pcaob 2012 annual report
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2012 Annual Report 10 Years o Protecting Investors
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Public comPany accounting oversight board
J r. d 2011p
lw h. F 2011p
J m. Fz 2012p
K J. g 20022008
d l. gz 20022012
b g 20022011
J d. h 2011p
s b. h 2008pW J. md 20032005
c d. n 20022011
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05
Jan. 6Washington, D.C., ofce opens
April 16Board adopts interim standards for auditing public company nancial
April 25sec Pcaob ppp z, w p a q
May 6Board adopts registration rules for accounting rms
July 17W-
Sept. 29b p j f ff
Oct. 7b p f p f p p
Jan. 1
PCAOB prepares for rstinspections of non-U.S. rms
July 26
b p
p f
accounting rms independenc
x f
02
04
July 30
s-ox a
w, Pcaob
Oct. 25
F b
pp sec
March 9
b p f f p
internal control over nancial reporting, as required
s-ox a
June 9
b p f
f f -u.s.
June 21
Board holds rst meeting of Standing Advisory Group
Aug. 26
b p 2003 pof Big Four rms
Nov. 30
Board hosts rst Forum on Auditing in the Small
b e
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10 years o ulilling our missionTe PCAOB is a nonprot corporation established by Congress to oversee the audits o public
companies in order to protect the interests o investors and urther the public interest in the
preparation o inormative, accurate and independent audit reports. Te PCAOB also oversees the
audits o broker-dealers, including compliance reports led pursuant to ederal securities laws, to
promote investor protection.
09
Jan. 8
b Pcaob p f f k
July 28
b p a s n. 7, Engagement
Quality Review, p f w
f k wk pf
Sept. 24
b Report on the First-Year Implementation
of Auditing Standard No. 5, An Audit Of Internal
Control Over Financial ReportingThat Is Integrated
With An Audit of Financial Statements
07
Jan. 22
Pcaob
p f Pcaob
p w
p f
May 2Board hosts rst International Auditor
r i
Dec. 5
b p f
497 p 2004, 2005
and 2006 of U.S.-based rms with 100 or
fw p p
08 June 10b p f preporting by registered rms
Dec. 5
As nancial crisis unfolds, PCAOB issues
:Audit Considerations in
the Current Economic Environment
Dec. 5
b p p
2004, 2005, 2006 2007 f u.s.-
rms with more than 100 public company
06 March 21b p rms responses to quality control criticisms
p p
July 28
d f pp k f k
p p p pp Pcaob
: Matters Relating to Timing
and Accounting for Option Grants
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11
June 14
b p p f p p
for registered public accounting rms audits of brokers and dealers
June 21
b p k p
p
July 6
b f Pcaob sp P,
p f f
Aug. 16
b p p
rm rotation
Oct. 3
i p -u.s. p
u.s. k, Pcaob :Audit Risks in
Certain Emerging Markets
1012May 4
Board holds rst meeting of Investor Advisory GroupJune 28
u.s. sp c fFree Enterprise Fund v.
PCAOB, k b sec w,
f , ff p f
sec , f Pcaob p
July 21
d-Fk a , xp Pcaob f
f k p, f -
setting authority and authorizing the PCAOB to share condential
f w -u.s. p
Aug. 5
b p f p
k f
Sept. 29
In wake of nancial crisis, PCAOB issues report on observations of PCAOB
p k f f
Aug. 1Pcaob f f p p f p p
Aug. 15b p a s n. 16, Communicationswith Audit Committees, q f w
Aug. 20b p p f pp f k
Dec. 4Pcaob p sf f a P a pp pf kp , f p f pf kp, ppp ppf pf kp pconsiderations for audit rms quality control systems
Dec. 10Pcaob p f 2010 pof domestic annually inspected rms regarding deciencieaudits of internal control over nancial reporting
2012 Board Members (f f) s b. h, lw h. F, J r. d, c, J m. Fz, J d. h
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Our ounding Board and tiny sta began work in January 2003, building
systems and processes or the registration and inspection o public audit
rms, or the development o auditing standards and or the enorcement
o the Boards standards and rules. Te mission that drove our earliest
Board and sta is the same one that inspires our work today: protectingthe interests o investors and urthering the public interest in the preparation
o inormative, accurate and independent audit reports or public companies
as well as brokers and dealers.
Our accomplishments in 2012 have their roots in the ground that was prepared 10 years ago and tended by the Board
members and sta who have served the PCAOB in the years since. From the beginning, the PCAOB recognized the
importance o global audit oversight. In May 2003, the Board decided it would notexempt non-U.S. accounting rms
rom PCAOB oversight.
Te importance o that decision, to oster a cross-border inspection regime, has been justied by ensuing events. Investors
have suered losses in the securities o companies based in emerging markets but trading in U.S. markets. In addition, the
reliance by multinational corporations on global networks o accounting rmsrms linked by name but registered as
individual entities in the countries where they are domiciledhas proven that the ability o the PCAOB to inspect and
hold accountable U.S. and non-U.S. rms is a vita l component o investor protection.
Te model o oversight, independent o the audit proession, has inspired and been taken up by governments and regulators
across the globe. oday, the PCAOB and its Board members play a leading role in the International Forum o Independent
Audit Regulators. en years ago, ew bodies would have even qualied or membership in the orum, had it existed then.
Yet, in the short time since its ounding in 2006, IFIAR has grown to a membership encompassing regulators in 44 countries,
acilitating exchanges o inormation and collaboration that can only expand the umbrella o protection or investors.
Indeed, an exchange o inspections ndings among these IFIAR members in 2012 ound that many share the primary
concerns o the PCAOB: globally, inspections reveal a disturbing number o common deciencies in the audits o publicly
traded companies.
o help address these concerns in 2012, the PCAOB continued its eorts to speed up the delivery o inspections ndings
to registered rms, and the Board met with representatives o the largest rms to encourage top-down attention to the
imperative o accurate and independent audit reports.
From the Chairman
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o remind auditors o their specic duties under existing standards, the PCAOB published
a Sta Audit Practice Alert,Maintaining and Applying Proessional Skepticism in Audits .
