Boeing’s
Sarbanes-Oxley Act non-compliance - they were whistleblowers.
The decision:
The U.S. District Court for the Western
District of Washington has dismissed the
auditors’ argument on the ground that leaking information to the
media is not protected activity under the Sarbanes-Oxley Act. So
Boeing did not violate Section 806 of the
Sarbanes-Oxley Act, which prohibits publicly traded companies from
discriminating against their employees for disclosing information
regarding certain alleged illegal conduct - and the firm had the
right to terminate the auditors on this ground.
Significant Enforcement
Actions
SECURITIES AND EXCHANGE
COMMISSION, :Plaintiff, : v. : GENERAL ELECTRIC COMPANY,
:Defendant.
CIVIL ACTION
COMPLAINT
Plaintiff Securities and Exchange
Commission (the “SEC” or the “Commission”) alleges that:
SUMMARY
1.
Starting in 2002 and continuing through 2003, the General Electric
Company (“GE”), a publicly-traded company headquartered in
Fairfield, Connecticut, acting primarily through senior corporate
accountants, made a number of improper
accounting decisions which resulted in its reporting materially
false or misleading results in its financial statements and
earnings reports in 2002 and 2003 and which required additional
adjustments through 2006.
Beginning in 1995 and continuing through the
filing of the Form 10-K for the period ended December 31, 2004, GE
met or exceeded final consensus analyst earnings per share (“EPS”)
expectations every quarter.
On four separate occasions in 2002 and 2003,
however, high-level GE accounting executives or other finance
personnel approved accounting which was not
in compliance with Generally Accepted Accounting Principles
(“GAAP”) so as to increase earnings
or revenues or to avoid reporting negative financial results.
In one instance, the improper accounting
allowed GE to avoid missing analysts’ final consensus EPS
expectations.
The four accounting
violations are as follows:
(a) beginning in January 2003, an improper
application of the accounting standards to GE’s commercial paper
(“CP”) funding program to avoid unfavorable
disclosures and an estimated approximately $200 million
pre-tax charge to earnings;
(b) a 2003 failure to correct a misapplication
of financial accounting standards to certain GE interest-rate
swaps;
(c) in 2002 and 2003, end-of-year “sales” of
locomotives to financial institutions in order to accelerate over
$370 million in revenue; and
(d) in 2002, an improper change to GE’s
accounting for sales of commercial aircraft engines spare parts
that increased GE’s 2002 net earnings by $585 million.
2. By engaging in the practices and
transactions alleged in this Complaint, GE violated Section 17(a)
of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §
77q(a)]; Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§
78j(b), 78m(a), 78m(b)(2)(A), 78m(b)(2)(B)] and Rules 10b-5,
12b-20, 13a-1, 13a-11, and 13a-13 under the Exchange Act [17
C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-11 and
240.13a-13].
3. Accordingly, the Commission seeks entry
of a permanent injunction against GE prohibiting further
violations of the federal securities laws as well a civil monetary
penalty.
DEFENDANT
7. GE, a
New York corporation with headquarters in Fairfield, Connecticut,
is a diversified technology, manufacturing, media, and financial
services company.
At all relevant times, GE’s common stock was
registered with the Commission pursuant to Section 12(b) of the
Exchange Act and was traded on the New York Stock Exchange.
GE wholly owns General Electric Capital
Services, Inc. (“GECS”), a holding company which in turn wholly
owns General Electric Capital Corp. (“GECC”). GECC contains the
consumer finance and commercial finance operations of GE and also
provides equipment financing and leasing to a variety of
industries. GE’s fiscal year ends on December 31.
To read more:
www.sec.gov/litigation/complaints/2009/comp21166.pdf
Dear member,
Thank you for reading our
monthly newsletter.
Take advantage of the distance learning
and online certification program of our Association - at a cost
that is unheard of:
www.sarbanes-oxley-association.com/Distance_Learning_and_Certification.htm
Best Regards,
George Lekatis
President of the Sarbanes Oxley Compliance
Professionals Association
General Manager, Compliance LLC
1200 G Street NW Suite 800, Washington DC 20005, USA
Tel:
(202) 449-9750
Email:
lekatis@sarbanes-oxley-association.com
Web:
www.sarbanes-oxley-association.com
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