Survey of PCAOB: Rate of Audit Deficiencies Increasing

Acuitas, a valuation and litigation consultant, has released a survey of recent PCAOB inspections that says that 43% of all audits inspected by the PCAOB in 2013 had deficiencies (compared to 16% in 2009).

The “2015 Survey of Fair Value Audit Deficiencies,” its fourth annual analysis of recent PCAOB inspections, also said that the number of Fair Value Measurement (FVM) and impairment deficiencies as a percentage of the total continue to be significant, representing 31% of all audit deficiencies in 2013.

Two trends that began to emerge in last year’s survey maintained their prominence, Acuitas reported. First, the FVM audit deficiencies attributable to mergers and acquisitions activity increased to 49% in 2013, up from 45% in 2012 and an average of 9% from 2008 to 2011. Second, the number of deficiencies caused solely by failures to assess risk and test internal controls remained high in 2013, at 45% of all deficiencies for the top 25 firms. By comparison, such failures were present in 22% of FVM deficiencies between 2008 and 2012.

According to Mark Zyla, managing director, “We have seen a significant shift from the years where FVM deficiencies were largely the result of financial instruments to the current trend of business combinations and a failure to test or understand financial assumptions. This shift has likely been caused by audit improvements for financial instruments that resulted from the PCAOB inspection process and by increased merger activity in recent years. The auditing community should certainly be concerned about the continuing increase in deficiencies caused by a failure to assess risk and internal controls, and the PCAOB’s assessment that they are caused by ‘a lack of due professional care.’”

The complete survey is available from Zyla, who can be reached at, or on the Acuitas website at

AICPA Significantly Revises Two Governmental Auditing Guides

The American Institute of CPAs (AICPA) has revised two key publications that are relied upon by auditors of governmental and not-for-profit entities that expend federal awards and those who audit state and local government financial statements. The guides are a facet of the AICPA’s Enhancing Audit Quality initiative.

The 2015 edition of the AICPA Audit Guide, Government Auditing Standards and Single Audits, is used by auditors performing single audits of federal expenditures, as well as audits performed in accordance with Government Auditing Standards (the Yellow Book).

“In particular, this year’s guide provides critical information for auditors to manage the transition from performing single audits under OMB Circular A-133 to the new OMB Uniform Guidance regulation for single audits,” said Mary Foelster, AICPA director of governmental auditing and accounting. Foelster oversees the Institute’s Governmental Audit Quality Center.

The audit requirements contained in the new Uniform Guidance for single audits generally become effective for December 31, 2015, year-end single audits and later. Audits performed prior to that time will be under OMB Circular A-133, but there are still Uniform Guidance implications for expenditure testing in those audits.

The 2015 edition of the AICPA Audit and Accounting Guide, State and Local Governments, provides the latest authoritative guidance and critical “how-to” advice for audits of state and local governments.

A critical addition to this year’s guide, updated as of March, 1, 2015, is a comprehensive new chapter that addresses the accounting and financial reporting requirements under GASB’s new pension standards, as well as related auditing considerations for both audits of governmental pension plans and the employers that participate in those plans.

Committee Seeking Comments on XBRL Tagging in SEC Reports

The XBRL US Data Quality Committee is seeking public comment on a set of rules designed to produce higher-quality XBRL tagging in financial reports submitted to the SEC, the Journal of Accountancy reported.

Extensible business reporting language (XBRL) is a technology format that allows public companies and other organizations to tag data included in financial statements and footnote disclosures. The tags translate the raw information in financial reports into a language computers can understand.

The AICPA has encouraged its members to read and comment on the new rules. The Institute is represented on the Data Quality Committee, which is tasked with providing guidance on XBRL tagging to the XBRL US Center for Data Quality.

XBRL supporters, including the AICPA, have said for years that the technology opens the door to a much more efficient use of financial reports by analysts and investors. In theory, tools using XBRL can extract key information from public company and other financial data far more efficiently than is possible now. In practice, persistent errors in applying XBRL tags to financial reports have limited the benefits of the technology, the Journal of Accountancy reported.

