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 Statement on Consideration of Concept Release on Possible Revisions to the Standard on Audit Confirmations

DATE: April 14, 2009
SPEAKER: Daniel L. Goelzer, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

The concept release the Board is considering today explores ways in which we could modernize and strengthen AU 330 -- the auditing standard that governs auditor confirmation procedures. "Confirmation" is the process by which an auditor seeks information directly from a third party about some aspect of the client’s financial statements. Asking customers to confirm the accuracy of their account balances is the most familiar example of a confirmation request. Because confirmation involves obtaining evidence from an independent, external source, it provides a high level of audit evidence.

AU 330 is not broken -- in fact it is, in my view, basically sound. Confirmation is, however, an audit area in which there is room for improvement. Since AU 330 was written, technological innovations, such as the internet and e-mail, have changed confirmation practice. More broadly, I view this proceeding as a step in the review and modernization of all of our interim standards with the goal of making any necessary revisions and then adopting permanent PCAOB auditing standards.

Reviewing confirmation procedures is particularly timely because the International Auditing and Assurance Standards Board has adopted its own standard on confirmation, and the Auditing Standards Board is now considering how to conform the private company auditing standards to the IAASB’s work. In connection with other projects, such as the pending engagement quality review standards, the Board has said that, in its standard setting, it will consider the provisions of the relevant international standards on auditing -- the ISAs -- and will seek to incorporate useful ideas. The same is true here.

Nonetheless, confirmation is an area in which we may have some fundamental differences with the ISAs. In the U.S., confirming accounts receivable is presumptively mandatory. The reasons for that requirement run back to the SEC’s 1940 McKesson Robbins case -- one of the major financial reporting frauds of its day and one of the seminal events in shaping U.S. auditing standards. In much of the rest of the world, confirmation is simply a tool available to the auditor, but not one that must be employed in every case. We are not considering making accounts receivable confirmations optional, and so this is a difference between U.S. and international auditing that is unlikely to disappear.

I also want to make a couple of comments about the process this release reflects. The Board has not typically begun its standard setting with a concept release, and this one is a bit of an experiment. We have been urged to be more transparent in standard setting and to afford interested persons more opportunities to help shape the Board’s thinking. I hope that the concept release procedure will meet some of those concerns. The release will give investors, preparers, and auditors a vehicle to let us know their reactions to our ideas at an early stage so that those reactions can be taken into account in the standards drafting process. This should be a useful supplement to the advice the Board already gets from its Standing Advisory Group.

The concept release is also an experiment in another respect. It consists of a high level release and a more detailed appendix. The release is intended to be understandable to general readers. The appendix, on the other hand, is somewhat more granular. It is designed primarily for auditors and seeks to elicit comment regarding technical issues. One consequence of this two-document format is that there is some repetition between the release and the appendix. I would welcome comment on whether this sort of concept release is a step in the right direction on transparency.

Finally, I want to acknowledge the hard work of Associate Chief Auditor Dee Mirando-Gould, who is the principal draftsperson of the concept release, along with Chris David in the Chief Auditor’s Office. Bob Burns and Nina Mojiri-Azad in the Office of the General Counsel have also played important roles in getting this release to the Board, as has Acting Chief Auditor, Jennifer Rand. Thanks to all of you for a job well-done.

It is somewhat difficult to ask questions about a release that contains no concrete proposals. However, I would like to give it a try and see whether the staff can illuminate a few of the issues that the concept release raises.

 

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