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Support for Fraud Task Force Gains Momentum

November 25, 2013

The PCAOB is working on plans to set up a fraud task force that may wind up submitting recommendations for the audit regulator, including improvements to auditing standards and issuing guidance about risk.Some board officials believe the task force may be a useful device for improving the quality of financial reporting.

The PCAOB is continuing to work on forming task force for its Standing Advisory Group (SAG) to help auditors detect financial reporting fraud.

Still in its early stages, the idea came out of the SAG in November 2012, when some members said it could be useful in identifying and considering ways to improve auditing practices.

During the latest SAG meeting on November 13, 2013, in Washington, the PCAOB’s staff presented a plan about how the task force could function.

In the staff’s view, the task force could first focus on its objectives and research the economic consequences of fraud; the effectiveness of audits in detecting fraud; and potential mechanisms to improve the effectiveness of audits in detecting fraud. The PCAOB’s new Center for Economic Analysis as well as the Office of Research and Analysis would support the effort.

The task force could then draw up specific recommendations for the PCAOB to consider, including improvements to auditing standards and issuing guidance about risk.Ten to 12 individuals with diverse expertise within and outside of the advisory group could meet every three months for about 18 months.The process is slated to end with a set of specific recommendations for the PCAOB.

SAG members welcomed the plans but expressed some concerns.

“This is a very expensive proposition,” said Mike Cook, retired chairman and CEO of Deloitte & Touche LLP.

While emphasizing that he has no objection to the task force, Cook said he worried whether the recommended amendments to standards, or revised procedures could add costs for auditors and their clients with not enough benefit.

John White, a partner at Cravath, Swaine & Moore LLP and a former director of SEC’s Division of Corporation Finance, asked the PCAOB to consider the terminology used by the fraud task force because many financial restatements involve unintentional errors.

“Is the goal here of this task force to detect and prevent fraud, or is it broader, to detect and prevent accounting errors?” asked White. “I can guess what the SEC’s goal is. Do we have the right title here?The SEC doesn’t’ have fraud in the title.”

John White is married to SEC Chair Mary Jo White.In July, the SEC announced that it formed a Financial Reporting and Audit Task Force to detect fraudulent and improper financial reporting.

David Woodcock, the SEC’s regional director in Fort Worth, TX, and the chairman of the agency’s task force, said his team is looking for areas that may be ripe for fraud and develop methods to identify fraud so that the agency can “be out in front of accounting fraud.”

PCAOB Chief Auditor Martin Baumann told John White that the audit regulator’s effort is “directed at financial reporting fraud,” but he added that several other board initiatives are under way to improve the quality of financial reporting.

Claudius Modesti, director of the PCAOB’s Division of Enforcement and Investigations, said he’s “highly appreciative” of the possibility of a SAG fraud task force.

“Auditors are uniquely positioned, given the breadth and depth of their access to issuers’ financial information,” he told SAG members. “If management thinks the auditor is more likely to detect fraud, they are less likely to engage in corrupt behavior.”