SEC leadership

SEC Leaders Discuss the Value of Independence

S enior officials of the Securities and Exchange Commission told members attending the American Institute of CPAs annual Conference on current SEC Developments in Washington, D.C., that audit firms must strive to ensure that audit quality will not be compromised and that auditor performance will continue to meet public expectations. SEC Chairman Arthur Levitt, Jr., and Chief Accountant Michael H. Sutton both commended the professions record for casting a "critical eye" on financial statements prepared by companies management, but they emphasized the need for auditors to continue to meet public expectations as the CPA profession provides clients with a new range of audit services.

To maintain both the fact and appearance of independence, Levitt said auditors needed to avoid all suggestions of mutuality of interests with the managements of companies for which they provide services. "Auditors cannot sell services that leave them auditing their own work," said Levitt. The chairman said some public opinion surveys had found that people thought auditing firms were more focused on consulting and other services at the expense of audit services. He said audits should remain the "soul" of the public accounting profession, "not a loss-leader retained as a foot in the door for higher fee consulting services."

The chairman said he broached the topic of independence because he had always held in high regard the "tremendous contributions the profession made to the stability and sophistication" of U.S. capital markets. "Let us build on the professions remarkable history, and, above all, let us work together to ensure that the confidence of investors is not compromised but, rather, strengthened."

Calling a fraud a fraud
The SEC chief accountant said that, finally, auditors had closed the expectation gap—the gap between what the ordinary person was thought to perceive as the auditors role and the responsibilities the profession established for itself. Sutton lauded new AICPA Statement on Auditing Standards no. 82, Consideration of Fraud in a Financial Statement Audit , as the most recent effort by the profession to help gain public confidence. He praised SAS no. 82 for referring to fraud by name, for the first time, instead of by the more euphemistic term "irregularities" and for describing over 40 fraud risk factors that auditors must consider in planning and performing an audit.

Sutton called on auditors to continue to earn public confidence by focusing on the appropriateness of accounting principles and the clarity of disclosures rather than reporting on whether an accounting principle is within the range of acceptable practice. "To continue to win the war of the expectation gap, auditors need to speak up—not just when things are wrong but also when things are not quite right—to pose difficult questions about the quality of reporting and to seek full and fair disclosure," said Sutton.

Single Audit Guidance Due This Spring

T he Office of Management and Budget (OMB) is expected to issue a final revision to Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, by April or May, according to Sheila O. Conley, OMB policy analyst. Under the Single Audit Act Amendments of 1996 (see "Auditing Federal Awards: A New Approach," JofA, Nov.96, page 53), OMB Circular A-128, Audits of State and Local Governments, was consolidated with the recently revised OMB circular A-133 for not-for-profit organizations. The proposed revisions to circular A-133 encompass both sets of entities that receive federal awards.

Besides the inclusion of state and local governments, the most significant changes for auditors in the proposed revisions include requirements for the auditor to prepare and sign a data collection form and the testing and reporting on the allowability of costs charged to cost pools.

Under the proposed revisions, the auditor would be required to prepare a data collection form and sign it as the preparer for use by the federal government as a basis for developing a database on federal awards and for use by the federal clearinghouse and pass-through entities in lieu of sending the full single audit report. There is concern in the audit community that this would increase audit costs and the auditors liability exposure.

Conley said this was a very contentious issue and changes to the language in the final version of A-133 were likely. "There is no doubt we are going to include the requirement for a data collection form," said Conley. "The question remains as to who will prepare it." Conley said the OMB wants the auditors to sign the report but would consider suggestions from the accounting profession on the language of the circular to help limit the auditors liability exposure. "One option is to have management prepare one portion of the report while the auditor prepares the part relating to audit findings and results," said Conley.

The proposed revision also would clarify the auditors responsibility for testing and reporting on the allowability of costs charged to cost pools. Auditors would be expected to perform tests of costs charged to cost pools during the period the costs were incurred rather than during the period in which the rate was applied or in which the costs were allocated.

The AICPA government accounting and auditing committee submitted its comments on the proposed revisions in January. For more information on A-133 revisions, contact Sheila O. Conley, OMB Office of Federal Financial Management at 202-395-3993.


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