“For investors and other consumers to fully realize the benefits that XBRL can deliver, better guidance and automated rules for mitigating errors in XBRL data is needed. Public review and input is an important part of this process,” Melancon said in an AICPA news release. “The comments provided over the course of the next 60 days will help the committee improve the guidance and rules that will reduce inconsistencies or errors in XBRL data filed with the SEC.”

The deadline for filing comments is Sept. 14, 2015.

New York CPAs Weigh in on the Future of Peer Review

The AICPA’s ambitious plan to revolutionize the 35-year-old peer review process with a near-real time engagement monitoring tool is being positioned to improve practice monitoring overall, but the New York State Society of Certified Public Accountants (NYSSCPA) has identified some aspects of that plan that need attention.

“While we share the AICPA’s commitment to improve the effectiveness of the peer review program, our organization has concerns about some of the changes being proposed,” says NYSSCPA executive director Joanne Barry.

The AICPA wants to build a system that would be programmed to provide a continuous analytical evaluation of a firm’s engagement performance that would require human review when the system identified concerns. It would review all firms that perform accounting, auditing and attestation engagements as well as monitor all engagements subject to review.

In a June 12 letter to the AICPA, the NYSSCPA expressed several concerns with the concept; namely the cost of the tool, which the Society said may be prohibitive for smaller firms; confidentiality – that the tool may go beyond understanding solely the quality aspects of how a firm performs engagements; and a concern that a metric-based peer review process — which relies on a CPA’s professional judgment — would lead to a “check the box” mentality, leading audit quality to suffer.

The NYSSCPA also urged the AICPA to make improvements on a firm’s peer reviewer selection and reviewer training requirements.

“We can see the merit in having a peer reviewer selected and assigned or recommended by the system based on objective and measurable criteria,” the drafters wrote. “The selection and assignment of a reviewer by the system would, in some measure, enhance the objectivity of a peer reviewer and the integrity of the peer review system.”

“Clearly there is no one-size-fits all approach for all firms,” says Barry, “but the CPA profession needs to begin harnessing the power that big data offers and that goes beyond peer review. This is a step in the right direction.”

Business Organizations Join to Comment on SEC Modernization Initiative

The Center for Audit Quality and three business and financial policy organizations have commented on ways to modernize online company filings with the SEC.

The SEC is seeking input on how to improve financial disclosure, including ways to improve its EDGAR system of company filings. The Center for Audit Quality joined with the Business Roundtable, Financial Executives International and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness to make numerous recommendations. The comment letter focuses on two phases of improvements: consolidating and updating current EDGAR search features by improving their visibility and organization, then making improvements to the company search page, filings detail screen and output functionality.

AICPA Proposes Six-Point Plan to Improve Audit Performance

The AICPA released a six-point plan to improve audits that provides a roadmap for the profession’s continued journey to audit excellence. The plan concentrates on financial statement audits for private companies, employee benefit plans and governmental entities in the United States. It is the AICPA’s latest effort to drive higher audit performance in an increasingly complex and constantly changing business environment.

The AICPA’s Enhancing Audit Quality (EAQ) initiative, launched in May 2014, addresses quality issues on a holistic, ongoing basis, with special emphasis on specialized audits, such as those of governmental entities and employee benefit plans. The six-point plan captures stakeholder input and the AICPA’s strategic thinking to improve audit quality. It represents the collective feedback of respondents and profession leaders.

“Audit quality has always been a CPA profession imperative. And as the issue has risen in importance worldwide, we recognized that a bigger, bolder step was needed to address challenges related to financial statement audit performance,” says AICPA president and CEO Barry Melancon. “This concerted effort is at the core of the profession’s quality-driven mission to meet the needs and challenges of a rapidly changing financial marketplace.”