Concern or independence, skepticism and objectivitythe behavioral DNA o the
eective auditoroccupies investors, regulators and capital markets around the world. o add
to our own knowledge, the Board hosted three roundtable discussions, centering on our 2011
concept release on auditor independence and audit rm rotation, in which we received a
range o inormation rom a wide variety o interested parties, rom ormer regulators to
proessional investors to corporate executives and leaders o accounting rms.
One o the most compelling and persistent themes we heard rom participants in those
roundtables was the importance o the role o the audit committee in closely monitoring,
supervising and even challenging auditors. Te role o the audit committee had been a
point o ocus within the PCAOB, and I was pleased that in 2012 we brought to ruition
two projects that should help all audit committees: a new auditing standard requiring enhanced communication between
the auditor and the audit committee and a release intended to help audit committees understand the ndings o our inspections
and tailor their inquiries about our inspection results.
Te Board cannot compel an audit rm to disclose inormation in the nonpublic portion o an inspection report to an audit
committee. Beyond the public portion o an inspection report, seeking disclosure by the inspected audit rm is an auditcommittees only means o obtaining inormation concerning a PCAOB inspection. Our release is meant to help audit committees
understand our inspection reports and encourage voluntary, meaningul disclosure by rms.
I am immensely proud o what the Board and sta accomplished in 2012, much more o which is described in the pages
that ollow. At the PCAOB, every inspection, report, international agreement, standard under consideration and enorcement
action is done with a singular purpose: to protect investors.
With the support o the SEC, we have worked hard to live up to the vision set out in the acts o Congress that gave us our
mandate and to the vision o the Board members who preceded us in the last 10 years. I trust that investors and uture
Boards will nd our eorts worthy.
James R. Doty, ChairmanPublic Company Accounting Oversight Board
Washington, D.C.
July 1, 2013
James R. Doty, Chairman
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Audit Reports per Registered FirmReprt r pubic cmpnie nd mutu und Dec. 31, 2012 (ued r pnning 2013 inpectin)
U.S. NoN-U.S. ToTal
Firms that issued no issuer audit reports 999 716 1,715
Firms that issued audit reports or 1-5 issuers 265 144 409
Firms that issued audit reports or 6-10 issuers 66 25 91
Firms that issued audit reports or 11-25 issuers 62 19 81
Firms that issued audit reports or 26-50 issuers 36 4 40
Firms that issued audit reports or 51-100 issuers 15 3 18
Firms that issued audit reports or >100 issuers 9 0 9
ToTals 1,452 911 2,363
RegistrationAny accounting rm that prepares
or issues an audit report or a public
company or an SEC-registered broker
or dealer, or plays certain roles in
those audits, must be registered with
the PCAOB.
Te public accounting rms registered
with the PCAOB vary in size, ranging
rom sole proprietorships to large audit
rms that are members o extensive
global networks, comprising numerous
separately registered accounting rms
in multiple jurisdictions.
In 2012, the Board considered and
approved registration applications o
110 accounting rms, including 41
non-U.S. rms. Te Board disap-
proved three registration applications.
Te Board also considered and granted
129 requests to withdraw rom
registration in 2012.
At the end o 2012, there were 2,363 frms
registered with the PCAOB, including
1,452 domestic rms and 911 non-U.S.
rms located in 87 jurisdictions. O
these registered rms, approximately
800 issued audit reports on the
nancial statements o brokers and
dealers or scal periods ended during
2012 that were led with the SEC.
Firms with More than 100
Public Company Audit
Clients in 2011
Inspected in 2012 by the PCAOB
BDO USA, LLP
Crowe Horwath LLP
Deloitte & ouche LLP
Ernst & Young LLP
Grant Tornton LLP
KPMG LLPMaloneBailey, LLP
McGladrey & Pullen, LLP
PricewaterhouseCoopers LLP
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a p f Pcaob d f r
ip 2003 w (f f) P tp, p
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o m 6, 2003, b p
system for public accounting rms, based on deadlines set out in
s-ox a. t q u.s.
public accounting rms must be registered with the Board if they wish pp p u.s. p p p
pp f p. t
W- w J 17, 2003, u.s.
rms had until Oct. 22, 2003, to be registered.
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Number o Registered Public Accounting Firms by Jurisdiction
( Dec. 31, 2012)
JURISDICTIoN NUMBER oF REGISTERED FIRMS
United States 1,452
China* 96
India 67
United Kingdom** 63
Canada 46
Australia 42
Germany 41
France 25
Singapore 22
Mexico 20
Chile, Russian Federation, Spain 18 each
Argentina, Israel, Netherlands, Peru 17 each
Brazil, Italy, Japan, Malaysia 16 each
Belgium 15
Ireland, Republic o Korea, aiwan 13 each
New Zealand, South Arica 12 each
Colombia 10
Indonesia, Philippines, Sweden, United Arab Emirates 8 each
Cayman Islands, Poland, Venezuela 7 each
Austria, Czech Republic, Greece, Hungary, Pakistan, Switzerland 6 each
Costa Rica, Denmark, Finland, Portugal, Tailand, Uruguay 5 eachBermuda, Egypt, Luxembourg, Paraguay, Romania 4 each
Bahamas, Bolivia, Kazakhstan, Panama, Vietnam 3 each
Dominican Republic, Iceland, Nigeria 2 each
Armenia, Bahrain, Barbados, Belize, Croatia, Curacao, Cyprus, Ecuador, El Salvador,Estonia, Ghana, Haiti, Jamaica, Malta, Mauritius, Nicaragua, Papua New Guinea,Saudi Arabia, Slovakia, anzania, unisia 1 each
ToTal 2,363
* Te number o registered rms in China includes 49 rms located in Hong Kong.
** Te number o registered rms in the United Kingdom includes rms located in Jersey, Isle o Man and the British Virgin Islands.
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Registered rms that issue audit reports
or more than 100 public companies
and other issuers are required to be
inspected annually. In 2012, the PCAOB
inspected nine such rms. As part o
these inspections, PCAOB inspectors
examined portions o more than
290 audits perormed by these rms.
Registered rms that issue audit
reports or 100 or ewer issuers are, in
general, inspected at least once every
three years. At any time, the PCAOB
may also inspect any other registered
rm that plays a role in the audit o an
issuer. Te PCAOB inspected 244 rms
in these categories in 2012, including
77 non-U.S. rms located in 25
jurisdictions. In the course o those
inspections, PCAOB sta examined
portions o more than 620 audits.
