PCAOB: Experts Only for Final Audit Reviews

But some finance executives fear the new rule could generate time-consuming, costly work.
Sarah JohnsonJuly 28, 2009

The Public Company Accounting Oversight Board has approved a new rule prohibiting audit firms from allowing lower-level employees to conduct final reviews of clients’ financials before releasing opinions.

Under the new Auditing Standard No. 7, such reviews — which the PCAOB officially calls “engagement quality reviews” but are often referred to as concurring reviews — are expected to be done by a partner or other high-level auditor who hasn’t worked on the audit under review.

PCAOB inspectors have found some reviews to be ineffective because reviewers lacked expertise and experience, or because they were conducted at an improper time during the audit process. The new rule allows smaller firms to use partners from other firms for the evaluations.

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The PCAOB has struggled to explain how these reviews should be conducted. After the original proposal was made in February 2008, finance executives worried it would lead to “reaudits” rather than just a final backstop to an audit team’s work before signoff on a client’s financial reports.

Critics believed the proposal’s wording could lead reviewers to be overly concerned with their personal liability by forcing them to say there was nothing they knew or “should have” known that would prevent the issuance of an audit report. That language, some said, had onerous legal implications and would led to extra, costly work by lawsuit-wary reviewers who were not fully responsible for the audit.

The board later revised the proposal, giving reviewers more leeway in judgment calls, and reissued it for a comment period that ended earlier this year. Still, not everyone was satisfied. Computer Sciences Corp. corporate controller Donald DeBuck, for instance, voiced concern that the new rule “could lead to high cost without commensurate benefits” in addition to the risk of late filings.

However, the PCAOB has not made major changes to the revised proposal. The board’s new acting chairman, Dan Goelzer, says worries that the new rule will lead to a second audit are “misguided.” Pending final approval by the Securities and Exchange Commission, which oversees the PCAOB, the new rule will go into effect for fiscal years beginning on or after December 15, 2009.