The six-point plan outlines enhancements in the following areas:

  1. Pre-CPA Licensure – A next version of the CPA exam designed to increase assessment of higher-order skills, such as critical thinking and professional skepticism; high school Advanced Placement accounting course; changes to college-level accounting education; additional doctoral-level audit professors with practical experience.
  2. Standards and Ethics – Quality control standards implementation support; auditor’s report revisions; evaluation of clarified standards implementation; ethics code codification.
  3. CPA Learning and Support – Competency models for audit engagements, including employee benefit plan and governmental audits; competency assessment tools; targeted resources to develop competencies; certificate programs to demonstrate competence.
  4. Peer Review – Increased focus on greater risk industries and areas; more significant remediation; root cause analysis; termination from the peer review program after repeat quality issues.
  5. Practice Monitoring of the Future – Long-term initiative for near real-time, ongoing monitoring of firm quality checks using robust technological platform.
  6. Ethics Enforcement and NASBA Collaboration – More aggressive pursuit of reported deficiencies and stronger ties with the National Association of State Boards of Accountancy and state boards of accountancy.

“The entire profession must be committed to enhancing audit quality, just as the AICPA is committed to supporting our members with the necessary tools, training and resources,” says Susan Coffey, the institute’s senior vice president of public practice and global alliances. “This six-point plan will promote the pursuit of quality throughout a CPA’s journey – from before an individual is licensed to when he or she builds professional competency and engages in peer review and practice monitoring. It places the necessary emphasis on areas that we believe will help our members stay focused on achieving the highest level of performance for financial statement audits.”

Law Firms Are Slowly Changing Focus to Efficiency Rather Than Billable Hours

Alternative fee arrangements at law firms have grown from about 5% of revenue in 2008-2009 to about 22% this year, according to Above the Law, which reports on the legal profession.

Change is happening, but slowly. Law firm clients are demanding more predictability in fees, and law firms are starting to offer discounts, value-pricing, alternate fee arrangements and off-site service centers. Some are hiring pricing directors.

Above the Law summarized a recent panel discussion at a National Association for Law Placement conference in Chicago on the subject, “Beyond the Billable Hour: The Intersection of Client Value Pricing, Efficiency and Associate Professional Development.” The panel discussed the experiences of Chicago-based Chapman and Cutler LLP.

Managing editor David Lat came up with six key points from the discussion:

  • Being an excellent lawyer is expected. Clients want the work done for less and they know there are plenty of great lawyers available to do it. Don’t count on loyalty.
  • Firms should be selective about the work they want to do and how to get it. Bigger law firm generally try to steer away from so-called “commodity work,” which is less sophisticated and less lucrative.
  • Today’s graduates expect to have many jobs over their career. Law firms need to recognize that they must nurture talent and help people with their careers, but these careers may be with other firms.
  • You can’t cut your way to success. Panelists noted that in today’s “flat revenue environment,” some law firms are trying to manage it by cutting expenses, but firms should be focusing on providing the best possible service to clients because so much work comes from referrals.
  • Use the data. Law firms must stop focusing on the profits for the partners and the rate hikes needed to get there. Instead, they must be better about knowing the costs of certain tasks and improving processes. “Firms that are proactive rather than reactive in terms of analyzing their data and proposing customized fee arrangements will enjoy greater success than firms that are reactive and stick to the billable hour,” Above the Law reported.
  • Consider different approaches to professional development. Chapman and Cutler has begun focusing on efficiency rather than the billable hour. “The firm no longer wants to incentivize high billable hours that don’t produce value for the client,” Above the Law reported. At the same time, those who work fewer hours but provide value to the client should be acknowledged and compensated.

Indiana Becomes First State to Permit Competency-Based Education for CPAs

Indiana is the first and only state to permit competency-based education to qualify for CPA license renewal. The Indiana CPA Society is cooperating with the Indiana Board of Accountancy on a landmark pilot program, and the change was facilitated through work of the CPA Center of Excellence®. Announced last week, the CPA Center of Excellence® has been established as a source for competency assessment, competency enhancement and intelligent collaboration for CPAs.