Many rms registered with the Board
perorm no audit work or issuers,
brokers or dealers, and the Board does
not inspect those rms.
Board inspections are designed to
identiy and address weaknesses and
deciencies related to how a rm
conducts audits. o achieve that goal,
Board inspections include an evalua-tion o the rms perormance in
selected audit engagements and
evaluation o the design and operating
eectiveness o a rms quality control
policies and procedures.
Te review o a rms work on issuer
audit engagements typically ocuses on
the engagements, and areas o those
engagements, identied by PCAOB
sta as presenting the more signicant
risks o nancial reporting misstate-
ments, related auditing challenges and
audit deciencies.
Evaluation o a rms system o qualitycontrol typically includes review o
policies, procedures and practices
concerning audit perormance, training
and compliance with independence
requirements; client acceptance and
retention; and the establishment o
policies and procedures. Other areas
reviewed may include the rms tone
at the top as it relates to audit quality;
partner management, including
evaluation, compensation, admission and
discipline; use o the work perormed by
oreign aliates; and the rms sel-mon-
itoring o its practice through the rms
internal inspections and analyses o, and
responses to, identied weaknesses.
Te PCAOB prepares a report on each
inspection and makes portions o each
report publicly available, subject to
statutory restrictions on public disclosure.
In 2012, the PCAOB issued 257 reports
on inspections o rms that auditpublic companies.
I an inspection report includes
criticisms o or identies potential
deects in a rms system o quality
control, the Board is prohibited rom
publicly disclosing those criticisms i
the rm addresses those criticisms to
the Boards satisaction within
12 months o the issuance o the report.
Any criticisms that a rm ails to
address to the Boards satisaction in
that period are made public. In 2012,
the Board published portions o
27 inspection reports relating to
quality control criticisms rom prioryear inspections that were not
addressed to the Boards satisaction.
Te Board may, at any time, publish
summaries, compilations or other
general reports concerning the proce-
dures, ndings and results o PCAOB
inspections. Such reports may include
discussion o criticisms o, or potential
deects in, quality control systems o
any rm or rms that were the subject
o a Board inspection, provided that the
report does not identiy the rm or
rms to which such criticisms relate, or
at which such deects were ound,
unless that inormation has previously
been made public.
In 2012, the PCaoB issued
the fwing reprts reted t
inspectins:a Report on the Progress
o the Interim Inspection Program
Related to Audits o Brokers andDealers; Inormation or Audit
Committees About the PCAOB
Inspection Process; and Observations
rom 2010 Inspectionso Domestic
Annually Inspected Firms Regarding
Deciencies in Audits o Internal
Control Over Financial Reporting.
Inspections
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Inspections continued
Audits of SEC-Registered
Brokers and DealersTe Dodd-Frank Wall Street Reorm
and Consumer Protection Act gave
the PCAOB authority or inspection,
standard setting and enorcement
over the rms that perorm audits o
brokers and dealers registered with the
SEC. In 2012, under a temporary rule
or an interim inspection program, the
PCAOB inspected 45 such rms and
examined portions o 64 audits o
brokers and dealers.
Te interim inspection program is
carried out under rules that took eect
in August 2011. Te program enables
the Board to assess the compliance o
registered rms and their associated
persons conducting audits o brokers
and dealers with the Sarbanes-Oxley
Act; Board and SEC rules; and
proessional standards. Te program willinorm the Boards eventual determi-
nation about the scope and elements o
a permanent inspection program.
Based on inspections o broker-dealer
auditors conducted between October
2011 and February 2012, the Board
issued a progress report Aug. 20, 2012.
PCAOB inspectors reviewed portions
o 23 audits o brokers and dealers
perormed by 10 registered publicaccounting rms and identied
deciencies in the portions o a ll
23 audits chosen or inspection.
Te audits and rms selected or the
reviews covered by the August 2012
report were not necessarily representative
o all broker and dealer audits and
their auditors. While the results
cannot be generalized to all brokerand dealer audits, the nature and
extent o the ndings were o concern
to the Board.
Te report noted that all registered
public accounting rms that issue
audit reports or SEC-registered
brokers and dealers should consider
whether the audit deciencies
described in this report might be
present in audits they currentlyperorm, and should take appropriate
action to prevent or correct any such
deciencies identied.
Te report discusses deciencies in
three areas: audit deciencies related to
SEC rules or customer protection and
net capital rules; audit deciencies
o o. 7, 2003, b p f p f
registered public accounting rms, including annual inspections
of rms that do the largest volume of audit work and inspections
at least once every three years for rms that do some volume of
wk. t p f p p
ppp
b . t Pcaob
opened its New York ofce Sept. 8, 2003, to serve as a base for
inspections; inspectors are now based in 15 ofces across the
u s.
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related to the nancial statement
audit; and ailures to satisy indepen-dence requirements. Te ull report,
including details about the identied
deciencies, is available on the
PCAOBs website.
In 2013, the interim inspection program
is expected to include inspections o
approximately 100 registered public
accounting rms covering portions
o more than 170 audits. Inspections
under the interim inspection programwill continue until rules or a perma-
nent inspection program take eect.
In addition to providing insight or the
development o a permanent inspection
program, the interim inspection
program, along with other research
and outreach, will inorm the Boards
uture standard-setting activities relevant
to the audits o SEC-registered brokersand dealers. At the end o 2012, SEC
rules continued to require that audits
o brokers and dealers be carried out
under GAAS, or generally accepted
auditing standards, although the
Commission has proposed rule changes
that would require those audits to be
conducted under PCAOB standards.
During the interim inspection program,
the Board will provide annual publicreports on its progress and signicant
issues identied. In the absence o
unusual circumstances, the Board will
not issue rm-specic inspection reports
beore inspection work is perormed
under the permanent program and will
not issue irm-speciic inspection
reports on any rms that are eventually
excluded rom the scope o the permanent
program. Te PCAOB did not issuerm-specic reports in 2012 under the
interim inspection program or auditors
o brokers and dealers.
In conormance with the Dodd-Frank
Act, the Board proposed amendments
Feb. 28, 2012, to tailor certain o its
rules to the audits and auditors o
SEC-registered brokers and dealers.
