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Revised Proposal for Audit Confirmations May Be Issued

The PCAOB appears to be reviving its project to write a new standard for auditor confirmations. The audit regulator’s staff is working toward a revised proposal, although the exact timing is not clear. Comment letters from auditors and companies in response to a 2010 version of the proposal criticized it for relying too heavily on specific requirements, and they preferred a standard that relied more on principles.

The PCAOB appears to be reviving its project to write a new standard for auditor confirmations, an effort that had been largely sidelined for much of the past five years while the audit regulator pursued an ambitious agenda to have auditors disclose more information to shareholders.

The 2010 proposal in Release No. 2010-003 , Confirmation , was an effort to replace AU Section 330, “The Confirmation Process.” The interim AICPA standard became effective in 1992 when electronics communications were far less advanced than are today.

According to the updated standard-setting agenda the board published on March 31, 2015, the audit regulator’s staff is working toward a revised proposal, although the exact timing is not clear.

The proposal in Release No. 2010-003 called for auditors to perform confirmation procedures for receivables, including those resulting from sales that rely on financing, loans, and other transactions. The confirmations are intended to provide audit evidence to address the risk of financial fraud. Auditor evidence has been a concern for SEC officials since the agency’s formation. In the late 1930s, regulators brought one of the first prominent accounting fraud cases when the auditor failed to verify falsified documents at a pharmaceutical company, McKesson & Robbins Inc.

“Albeit it’s not the sexiest topic in the world, but the confirmation standard was written at a time when you didn’t have emails, you didn’t have the electronic ability to go into access a client’s bank records directly as a way to confirming balances,” said Daniel Goelzer, a partner with law firm Baker & McKenzie LLP, who was the PCAOB’s acting chair when it issued the proposal.

The proposal also requires an auditor to confirm cash and other relationships with financial institutions, such as lines of credit, the balances banks require corporate accounts to keep to get free services, possible legal liabilities, and financial guarantees.

Moreover, Release No. 2010-003 requires auditors to confirm a client’s risks and the client’s response to some of the risks. But the comment letters from auditors and companies criticized the proposal because it relied too heavily on specific requirements, and they preferred a standard that relied more on principles. Auditors would also like the confirmation standard to be more consistent with the eight risk assessment standards that range from Auditing Standard (AS 8) No. 8 , Audit Risk , to AS 15 , Audit Evidence.

Release No. 2010-003 is “a great example of a rule that’s overly prescriptive in how it’s structured,” Douglas Anderson, corporate auditor for Dow Chemical Co., said during an October 2010 Standing Advisory Group meeting, three months after the proposal was issued. The proposal focuses on receivables and cash, but often risks arise in other areas.

“I think it should be stated, ‘Look at your risks and look at confirmations as a way to potentially get audit evidence, based on the risks of the situation, and two areas you want to give special consideration to are receivables and cash,'” Anderson said.

The work on the confirmation proposal comes at a time when the SEC is pressuring the PCAOB to reorient its priorities and focus more on standards that deal with auditors’ reviews of clients’ finances and less on disclosures to investors.

“A proposal was put out in 2010 in an attempt to modernize the standard,” Goelzer said. “That seems like a very logical thing for a standard-setter to do. And it just seems a shame it takes five plus years to get that sort of thing to be done. There are some controversial things in the proposal related to what to be confirmed, but a lot of the basics are straightforward.”

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