NEW AUDIT STANDARDS NOW APPLY TO EVERYONE!   

As almost everyone will remember, 2001 and 2002 were years that were marked by financial scandals including the Enron dissolution, WorldCom frauds with the resulting implosion, and other widely publicized business failures.  The massive public outcry brought scrutiny from Congress and the Securities and Exchange Commission (SEC) based on the concern that the business world was rife with misstatements.  

The audit process used at that time, especially as applied by the major accounting firms, was perceived to be flawed and inadequate.  Congress held widely publicized hearing and as is typical of governmental bodies decided it was their job to fix the problem.   This perception led to the passage of the now notorious Sarbanes Oxley Act (SOX).   This legislation was approved in the Senate by a vote of 98 to 2. Many observers believe that ANY law passing so quickly by such a lopsided vote cannot possibly be good legislation. Even former senator Sarbanes (now Chairman of NASDAQ) concedes that some parts of the law and implementation are flawed. 

What was created by SOX was the Public Company Accounting Oversight Board (PCAOB).  This creation transferred audit rule making, for public companies from the Auditing Standards Board (ASB), which was part of the American Institute of CPAs (AICPA), to this new governmental agency.  As might be expected the PCAOB issued new audit standards which significantly expanded the audit work and documentation requirements for public company audits.  While initially these rules were only applicable to public companies, and some only applicable to larger public companies, the “trickle down” effect was bound to happen.   Those requirements are now part of all audits. The ASB has issued 14 new standards within the past 18 months.  These are the most substantial changes in the audit process in over 20 years.

The new requirements range from: much more searching for the potential to fraud; written communication regarding weakness in internal control; to new “risk assessment” standards. Not only is substantially more audit work apparently required, the process must be documented in such a way that all the thought and work can be completely duplicated.    
 
While we believe the audit procedures we have historically utilized have actually substantially conformed to these requirements, the new standards require these procedures be more fully documented.  For example:  based on our experience or professional judgment the extent of tests for individual accounts may have been expanded or reduced based on the risk involved.   Under the new rules we must write down the analyses and conclusions we made in determining the risk, the procedures followed and how those procedures are linked to our risk assessment.  We must now spend considerable extra time documenting the process so that an outside party (such as our peer reviewers) can tell exactly what we thought and did.    If you have ever tried to explain exactly how you considered your options and the weight you gave to every factor, you can see the additional burden this has added.  

PCAOB and the ASB believe this will increase the effectiveness of financial statement audits.  Whether this is actually true or not, one thing is certain; implementing the new standards will result in an overall increase in efforts by the auditee, its consultants and the auditors.  Experts in the industry predict the resulting additional cost of operations and auditing will range from 15% to as much as 35% in some cases.  While our goal continues to make audits as efficient as possible, we think it is important that you be aware of these changes.  We will be glad to discuss these new standards with you and the affect it will have on your audit.