Te proposed amendments wouldinclude reerences to audits and
auditors o brokers and dealers in
relevant Board rules and call or
relevant inormation about broker and
dealer audit clients on registration,
withdrawal and reporting orms led
with the PCAOB.
Douglas Grande (left), associate director in the Denver ofce, and Paul Bijou,
deputy director and inaugural head of the PCAOBs New York ofce, joined
p ff J 2003.
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Inspections continued
Te proposed amendments would also
require that registered rms that audit
brokers and dealers comply with the
Boards auditing and certain o the
Boards proessional practice standards.
Te proposals would also update a
number o Board rules and orms in
light o administrative experience and
make certain amendments to the
Boards Ethics Code.
In 2012, the PCAOB hosted our
broker-dealer orums to provide
registered public accounting rms with
observations rom the Boards interim
inspection program, developments
in Board standard-setting initiatives
and updates rom the SEC and the
Financial Industry Regulatory Authority.
he orums drew 506 auditors to
day-long sessions in Chicago, Houston,
Jersey City and San Diego.
Information for Audit Committees
about the PCAOB Inspection Process
Te PCAOB issued a release Aug. 1,
2012, with a goal o better equipping
audit committees o public company
boards o directors to engage in
meaningul discussion with PCAOB-
registered audit rms about the results
o inspections.
Te release provides inormation about
the meaning and signicance o PCAOB
inspection ndings in the context o
both engagement reviews and quality
control reviews. Te release also
suggests specic approaches that an
audit committee might consider or
initiating or enhancing inspection-
related discussions with an audit rm.
Te ull release is available on the
PCAOBs website.
Under the Sarbanes-Oxley Act, the
Board cannot disclose to an audit
committee the nonpublic portion o an
inspection report or other nonpublic
inspection inormationincluding
whether the inspection identied
deciencies in the audit that the audit
committee overseesand the Board
cannot compel an audit rm to disclose
such inormation to an audit committee.
Beyond the public portion o an
inspection report, voluntary disclosure
by the inspected audit rm is an audit
committees only means o obtaining
inormation concerning a PCAOB
inspection.
During public meetings on auditor
independence and audit rm rotation
and other orums, members o audit
committees indicated that it would
be helpul or the PCAOB to provide
more inormation about the PCAOB
inspection process and the meaning o
reported inspection results.
Specically, the Board has heard rom
audit committee members about some
instances in which they received rom
their audit rm nonpublic inspection
inormation that was signicant to the
audit committee in its oversight role,
and the Board has also heard, rom
those and other audit committee
members, that audit committees
would benet rom access to more
inspection inormation.
Te release highlights certain areas o
inquiry that audit committees may wish
to address with their auditors. Tese
include: whether the audit overseen by
the audit committee was selected by
the PCAOB or an inspection and
whether any ndings were made;potentially relevant inspection ndings
on other audits perormed by the
rm; the rms response to PCAOB
ndings; and the rms remedial
eorts in light o any quality control
deciencies that may have been
identied by the PCAOB.
Te PCAOB encourages auditors to
communicate this inormation to
their audit clients. In the Boardsview, an audit rms candid discussion
o its PCAOB inspection results with
an audit committee can have value
or an audit committee not only in
relation to the audit committees
oversight and evaluation o the audit
engagement generally, but also in
relation to the audit committees role
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in the oversight o the companys
nancial reporting process.
Audits of Internal Control
Over Financial Reporting
Te PCAOB released areport Dec. 10,
2012, summarizing observations drawn
rom inspections o 309 audits o
internal control over nancial reporting
at public companies.
Te report stated the Boards concern
about the number and signicance o
deciencies identied in rms audits
o internal control during the inspec-
tions, which generally involved reviews
o the integrated audits o nancial
statements and internal control or
issuers scal years ending in 2009.
Te report describes the most pervasive
deciencies identied during PCAOB
inspections in 2010 in rms auditing
o internal control and includes
inormation on the potential root
causes o the deciencies. Te ull report
is available on the PCAOBs website.
Te deciencies identied do not mean
the issuers nancial statements were
materially misstated or that the issuers
internal controls were inadequate.
Generally, the deciencies related
to execution issues on the part o
individual engagement teams that did
not meet the requirements o the
rms methodologies.
Te rms whose internal control
audits were covered by the report are
BDO USA, LLP; Crowe Horwath
LLP; Deloitte & ouche LLP; Ernst &
Young LLP; Grant Tornton LLP;
KPMG LLP; McGladrey LLP; and
PricewaterhouseCoopers LLP.
In an audit o internal control over
nancial reporting, the auditors
objective is to express an opinion on the
eectiveness o the companys internal
control over nancial reporting.
An audit o internal control includes,
among other things, assessing the risk
that material weaknesses exist; testing
important entity-level controls and
important controls over signicantnancial statement accounts and
disclosures based on the assessed risks;
and evaluating whether identied
deciencies in internal control are
material weaknesses. Deciencies in
the testing and assessment o internal
control may increase the risk o the
auditor ailing to identiy a material
misstatement since the level o
substantive testing is predicated on the
auditors assessment o the eective-ness o the issuers internal controls.
In 46 o the 309 integrated audit
engagements (approximately 15 percent)
that were inspected in 2010, the
PCAOB ound that the rm, at the
time it issued its audit report, had ailed
to obtain sucient audit evidence to
support its audit opinion on the
eectiveness o internal control due
to one or more deciencies identied
by the PCAOB. In 39 o those
46 engagements (approximately
85 percent) in which the rm did not
have sucient evidence to support theinternal control opinion (representing
approximately 13 percent o the 309
integrated audit engagements that were
inspected), the rm also ailed to obtain
sucient audit evidence to support the
nancial statement audit opinion.
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t Pcaob 2003 w f -u.s. p
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accounting rms that audit companies whose securities trade in public markets. In
October 2003, the Board released a brieng paper describing a framework to permit
varying degrees of reliance on a rms home country system of inspections, based on
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the four largest accounting rms that year.
