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Financial Reporting and the Law

The SEC recently issued an order approving the PCAOB’s budget for 2014 and expressing support for the PCAOB’s near-term priority projects as articulated in the PCAOB’s five-year strategic plan. In the February 5 order, the Commission stated that it “encourages the PCAOB to continue keeping the Commission and its staff apprised of developments throughout the implementation of these near-term projects and looks forward to providing views to the PCAOB as future updates are made to the [strategic] plan.” Several items included in the PCAOB’s strategic plan and discussed by the PCAOB and SEC during the February 5 SEC Open Meeting approving the PCAOB budget reflect important developments at the PCAOB. These include the following:

  • The PCAOB established a Center for Economic Analysis in November 2013, which will advise the PCAOB on how economic theory, analysis, and tools can be better used to enhance the effectiveness of PCAOB program areas, including standard setting, inspections, and other oversight activities.
  • In 2014, the PCAOB expects to propose auditing standards related to the performance of parts of an audit by specialists and other auditors and the auditing of estimates and fair value measurements—projects that the PCAOB has been discussing since February 2013.
  • PCAOB Chair James R. Doty is optimistic that, during 2014, the PCAOB will be able to sign an agreement to inspect the audit work of China-based PCAOB-registered firms.
  • SEC Commissioner Luis A. Aguilar stated that the “success [of the PCAOB] must be measured by significant and sustained reductions in the number of audit deficiencies identified through the inspection process.”
  • Chairman Doty indicated that the PCAOB does not have an active project on mandatory auditor rotation and that such a project is not part of the 2014 budget.
  • The PCAOB will continue work on developing Audit Quality Indicators through issuance of a concept release designed to identify quantifiable criteria for use by, among others, audit committees to evaluate the quality of audits performed by registered public accounting firms.
  • The PCAOB will continue to enhance its outreach to, and interaction with, audit committees to engage in areas of common interest, including auditor independence, objectivity and professional skepticism, and audit quality.
  • The SEC staff and PCAOB have shown an increased focus on internal control over financial reporting. Commissioner Aguilar observed that “investor confidence in the reliability of public company financial statements—and in the effectiveness of their internal controls—is essential to true capital formation.”