PCAOB issues staff Q & A, extends deadlines, tackles tax services

This column is the first in a new series designed to keep our members updated on all things Sarbanes-Oxley. Due to the extreme significance and pervasiveness of the Act's provisions, keeping abreast of the recent and impending developments that stem from the original promulgation can be a daunting task. Nonetheless, the far-reaching nature of SOX means that the importance of these unfolding events shouldn't be underestimated. Thus, we hope this column serves to help readers remain informed about prominent issues and major developments related to the Sarbanes-Oxley Act.  

PCAOB issues staff questions and answers
The Public Company Accounting Oversight Board (PCAOB) has issued three sets of Staff Questions and Answers to provide additional guidance to auditors on performing audits of internal controls over financial reporting as required by PCAOB Auditing Standard No. 2. The first set of questions, issued June 23, 2004 and revised July 27, 2004, addresses several broad topics including auditor independence, the scope and extent of audit testing, and evaluating deficiencies. The second set, issued October 6, 2004, also addresses questions regarding the scope and extent of testing and evaluating deficiencies.

Additionally, the second issuance discusses specific matters related to the performance of audits of internal controls over financial reporting for service organizations. The third series of questions, issued Nov. 22, 2004, discusses the auditors' use of the work of others in conducting an audit of internal control over financial reporting and provides further guidance on the scope and extent of testing and evaluating deficiencies.

The full text of the Staff Questions and Answers can be found on the PCAOB's Web site at www.pcaobus.org/Standards/Staff_Questions_and_Answers/index.asp.

SEC extends deadlines for internal control reports
The Securities and Exchange Commission (SEC) has provided temporary relief for those companies qualifying as "accelerated filers" with regard to the internal control requirements of Section 404 of the Sarbanes-Oxley Act. Under the initial SEC amendments required by the Act, companies that meet the definition of an accelerated filer - generally, those with a public float of $75 million or more - are required to adhere to an accelerating schedule for filing annual and quarterly reports with the SEC. The three-year schedule, originally set to conclude with reports for fiscal years ending on or after Dec. 15, 2004, gradually reduces the amount of time companies have to file their annual and quarterly reports with the SEC from 90 days to 60 days, and from 45 days to 35 days, respectively. The Temporary Postponement of the Final Phase-In Period for Acceleration of Periodic Report Filing Dates (SEC Release 33-8507) allows accelerated filers to continue using the transitory filing periods of 75 days for annual reports and 40 days for quarterly reports for one additional year. Therefore, the final 60- and 35-day filing requirements won't take effect until companies file their reports for fiscal years ending on or after Dec. 15, 2005.

Furthermore, the SEC has issued another release providing supplementary relief to smaller companies that are considered accelerated filers. Those companies with a public float of less than $700 million have a further 45-day extension to file the new internal control reports required under Section 404. While all other information normally included in the companies' annual and quarterly reports must still be filed by the general filing deadlines, companies that qualify for this extension have a total of 120 days to file the two new required reports -Management's Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm - with the SEC for fiscal years ending on or after Dec. 15, 2004.

Tax services next on the block
In December, the PCAOB issued Release No. 2004-015, Proposed Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees. The proposal identifies three tax services, the performance of which constitutes an impairment of auditor independence: contingent fee arrangements, assistance in aggressive tax avoidance transactions, and tax services provided to senior officers involved in the financial reporting process. The proposal also lists several tax services that the Board has specifically excluded from the proposed prohibited services list, including routine tax preparation, general tax planning and advice, and employee personal tax services. Moreover, the proposed rules require registered public accounting firms to disclose specific information to a client's audit committee when seeking approval for non-prohibited tax services.

Two general rules are included in the proposal as well. First, the Board has recommended an explicit requirement that all registered public accounting firms remain independent of the client throughout the audit and professional engagement period. The second general provision prohibits persons associated with a registered public accounting firm from causing the firm to violate applicable laws, regulations, and professional standards including the Sarbanes-Oxley Act and the related SEC rules. The Board's proposed rules are currently available for public comment and must receive SEC approval before full enactment. The full text of the rules can be found on the PCAOB's Web site at www.pcaobus.org/Rules_of_the_Board/Documents/Docket_017/Release2004-015.pdf.

SOX feedback
Two recent studies indicate mixed views on the success and benefits of Sarbanes-Oxley implementation thus far. The 2004 Oversight Systems Financial Executive Report on Sarbanes-Oxley presents the results of a survey of 222 corporate financial executives across the U.S. Of those polled, 57 percent believe compliance with Sarbanes-Oxley to be a good investment for stockholders, and 74 percent say their companies have realized some benefit from compliance. Additionally, 79 percent say compliance has resulted in stronger internal controls within their companies. However, 54 percent of the respondents state that their cost of first-year compliance was more than they expected. Moreover, 33 percent believe the cost of compliance created a financial burden that suppresses share prices, and 14 percent believe the costs significantly depleted earnings and accordingly reduced their company's ability to pay out dividends. Only 13 percent of the survey participants say that the benefits of complying with Sarbanes-Oxley outweigh the costs, while 25 percent say the compliance costs are greater than the benefits realized.

Another study, the J.D. Power and Associates 2004 Audit Firm Performance Study, assessed post-Sarbanes-Oxley auditor performance through interviews with 1,007 audit committee chairs and 944 CFOs. In stark contrast to the above results, nearly 90 percent of the CFOs involved in this study indicate that the costs of compliance with the new requirements are greater than the resulting benefits. In addition, the study shows the accounting profession has experienced a decline in its performance ratings, with only 44 percent of the CFOs interviewed saying they have a high level of confidence in the industry. This may be highly correlated to the overextension many auditors are feeling due to the additional audit requirements arising from the Act, thereby resulting in a negative impact on their service levels. The study also found that audit committees are feeling the pressure of their new responsibilities under the Act because of their increased accountability for the financial reporting process.

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Andi McNeal, CFE, CPA, is the accounting writer and editor for the research department of the Association of Certified Fraud Examiners.

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