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i oP p, w
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requirement to periodically le audited
nancial statements with the Securities
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Pcaob | 10 years 13Pcaob | 10 years 13
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i o continued
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Ofce of Research
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Developing and maintaining
high-quality auditing and relatedproessional standards is a key priority
o the PCAOB. Te PCAOB regularly
monitors audit risks, challenges and
the prevailing economic environment
as it maintains and adjusts its standard-
setting agenda.
Te standard-setting agenda is determined
based on consideration o, among other
things, the results o the PCAOBs
oversight o registered public accounting
rms; monitoring o the economic
environment; consultation with the
Boards Standing Advisory Group
(SAG); input rom the Boards Investor
Advisory Group (IAG); and discussions
with the Securities and Exchange
Commission sta.
PCAOB standards are rules o the
Board. Te Board uses a notice-and-comment process similar to the process
used by ederal agencies and other
standard setters, under which the Board
proposes standards or public comment
beore adopting new standards or
amendments to existing standards in
a public meeting. All Board standards
must be approved by the Securities and
Exchange Commission beore they can
become eective.
In addition to proposing new standardsand amendments to existing standards,
the PCAOB issues concept releases and
hosts public discussions to obtain
eedback on possible auditing standards
and related proessional standards
rom investors, auditors, representatives
o public companies and other
interested parties.
Te PCAOB also publishes Sta Audit
Practice Alerts to highlight new,emerging or otherwise noteworthy
circumstances that may aect how
auditors conduct audits under the
existing requirements o PCAOB
standards and relevant laws.
Ecnmic Cnidertin Reting
t PCaoB stndrd
Te Boards processes or standard
setting and rulemaking have historically
incorporated certain elements oeconomic analysis, such as consideration
o advantages, disadvantages and
potential unintended consequences o
proposed rules.
In early 2012, the PCAOB began
exploring ways to urther incorporate
economic considerations throughout the
Standards
Greg Scates, deputy chief auditor, joined the PCAOBs Ofce of Chief Auditor in June 2003.
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standard-setting process commensurate
with the potential signicance o therule under consideration.
While this work was underway, the
Jumpstart Our Business Startups Act, or
JOBS Act, became law April 5, 2012.
Te JOBS Act amended the Sarbanes-
Oxley Act, in part, by providing that
any standards or rules adopted by the
Board ater April 5, 2012, shall not
apply to an audit o any emerging
growth company, unless the [Securities
and Exchange] Commission determines
that the application o such additional
requirements is necessary or appropriate
in the public interest, ater considering
the protection o investors and whether
the action will promote eciency,
competition, and capital ormation.
Tis new requirement had an impact on
standard setting in 2012 as the PCAOBcareully considered the criteria
prescribed in the provisions and began
to perorm the analyses and provide
inormation to help the Commission
determine whether new standards
should apply to audits o emerging
growth companies.
Cmmunictin with
audit Cmmittee
With the adoption o Auditing Standard
No. 16, Communications with AuditCommittees, the Board issued new
requirements intended to enhance the
relevance and timeliness o the commu-
nications between a public companys
auditor and its audit committee,
encouraging constructive dialogue
between the two on signicant audit
and nancial statement matters.
Auditing Standard No. 16 is aligned
with the requirements o the Sarbanes-Oxley Act, which placed the audit
committee at the center o the relation-
ship between a public company and
its auditor. Te standard requires the
auditor to communicate certain
signicant matters regarding the audit
and the nancial statements to the audit
committee, which should assist the audit
committee in ullling its oversight
responsibilities regarding the nancial
reporting process. Eective two-waycommunication between the auditor
and the audit committee on such
relevant matters also will benet the
auditor in perorming an eective audit.
Te Board approved the standard
Aug. 15, 2012. Te SEC approved
Auditing Standard No. 16 and related
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amendments to other PCAOB standards
Dec. 17, 2012. Te standard and related
amendments became eective or public
company audits o scal periods
beginning on or ater Dec. 15, 2012.
Te standard was the rst adopted by
the Board ater the enactment o theJOBS Act. In developing the nal
standard, the PCAOB worked closely
with the SEC in considering the type
o data and analyses that would aid the
Commission in making the necessary
determination under the JOBS Act. Te
SEC determined that the standard and
related amendments will apply to audits
o emerging growth companies under
the JOBS Act.
auditr Independence, objectivity
nd Prein skepticim
Observations rom the PCAOBs
oversight activities continue to raise
concerns about whether auditors
consistently and diligently apply
proessional skepticism in their audits o
public company nancial statements.
Te Board hosted three public meetings
in 2012 to solicit comment on waysto enhance auditor independence,
objectivity and proessional skepticism,
including through mandatory rotation
o audit rms. Mandatory rotation
would limit the number o consecutive
years or which a registered public
accounting rm could serve as the
auditor o a public company. Te
meetings were held in Washington, San
Francisco and Houston.
Te discussions were based on a concept
release,Auditor Independence and Audit
Firm Rotation, issued by the Board
Aug. 16, 2011, and eatured a total o
97 panelists, including investors andinvestor advocates; ormer regulators
(including ormer chairmen o the SEC),
senior executives and audit committee
chairs o major corporations; chie
executive ocers o audit rms;
academicians; and other interested
parties. Panelists statements are posted
on the PCAOBs website.
On Dec. 4, 2012, the PCAOB pub-
lished Sta Audit Practice Alert No. 10,Maintaining and Applying Proessional
Skepticism in Audits, to remind auditors
o the requirement to appropriately
apply proessional skepticism through-
out their audits.
PCAOB standards dene proessional
skepticism as an attitude that includes
a questioning mind and a critical
assessment o audit evidence. Te
standards also state that proessionalskepticism should be exercised through-
out the audit process. While proessional
skepticism is important in all aspects o
the audit, it is particularly important in
those areas o the audit that involve
signicant management judgments or
transactions outside the normal course
o business.
Proessional skepticism also is important
as it relates to the auditors consideration
o raud in an audit. When auditors
do not appropriately apply proessional
skepticism, they may not obtain
sucient appropriate evidence to
support their opinions or may not
identiy or address situations in
which the nancial statements are
materially misstated.
Te Sta Audit Practice Alert describes
certain circumstances that can impede
the appropriate application o proes-
sional skepticism and allow unconscious
biases to prevail, including incentives
and pressures resulting rom certain
conditions inherent in the audit
environment, scheduling and workloaddemands or an inappropriate level o
condence or trust in management. Te
Sta Audit Practice Alert reminds audit
rms and individual auditors to be alert
or these impediments and take
appropriate measures to assure that
proessional skepticism is applied
appropriately throughout all audits
perormed under PCAOB standards.
