New PCAOB Reporting Requirements a Practical Guide

¶ … New PCAOB

Reporting Requirements

A PRACTICAL GUIDE TO THE NEW PCAOB REPORTING

A Practical Guide to the New PCAOB Reporting Requirements

PCAOB is a Public Company Accounting Oversight Board established by Sarbanes-Oxley Act to oversee the auditing procedures of public companies in order to protect the interest of investors and enhance public confidence towards preparation of accurate audit information. The PCAOB attempts to protect the interests of investors as well as enhancing fair and accurate audit reporting.

The objective of this study is to justify whether the reporting requirements of the PCAOB reduce the chance of financial fraud.

Justification how the reporting requirements of the PCAOB reduce the chance of financial fraud

Fundamental objective leading to the enactment of the Sarbanes-Oxley (SOX) Act of 2002 was in response of corporate financial scandals that rocked business circle in the late 1990s and early 2000s in the United States. To restore investors' confidence and improve overall financial reporting, SOX Act mandates public traded company to display their financial data publicly through annual report. Under Section 404 of SOX Act, public company should implement internal control to enhance financial accounting transparency. Equally important, the section 409 of SOX Act mandates publicly traded company to seek for the service of an external auditor to audit the company annual financial statement.

To comply with the SOX Act, PCAOB was established to oversee the auditing procedures implemented by the public traded companies. To ensure that companies comply with PCAOB laid down requirements, PCAOB promulgated new rules where an accounting a firm charged to audit a company financial data is to file current and annual return with PCAOB to implement the requirement of SOX Section 102(d).There is an also disclosure requirement where the audit firm is required to provide information about its performing audit, and report annual information about the firms and the overall audit practice.

To comply with the reporting requirements of the PCAOB, publicly traded company should restructure the Board of Directors and assigned special responsibilities to key officer within the organization to enhance company financial reporting. Despite the shortcomings identified in the PCAOB reporting requirements, the system has been able to reduce fraud practice within the publicly traded company. Typically, Chief Executive Officer (CEO) and Chief Financial Officer (CFO) know that they are likely to go to jail in case of financial scandal, thus these two officers are implementing tight financial scrutiny to enhance financial transparency within the company. (Coates, 2007).

Typically, the financial reporting requirements of PCAOB have been able to reduce the chance of financial fraud because apart from the internal control system that a firm needs to implement, an external auditor should also attest to the financial transparency of the firm. Thus, all the steps taken by firms to enhance financial transparency should be filed with PCAOB with Form and Form 3.

Overall objectives for making public traded companies to implement PCAOB requirements are to enhance financial transparency of the company financial data. To comply with the PCAOB reporting requirements, firms need also set aside large amount of money to enhance compliance.

Despite the effectiveness of PCAOB to address financial fraud, there is still issue such as Ponzi scheme which seems to be a new fraudulent practice in the United States. Recently, chairman of NASDAQ has involved in a financial scandal worth $50 billions. Jonas (2007) points out that with PCAOB reporting requirement, many firms are still heading to the reporting risks. Data collected revealed that 74 companies were not able to implement effective internal control thereby leading to the ineffective internal reporting.

Illustration of Responsibilities of an auditing firm to detect fraud during the audit process

"An audit is the process of accumulating and evaluating evidence by a competent independent person about the specific economic entity for the purpose of determining and reporting upon the degree of correspondence between the quantifiable information and established criteria. The financial statement audit applies this concept to the financial statements prepared by the entity." (U.S. Department of Interior 2003 P1).

"The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud."( Apostolou & Crumbley 2008 P. 1).

Responsibility of an auditing firm is to assess whether the financial statement presented by a publicly traded company fairly reflects the company performances. SEC requires a publicly traded company to use independent auditor to assess whether the financial statements presented by the company reflects their financial positions. Auditing involves evaluation of a company financial position and present auditing note in accordance with the general accepted accounting principles.

Following are the responsibilities of an auditing firm to detect fraud:

First, an auditing firm should perform the test of the financial statement of a company to determine whether the company financial data comply with the law and regulations.

In addition, an auditing firm should implement internal control testing to assess the effectiveness of internal system within a company. When an auditing firm sees that internal control is strong, an auditing firm should implement substantial analytical procedure by comparing financial information with non-financial information to ascertain whether data collected make sense. If the company internal control is weak, an auditing firm should implement a substantial test for detail by selecting major account balance and find hard evidence such as invoices or bank statement in order to detect any fraud

Giving challenges in detecting fraud, one of the effective methods that an auditing firm could employ to detect fraud is to subject a company to forensic auditing. Forensic auditing is the most aggressive method to detect fraud. Typically, forensic method to detect fraud is much more detail and involve evaluation of complete company record which includes all the company financial data. Forensic method to detect fraud also includes questioning of all company employees. Thus, a public company needs to undergo forensic auditing methodology on a regular basis. While forensic method to detect fraud is very effective, the procedure is significantly more expensive to implement and the method is time consuming than regular auditing system. While financial auditing system does not cover every transaction, a forensic auditor performs detailed analysis of the company to detect fraud. (Apostolou & Crumbley 2008).