The competency-based courses permitted for license renewal include gamification and “nano-learning.” The courses are online, interactive modules and can be taken on-demand. Digital badges, a new concept for the CPA profession, will be earned upon completion. Course offerings cover vital skills for CPAs to be successful in the 21st century and are rooted in the core competencies identified by the AICPA in the CPA Horizons 2025 project. The CPA Center of Excellence® plans to expand offerings over the next 12 to 24 months.

“Our profession has long been in need of innovation and enhancements in the area of professional development and educational activities of CPAs,” said Greg Coy, chair of the Indiana Board of Accountancy. “The Competency-Based Learning Pilot Program is an outstanding development in proficiency based learning. I am proud and excited to see Indiana at the forefront of these changes in the profession.”

The pilot program is in effect through Dec. 31, 2015. Any currently-licensed CPA in Indiana is eligible to participate. As part of the program, each CPA may take up to two online course modules and receive a waiver for 16 hours of CPE credit (eight hours each). The courses themselves must be completed within 90 days, and the time to complete each course will vary from participant to participant. Estimates range from five to 12 hours.

“It is fair to say, with the changes we see in the world, our CPE model needs to improve. Time is valuable, everyone learns in different ways, learns at a different pace, and the pilot program that the Indiana CPA Society proposed and was approved by the Indiana Board of Accountancy addresses these issues,” says John Kane, a member of the Indiana Board of Accountancy.

Ontario’s Accounting Profession Unites Under CPA Designation

The Chartered Professional Accountants of Ontario and the Certified General Accountants of Ontario signed a unification agreement, the second last step to uniting this province’s accounting profession under the CPA designation. The final step will be the passing of a new Chartered Professional Accountants Act.

The signing of this agreement brings to a close a significant amount of collaboration and dedication to building a stronger unified accounting profession, both within this province and across Canada, all of which began in earnest in the spring of 2011.  Ontario’s certified general accountants will now become members of CPA Ontario.

An earlier agreement was signed between CPA Ontario (formerly the Institute of Chartered Accountants of Ontario) and the Certified Management Accountants of Ontario, leading to CMAs becoming members of CPA Ontario in April, 2014.

A united Canadian accounting profession will have a stronger voice at home and around the world, a single Canadian accounting designation, and one rigorous set of standards for qualifications and conduct – all of which will provide strong protection of the public interest.

“Our combined membership of more than 80,000 is now part of a unification movement that represents all of Canada’s more than 185,000 designated accountants,” says Robert Scullion, the chair of CPA Ontario. “This is a significant achievement, one which brings the opportunity for a united accounting profession to speak on behalf of the public interest and its members.”

Optimism Highest Since Recession, AICPA Survey Says

Most business executives are optimistic about the economy for the first time since the recession, according to the second quarter AICPA Economic Outlook Survey.

About 51% of business executives are now optimistic, which is up 2% from last quarter. The level was at 5% in early 2009, the height of the recession, the AICPA says.

In addition, about 61% of business executives expressed optimism about their own company’s prospects, a two-point increase over last quarter, and 17% of companies said they have too few employees and plan to hire immediately, up from 15% last quarter.

“We have to wait and see if we’ve truly turned a corner, but executives are clearly feeling more comfortable about the domestic business climate going forward,” says Arleen Thomas, the AICPA’s senior vie president of management accounting and global markets.

The survey, conducted in mid-May, includes responses from 1,810 CEOs, CFOs, controllers and CPAs.

Managers are now more concerned with hiring and keeping staff. No. 3 on the list of top challenges is “availability of skilled personnel,” which is up from No. 6 at the end of 2013. “Staff turnover” moved up three points to No. 10, the survey says.

The CPA Outlook Index – a comprehensive gauge of executive sentiment within the AICPA survey – rose two points in the second quarter to 72, a post-recession high. The index is a composite of nine, equally weighted survey measures set on a scale of 0 to 100, with 50 considered neutral.