Reted Prtie nd signicntUnuu Trnctin
On Feb. 28, 2012, the Board issued or
public comment a proposed auditing
standard, Related Parties; amendments
to certain PCAOB auditing standards
regarding signicant unusual transac-
tions; and other amendments to
PCAOB auditing standards.
Standards continued
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Te auditors evaluation o a companys
identication o, accounting or and
disclosure about its relationships and
transactions with related parties is
important to the protection o the
interests o investors and to the prepara-
tion o inormative, accurate and
independent audit reports. ransactions
with related parties can pose signicant
risks o material misstatement, as their
substance might dier materially rom
their orm.
Likewise, signicant transactions that
are outside the normal course o business
or that otherwise appear to be unusual
due to their timing, size, or nature can
create complex accounting and nancial
statement disclosure issues and, in some
instances, have been used to engage in
raudulent nancial reporting.
In addition, incentives and pressures
or executive ocers to meet nancial
targets can result in risks o material
misstatement to a companys nancial
statements. Such incentives and
pressures can be created by a companys
nancial relationships and transactions
with its executive ocers (e.g., executivecompensation, including perquisites,
and any other arrangements).
Te proposed standard and proposed
amendments address the ollowing areas
or auditors: (1) evaluating a companys
identication o, accounting or and
disclosure o relationships and
transactions with related parties; (2)
identiying and evaluating a companys
signicant unusual transactions; and
(3) obtaining an understanding o a
companys nancial relationships and
transactions with its executive ocers as
part o the auditors risk assessment.
Te proposed standard and proposed
amendments were discussed with the
SAG May 17, 2012.
On May 7, 2013, the Board issued or
public comment a reproposed auditing
standard and reproposed amendments
addressing the same areas that the
February 2012 proposal did. Te
reproposal included certain changes in
response to comments received on theproposal. Te reproposal was discussed
with the SAG May 15, 2013.
Future stndrd setting
In addition to the proposed standard
on related parties and the project on
auditor independence, objectivity, and
proessional skepticism, projects on the
Boards standard-setting agenda as o
March 2013 included:
Reorganization o PCAOB Auditing
Standards. On March 26, 2013, the
Board issued or public comment a
potential ramework or reorganizing
the Boards existing interim and
PCAOB-issued auditing standards into
a topical structure with a single
integrated numbering system, along
with certain implementing amendments
to its rules and standards. Te
proposed reorganization is intended to
present the standards in a logical order
that generally ollows the fow o the
audit process and is intended to help
users navigate the standards more easily.
Auditors Reporting Model. Te Board
issued a concept release or public
comment June 21, 2011, on alternatives
or potential changes to the auditors
reporting model that could increase its
transparency and relevance to nancial
statement users. Te concept release
was preceded by several discussions
with the PCAOBs SAG and IAG, in
addition to extensive outreach by
PCAOB sta in 2010 and 2011. Te
Board solicited urther comment at a
roundtable discussion Sept. 15, 2011.
Auditors Responsibilities with Respect
to Other Accounting Firms, Individual
Accountants and Specialists. Te PCAOB
is considering possible revisions to
standards related to audits involving
other accounting rms, individual
accountants and specialists. Te
project is intended to improve the
planning, supervision and other
aspects o such audits.
Audit ransparencyIdentication o the
Engagement Partner. On Oct. 11, 2011,
the Board proposed amendments to its
standards and rules that would improve
the transparency o public company
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audits by requiring that audit reports
disclose the name o the engagement
partner. Te amendments also would
require registered public accounting
rms to disclose the name o the
engagement partner or each audit
report listed on the rms annual lings
with the PCAOB.
Audits o Brokers and Dealers . In June
2011, the SEC proposed to amend its
rules to require that certain audit and
attest reports led by SEC-registered
brokers and dealers be prepared by
PCAOB-registered auditors using
standards established by the PCAOB.
On July 12, 2011, the Board proposed
attestation standards or auditors o
brokers and dealers tailored to theSEC-proposed rule amendments. Te
Board also proposed a standard or
audits o supplemental inormation
accompanying audited nancial
statements that would apply to audits o
brokers and dealers and audits o issuers.
Further action on the Boards proposals
is dependent on the SECs adoption o
the proposed amendments to its rules.
Going Concern. Te PCAOB is
considering possible revisions to theauditing standard on the auditors
evaluation o a companys ability to
continue as a going concern. Among
other things, the PCAOB is consider-
ing how to enhance the auditors
evaluation process and the useulness
o the auditors communication to
investors regarding going concern
uncertainty. he PCAOB also i s
monitoring the activities o the FASB
and IASB in this area. Any new
auditing standard would take into
consideration any relevant changes
to the accounting standards proposed
by the FASB and/or IASB.
Audit ransparencyIdentication o
Other Public Accounting Firms or Persons
Not Employed by the Auditor. On Oct. 11,
2011, the Board proposed amendments
to its standards that would improve the
transparency o public company audits
by requiring that audit reports disclose
the names o other independent public
accounting rms and other persons that
took part in the audit.
Quality Control Standards. Te PCAOB
is developing a concept release to
explore potential improvements to
the existing quality control standards,
including the SEC Practice Section
requirements. Tis project also
includes consideration o potential
improvements to the quality control
standards regarding rm supervisory
responsibilities.
Auditing Accounting Estimates, IncludingFair Value Measurements and Related
Disclosures. Te PCAOB is considering
possible revisions to the auditing
standards on accounting estimates,
including air value measurements and
related disclosures. Tis project is being
inormed by input rom the PCAOB
Pricing Sources ask Force, which has
ocused on the auditing o the air value
o nancial instruments that are not
actively traded and on the use o
third-party pricing sources.
Conrmation. Te Board proposed a
standard July 13, 2010, to update and
expand requirements related toauditors use o conrmationsthe
direct communications between an
auditor and a third party about a
particular item aecting a companys
nancial statements.
Subsequent Events. Te PCAOB is also
evaluating potential improvements to
the auditing standards related to events
or transactions that occur subsequent
to the balance-sheet date.
