Auditor reporting requirements

- The nature of the reports they issued for companies subject to SEC reporting requirements, (such as whether the entities were limited to employee benefit plans that file on Form 11-K), additional details (by issuer and date) of the audit reports that apply to public companies' financial statements, breakdowns of the fees billed to issuer audit clients (audit services, other accounting services, tax services and non-audit services), and the number of audit firm personnel who exercised the authority to sign the firm’s name to an audit report during the period.

- Alternatively, if the firm did not issue any reports for companies subject to SEC reporting requirements, then it needs to report details of any such reports that it played a "substantial role" in preparing or furnishing.

What about non-issuer broker-dealers, such as Madoff?

If an audit firm has not issued any report for an issuer during the reporting period, then it must indicate whether it has issued any document with respect to the financial statements of a non-issuer broker-dealer.

What about accounting firm networks and alliances?

Audit firms must report memberships in (or affiliations with) any network, alliance, association, or other arrangement that: (a) licenses or authorizes audit procedures, manuals or related materials; (b) licenses or authorizes the use of a name in connection with the providing of audit or accounting services; (c) markets audit services or through which joint audits are conducted, or (d) employs or leases personnel to perform audit services.

What about the audit firm's financial health?

An audit firm will need to file a special report when the firm (or its partners or employees) are charged in certain criminal, civil or administrative proceedings, but the PCAOB and SEC did not propose any requirement to disclose any information about the firm's financial condition.

Auditor Reporting Requirements Start in 2010

Last updated: July 12, 2010.

Investors will soon have more information about the accounting firms that audit public companies, thanks to an order that was signed by the US Securities and Exchange Commission in August 2009. The SEC’s order officially approves a new set of reporting requirements for all firms registered with the Public Company Accounting Oversight Board (PCAOB). Under the rules, registered firms are required to report certain events occurring in 2010 and to submit annual reports starting on June 30, 2010.

More Transparency for Audit Firms

The PCAOB's auditor reporting rules are one of the reforms required by the Sarbanes-Oxley Act of 2002. Recent events, such as the charges against Madoff's auditors and life-threatening lawsuits against accounting firms, have emphasized the need for more transparency about audit firms. Highlights of the annual and special reporting requirements are as follows:

Annual reporting. The annual reports will be required by June 30th of each year for the year ended March 31st of that year. The reports will include information about audits of issuers subject to SEC reporting, such as reports issued in the past year, disciplinary actions and fees.

Special reporting. Audit firms will need to file special reports within 30 days after the occurrence of certain events, such as a change in the firm's name or ownership structure or certain administrative, legal or disciplinary proceedings.

Both the annual and special reports will be made available to the public on the PCAOB's website, subject to certain exceptions for information for which a firm requests confidential treatment.

Reportable Current Events

The added disclosures are designed to help investors and regulators better assess the risks associated with audit firms and their audit opinions. For example, the list of reportable current events includes the following:

An accounting firm withdraws an audit report, and the related issuer has not complied with its requirement to report that event on a Form 8-K.
A firm becomes aware than an issuer has made use of the firm’s name in an unauthorized manner without the required consent of the firm.
A firm (or any of its partners, managers, or members) becomes a defendant in certain criminal, governmental, administrative or disciplinary proceedings.
A firm hires an employee, admits a partner, or contracts to work with a person or entity who is the subject of certain disciplinary sanctions.
Any of certain professional licenses or certifications is revoked, suspended or made subject to conditions or contingencies.

More Work for Accounting Firms

Some of the current events reporting requirements were controversial because of the added work they will make for the accounting firms.

One area of added work relates to the communications and controls needed to ensure that current events reports are timely filed. The general rule is that a report for a certain type of event must be filed 30 days from the date the firm becomes aware of certain facts. The firm is considered aware of the facts at the same time that any partner, shareholder, principal, owner of member of the firm becomes aware of the facts. So firms will need to establish procedures to make sure the person responsible for filing the reports is timely notified.

Another area of added work involves the level of documentation needed for those firms that may be able to shield themselves to some extent from the public spotlight in the new regulatory environment. The PCAOB is signaling that it intends to be reasonable, but it doesn’t intend to accept too many excuses or make too many exceptions for firms that fail to provide the appropriate documentation. Examples:

Claims of proprietary information. A firm can request that certain categories of information be held confidential. But it will need to support that request with solid documentation, including a representation that the information has not otherwise been publicly disclosed and a detailed explanation of the basis for asserting the information is proprietary or protected by law.
Claims of extraterritorial reach. A non-US audit firm may withhold information that it feels cannot be disclosed without violating a non-US law. But the firm will need to provide adequate support for any omissions, including a copy of the local law, a legal opinion, and an explanation of its efforts to obtain the necessary consents or waivers. If the PCAOB feels the support is not adequate, it can use its authority to compel the firm to disclose the information.

The PCAOB has the power to enforce the new requirements under the Sarbanes-Oxley Act of 2002. Under this Act, the Board is, in effect, the auditor of the auditors. It is responsible for registering and inspecting accounting firms that audit public companies whose stock is traded on any US exchange. It also sets applicable auditing standards, and it can conduct investigations of and initiate disciplinary proceedings against registered firms.

Effective Dates and Future Directions

The PCAOB's new requirements were originally scheduled to take effect for events occurring on or after October 12, 2009 (60 days after the SEC’s approval) but were postponed to events occurring on or after December 31, 2009. Starting then, the firms will make their reports to the PCAOB, and the PCAOB in turn will make the information available on its website to investors and the general public. Based on this timetable, the first reports on current events could be due to the PCAOB as soon as January 30, 2010 and available to the public shortly thereafter. The first annual reports are due to the PCAOB on June 30, 2010 and will likewise be made available to the public soon thereafter.

Some firms are already issuing annual reports on a strictly voluntary basis, and additional reforms are possible following recommendations in the final report of the US Treasury Advisory Committee on the Auditing Profession. The Advisory Committee, also known as the Paulson Committee, suggested that the PCAOB should require the largest audit firms to prepare and privately submit audited financials adhering to Generally Accepted Accounting Principles to the PCAOB by 2011. This would help guide the PCAOB's decisions about inspections and registrations

Additional Guidance

In January 2010, the PCAOB staff issued additional guidance in the form of questions and answers (Q&As). Among other things, the staff's guidance clarifies that the requirement to file special reports on Form 3 applies to all registered firms, regardless of the nature of the firm’s practice.

In June 2010, the PCAOB staff issued Q&As related to Form 2. The staff's guidance clarifies that fees must be broken down into four categories: audit services, other accounting services, tax service and non-audit services. The definitions of these categories correspond with the SEC's descriptions of services for which an issuer must disclose fees paid to its auditors, (i.e., the definitions in Item 9(e) of Commission Schedule 14A for audit fees, audit-related fees. tax fees, and all other fees). Firms may estimate these numbers, provided they disclose the methodology used in making their estimates. The guidance also clarifies the mechanics of reporting through the PCAOB's web-based system, and it provides additional instructions regarding the withholding of certain information on the grounds that disclosure would represent a legal conflict with a non-US law.

Links

SEC's Order Approving Rules

PCAOB News Release Delaying Effective Date

PCAOB Staff Q&As on Annual Reporting on Form 2

PCAOB Staff Q&As on Special Reporting on Form 3

PCAOB Staff Q&As on Form 4

SEC Release Requesting Comments on Delayed Effective Date

Final Report on the Advisory Committee on the Auditing Profession

Deloitte and Touche 2009 annual report

Ernst & Young 2009 annual report

KPMG 2009 annual review

PwC 2009 Global Annual Review