In 2002, the USA Congress passed the Sarbanes-Oxley Act following increased corporate scandals in the nation that saw investors and the public losing billions of dollars. Ensuing the passage of the law, it laid down a foundation for the creation of the Public Company Accounting Oversight Board (PCAOB) that would superintend the auditing of public listed corporations to protect the public’s interests and investors by promoting independent, accurate and informative reports (Acito et al., 2014). Nonetheless, despite ensuring that no financial reporting scandals will affect companies, the PCAOB has its fair share of setbacks.
The significant impact of complying with the Sarbanes-Oxley Act and PCAOB 2201 proposed rules is an increase in costs (Acito et al., 2014). The auditor’s costs will most likely increase due to additional time required towards the preparation of reviewing of the audit reports. Furthermore, the auditors will need extra time in conducting discussions with audit committees and management, and this translates to a rise in commissions and allowances. The auditor's cost will be based on a recurring or one-time basis. The one-time costs will include conducting and developing of training programs for the auditing committee members and the implementation of quality control methodologies. Some of the recurring costs include those resulting from additional time. Other factors that might increase costs due to the enforcement of the proposed rules include potential legal expenses in relation to reviewing of the critical audit matters (CAM).
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PCAOB 2201 has changed the auditing landscape after its reorganization from AS 2 2007 standards (Acito et al., 2014). Instead of reporting under section 404 (a) of Sarbanes-Oxley Act 2002, they will use section 404 (b) which requires them to attest directly to the internal control over financial reporting (ICFR) effectiveness (PCAOB, 2007). It is an indication that they will have to adhere to specific standards that were no initially not necessary. Furthermore, the CEO’s duties have increased due to the attestation factor that is added during financial reporting (PCAOB, 2017). Attestation involves engagement of a CPA to provide assurance over agreed-upon procedure reports, examination or reviews. The sole aim of this to ensure that the auditor trust the information for management will have to sign on the respective documents.
Furthermore, the management will have to take full responsibility for all the measures used in the internal control. The sole aim for this is to ensure that they will be held liable in case any deficiencies arise from the information used during the auditing process. Without having internal control measures in place, an organization is susceptible to financial malpractices that will see it losing funds to fraudulent engagements.
The passing of PCAOB 2201 and SOX brought about significant changes in respect to the auditor's responsibilities. The new rules have brought about an integrated type of auditing hitch indicates that an auditor must conduct various procedures with the aim of gathering evidence that will form a foundation towards the expression of an opinion or both (PCAOB,2017; PCAOB,2007). In the past, the auditors used methods that will no longer become accepted under PCAOB 2201. This will involve using various test controls for they are required to enhance the effectiveness and efficiency of the entire auditing process. These tests will be used in determining any form of deficiencies in the financial reports. Currently, for an auditor to provide an opinion on ICFR, the auditor must first point out the usefulness of a firm’s internal controls and the administration’s written attestation addition, the tests will help one in determining the effectiveness of the restrictions applied, the uniformity of the application and the individuals who applied them (PCAOB,2007). However, the auditor should not rely on the tests provided by the management as a principal form of evidence. The increased need for evidence results from the auditor’s role in conducting independent tests on every account and class of disclosure and transaction (PCAOB, 2007).
Additionally, the company’s responsibilities towards internal control are bound to change following implementation of the proposed regulations. The company’s management will now have to attest to the internal controls by determining their effectiveness using the PCAOB’s standards for attestation engagements (PCAOB, 2017). In order to fulfil this new responsibility, the management must first accept full responsibility for the firm’s internal controls effectiveness. Moreover, they will have to conduct various procedures with the aim of gathering sufficient evidence to back up the attestation documentation. The final role of the management is to ensure they provide a signed attestation documentation either as a separate report accompanying the auditor’s report or as a letter of representation to the auditor (PCAOB, 2017).
Following an increased corporate scandal that resulted in the loss of billions, the government decided to come up with regulations that would prevent any such happenings in future. The beginning of such laws trace back their roots to the Sarbanes-Oxley Act passed in 2002 . Over the years, there have been countless changes in accounting regulations as seen in the case of PCAOB. It ensures that all publicly listed firms adhere to auditing rule that will protect investors and public interest. Nonetheless, adhering to the regulations has its fair share of setbacks as seen from the case of increased costs resulting from a need for legal counsel and additional auditor accountabilities. Furthermore, the management’s duties are bound to increase as seen from the attestation which will require one to determine the effectiveness of the internal controls. Lastly, the auditors’ roles have also changed with respect to the adoption of new and better auditing procedures.
References
Acito, A. A., Hogan, C. E., & Imdieke, A. J. (2014). Auditing Standard No. 2 versus Auditing Standard No. 5: Implications for integrated audits and financial reporting quality . Retrieved on 29 August 2018, from http://www.isarhq.org/2014_downloads/papers/ISAR2014_Acito_Hogan_Imdieke.pdf
PCAOB. (2007). AS 2201: An audit of internal control over financial reporting that is integrated with an audit of financial statements. Retrieved on 29 August 2018, from https://pcaobus.org/Standards/Auditing/Pages/AS2201.aspx
PCAOB. (2017). Auditing standards of the public company accounting oversight board . Retrieved on 29 August 2018, from https://pcaobus.org/Standards/Auditing/Documents/PCAOB_Auditing_Standards_as_of_December_15_2017.pdf