Standards continued
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Te Board uses its investigative
authority to address serious audit
deciencies that pose signicant risks
to investors. Te Board uses its
disciplinary authority to demonstrate
that auditors who run aoul o their
proessional obligations will ace real
consequences. Te Board also takesdisciplinary action against auditors
who threaten the Boards regulatory
processes, such as by ailing to
cooperate in a Board inspection
or investigation.
Te Board issued eight settled disci-
plinary orders in 2012, imposing
sanctions on auditors ranging rom
censures to monetary penalties to bars
on their association with registered
accounting rms. In all, the Boarddisciplined our registered accounting
rms and 11 associated persons in
those proceedings. In all o the settled
proceedings, the rms and the
associated persons neither admitted nor
denied the Boards ndings.
Fiure t Cmpy with PCaoB
Rue nd auditing stndrd
In a settled disciplinary order
announced Feb. 8, 2012, the Board
imposed a $2 million civil monetarypenalty against Ernst & Young
LLPthe largest monetary penalty
imposed by the Board in its rst
10 years o operation. Te Board also
censured the rm and sanctioned our
o its current and ormer partners or
violating PCAOB rules and standards.
Te order related to three Ernst &
Young audits o Medicis Pharmaceutical
Corp. and a consultation stemming
rom an internal Ernst & Young audit
quality review o one o the audits.
In the audits o Mediciss Dec. 31, 2005,
2006 and 2007 nancial statements,the Board ound that Ernst & Young
and its partners ailed to properly
evaluate the companys sales returns
reserve, a material component o the
companys nancial statements.
During a 2008 inspection o Ernst &
Youngs audits o Medicis, PCAOB
sta questioned the rms acceptance
o the companys accounting or its
sales returns reserve. Ernst & Youngultimately concluded that Mediciss
reserving or its sales returns was not in
conormity with U.S generally accepted
accounting principles. Te company
corrected its accounting or its sales
returns reserve and led restated
nancial statements with the Securities
and Exchange Commission as a result.
Te Board also ound that, in auditing
the companys Dec. 31, 2005, nancialstatements, Ernst & Young and its
responsible partners violated PCAOB
standards by accepting the companys
basis or reserving at replacement cost
when the auditors knew, or should have
known, that it was not supported by
the audit evidence.
Te Board urther ound that two
months later, during an internal audit
quality review o the Dec. 31, 2005,
audit, Ernst & Young personnel not
associated with the audit identied the
rationale as conficting with both
GAAP and Ernst & Youngs internal
accounting guidance. Rather thanappropriately addressing this material
departure rom GAAP, Ernst & Young
and its personnel decided that another
fawed accounting rationale supported
the companys existing practice o
reserving or most o its product
returns at replacement cost.
Te Board also ound that Ernst &
Young and its responsible partners
violated PCAOB standards in auditing
the companys new methodology or
calculating its year-end product returns
reserve estimates or 2006 and 2007.
Te Board ound that they ailed to
suciently audit key assumptions and
placed undue reliance on managements
representation that those assumptions
were reasonable.
In addition to the censure and ne o
Ernst & Young, the Board barred Ernst
& Young partner Jerey S. Andersonrom associating with a PCAOB-
registered accounting rm, with the
right to petition to remove the bar ater
two years, and imposed a $50,000 civil
monetary penalty against him. Anderson
was the lead partner or the Dec. 31,
2005, and 2007 audits.
Enorcement
Pcaob | 10 years 23
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Enorcement continued
s 105 f s-ox a b
p
public accounting rms and persons associated with such
rms. The Act also directed the Board to establish, by rule,f p f p f
registered public accounting rms and associated persons.
t b p
j sp. 29, 2003.
Te Board barred ormer Ernst &
Young partner Robert H. Tibaultrom associating with a PCAOB-
registered accounting rm, with the
right to petition to remove the bar ater
one year, and imposed a $25,000 civil
monetary penalty against him. Tibault
was the independent review partner or
the Dec. 31, 2005, and 2006 audits.
Te Board censured Ernst & Young
partner Ronald Butler Jr., and imposed
a $25,000 civil monetary penalty againsthim. Butler was the second partner,
supervised by Anderson, on the Dec. 31,
2005, audit, and he led the Dec. 31,
2006, audit. Te Board also censured
Ernst & Young partner Tomas A.
Christie, who was the second partner,
supervised by Anderson, on the Dec. 31,
2007, audit.
Fiure t Cmpy with PCaoB
Rue, auditing stndrd ndQuity Cntr stndrd
In three settled cases announced Sept. 7,
2012, the Board took disciplinary
action against Jewett, Schwartz,
Wole & Associates, P.L., based in
Hollywood, Fla., and the rms two
partners who perormed audits o
public companies.
Te Board ound that Jewett,
Schwartz, Wole & Associates violated
PCAOB rules, quality control stan-dards and auditing standards in
connection with the audits o our
public companies. Te Board ound
that the rm ailed to establish,
implement and communicate quality
control policies and procedures
sucient to provide the rm with
reasonable assurance that the work
perormed by engagement personnel
met applicable proessional standards.
Te Board also ound that the quality
control violations resulted in or
contributed to numerous and repeated
violations o PCAOB auditing standards
in connection with the audits. In
addition, the Board ound that Jewett,
Schwartz, Wole & Associates, P.L.
violated PCAOB rules by ailing to pay
its annual ee to the Board in 2011.
Based on its ndings and in responseto an oer o settlement rom Jewett,
Schwartz, Wole & Associates, the
Board censured the rm and revoked
its registration, with the right to
reapply or registration ater ve years.
In a related case, the Board ound that
Lawrence H. Wole, the partner o
24 Pcaob | 10 years
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J a (f) r h, d f
ef i, j Pcaob 2003.
Jewett, Schwartz, Wole & Associates
who was responsible or the our audits,violated PCAOB rules and auditing
standards; violated the anti-raud
provision o the ederal securities laws
in connection with one companys
audit; and directly and substantially
contributed to the rms violation o
PCAOB quality control standards.
Based on these ndings and in
response to an oer o settlement rom
Wole, the Board censured Wole and
permanently barred him rom being an
associated person o a registered public
accounting rm.
