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Auditing Standards Board Sees Complexity in Diverging Standards

The AICPA’s Auditing Standards Board (ASB) told the FASB that the growing number of standards frameworks for financial reporting and audit work are adding to the challenges auditors face, and making it harder for accounting firms to sufficiently train employees and guarantee customers a minimum level of service.

Members of the AICPA’s Auditing Standards Board (ASB) told the FASB during an October 13, 2016, meeting that the growing number of standards frameworks for financial reporting and audit work are adding to the challenges auditors face, and making it harder for accounting firms to sufficiently train employees and guarantee customers a minimum level of service.

The challenge is particularly acute for accounting firms that have both public companies and private companies in their client base.

Auditors say the problems they face are caused in part by the growing differences between the FASB’s GAAP and the reporting exceptions for private companies at the behest of its Private Company Council and the differences between the PCAOB’s standards for auditors of public companies and broker-dealers and the ASB’s GAAS, which are mainly applicable to auditors of privately held or unregulated companies and other organizations. The problems are compounded by the continued differences between U.S. GAAP and the IASB’s IFRS. Large audit firms also need to have staff trained in the guidance put forth by the GASB.

“What types of resources, costs does that drive in the auditing world?” asked ASB Chair Michael Santay at the meeting’s outset.

FASB member Lawrence Smith, who moderated the meeting, said the problems are somewhat more pronounced than what many auditors can remember from the start of their careers because of the changes the accounting profession has undergone since the enactment of the Sarbanes-Oxley Act of 2002 . The law’s requirements fall largely on public companies and their auditors, but FASB members have wondered if their has been an indirect effect for private companies, given that so many large firms serve both markets.

Smith asked the ASB representatives if they tailored their work differently for private businesses and public companies.

“We are moving to two sets of methodologies for public and private,” said Ilene Sussman, a partner with KPMG LLP. Audit firms have tended to have one approach to their work, but in recent years as the PCAOB has stepped up the intensity of its inspection process and its enforcement activity, the fallout has been felt throughout the client base, including businesses for which auditors need not adhere to PCAOB standards.

Sussman added that the standard-setting challenge for the ASB is compounded by the AICPA’s decision to converge its guidance with the International Standards on Auditing (ISAs) from the International Auditing and Assurance Standards Board (IAASB). The decision has compounded the differences between the guidance from the ASB and the PCAOB.

FASB Chair Russell Golden wondered if the problems auditors are facing may be manageable now but worsen as the differences among the various reporting frameworks continue to grow.

“You could look out 10 years from now, and between the auditing and the accounting, you could have a substantial number of real word differences, but also real world application differences,” Golden said. “Is that a good thing for the profession as a whole? Is that a neutral thing? How should we be thinking about it?”

In January, the ASB addressed one aspect of the problem with the publication of Statement on Auditing Standards (SAS) No. 131, Amendment to Statement on Auditing Standards No. 122, Section 700, Forming an Opinion and Reporting on Financial Statements, which clarified the format of auditors’ reports for audits that are conducted according to PCAOB standards but not under the board’s jurisdiction.

SAS No. 131 addresses the different reporting requirements of GAAS and the PCAOB’s standards. It says that when accountants are required to conduct audits that come under the PCAOB’s jurisdiction in accordance with the board’s standards, they are not required to conduct the audit according to the ASB’s GAAS.

However, when the audit is not under the jurisdiction of the PCAOB, but the entity wants, or is required to, by an agency, regulator, or contract to have its financial statements audited under PCAOB standards, the auditor is also required to conduct the audit in accordance with GAAS.

When auditors refers to PCAOB standards in addition to GAAS in the auditor’s report, SAS No. 131 requires them to use the form of report required by the PCAOB and amend it to state that the audit was also conducted in accordance with GAAS.