In a related settled proceeding, the
Board ound that Uma D. Basso, a
partner in Jewett, Schwartz, Wole &
Associates audit practice, violated
PCAOB rules and auditing standards
in connection with the audits o two
public companies or which she servedas audit manager.
Based on these ndings and in
response to an oer o settlement rom
Basso, the Board censured Basso, and
or a period o two years, limited her
activities in connection with audits by
prohibiting her rom serving in the role
o engagement partner or engagement
quality reviewer. In addition, the Board
required Basso to complete 40 addi-
tional hours o continuing proessional
education in subjects that are directly
related to the audits o issuer nancial
statements under PCAOB standards.
Fiure in Cnnectin with audit
Nn-U.s. Cmpnie
Te PCAOBs ocus on audits o
non-U.S. companies advances the
Boards mission to improve audit
quality and protect investors in theglobal marketplace.
In asettled case announced May 22,
2012, the Board ound that Bualo,
N.Y.-based Brock, Schechter &
Polako, LLP violated PCAOB rules,
quality control standards and auditing
standards in connection with the audits
o three China-based and aiwan-based
companies traded in U.S. markets. In a
related case, the Board ound that the
rms ormer director o accounting and
auditing,James R. Waggoner, CPA,
violated PCAOB rules and auditing
standards in connection with the audits
o the companies.
Te Board ound that when Brock,
Schechter & Polako began auditing
the nancial statements o public
Pcaob | 10 years 25
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companies located in aiwan and China,
the rm had no prior experience auditing
public companies pursuant to PCAOB
auditing standards and had no prior
experience auditing companies based in
aiwan or China.
Te Board ound that Brock, Schechter& Polako ailed to comply with
PCAOB quality control standards
because the rm had not developed
policies and procedures sucient to
provide it with reasonable assurance
that the rm undertook only those
public company audit engagements
that it reasonably could expect to
complete with proessional competence.
In addition, the Board ound that
Brock, Schechter & Polako ailedto comply with PCAOB auditing
standards related to the planning,
perormance and supervision o the
audits. Te Board also ound that the
rm ailed to gather sucient compe-
tent evidential matter and ailed to use
due care and exercise proessional
skepticism in the course o the audits.
Based on these ndings and in response
to an oer o settlement rom Brock,
Schechter & Polako, the Board
censured and revoked the rms
registration, with the right to reapply
or registration ater two years, and
imposed a $20,000 civil monetary
penalty against the rm.
Te Board ound that Waggoner, at the
time he had nal responsibility or the
audits, ailed to properly supervise and
review the work o two audit rms,
one located in aiwan and one located
in China, responsible or planning
and perorming the audits o the
non-U.S. companies.
Te Board also ound that Waggonerimproperly created, added and altered
audit working papers ater the
relevant documentation completion
dates or two audits shortly beore a
PCAOB inspection.
Based on these ndings and in response
to an oer o settlement rom Waggoner,
the Board censured and barred him
rom associating with a PCAOB-
registered accounting rm with the
right to petition to remove the bar ater
three years.
In asettled disciplinary order announced
Sept. 7, 2012, the Board imposed
sanctions against Michael . Studer, CPA
and the New York-based rm Michael
. Studer, CPA, P.C. or violating
PCAOB rules, auditing standards and
quality control standards.
Te Board ound that Studer and the
rm ailed to comply with PCAOB
auditing standards in auditing manage-
ments assessment o the eectiveness o
internal control over nancial reporting
and the nancial statements o an
issuer client based in France.
Te Board ound that the rm, at Studers
direction, issued an unqualied audit
report on the clients internal control
over nancial reporting as o Dec. 31,
2008, without sucient basis or the
opinion expressed in the report. Te
rm issued the report despite Studer
and the rms ailure to perorm
required audit procedures including,
among others, identication andtesting o the issuers internal controls.
Te rm concurrently issued an
unqualied audit report (with a going
concern explanatory paragraph) on the
issuers nancial statements as o and
or the year ended Dec. 31, 2008.
In conducting audits o two China-
based issuers, the Board ound that the
rm used assistants based in Canada to
perorm eld work in China and thatthese assistants conducted a signicant
portion o the rms audit procedures.
Te Board also ound that Studer and
the rm ailed to direct the eorts o
these assistants or review the work they
perormed in order to ensure that
the rms audit documentation would
be prepared in accordance with
PCAOB standards.
Based on these ndings and in response
to an oer o settlement rom Studer andthe rm, the Board censured Studer
and the rm and required the rm to
retain an independent monitor. Te
Board also imposed specic limitations on
the activities, unctions and operations
o Studer and the rm, subject to the
issuance o a certicate o compliance
by the independent monitor.
Enorcement continued
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Fiure t Cmpy with the Brd
Rue nd Nn-Cpertin with
Brd PrceeTe PCAOB also ocuses on auditors
ailures to comply with the laws and
rules governing the Boards processes,
including ailures to cooperate with
inspections and violations o Board
orders and rules.
On Nov. 13, 2012, the PCAOB
announced settled disciplinary orders
against three auditorso the rm
McGladrey & Pullen, LLP aternding that, shortly beore a PCAOB
inspection, the three improperly
created, added and altered audit
documentation.
Based on these ndings, the Board
accepted oers o settlement rom
partner Dale A. Hotz, director Jyothi
N. Manohar and ormer manager
Michael J. Fadner. Te Board censured
and barred Hotz rom associating witha PCAOB-registered accounting rm
with the right to petition to remove the
bar ater two years. Te Board censured
and suspended Manohar rom being an
associated person o a registered public
accounting rm or a period o one
year. Te Board censured Fadner.
adjudicted Dicipinry
order nd opinin
Under the Sarbanes-Oxley Act, anyperson sanctioned by the Board may
seek review by the SEC in accordance
with SEC rules, and any such application
or review operates as a stay o the
sanction. Te Sarbanes-Oxley Act
prohibits the Board rom reporting the
sanction to the public unless and until
the SEC lits the stay o the sanction.
Because o the stay, the Board does not
publish Board orders and opinions
beore the SEC review has occurred orthe opportunity to seek SEC review has
passed. In addition, because o the stay,
the eective date o the sanctions
imposed by the Board is dierent rom
the date o the Board action imposing
the sanctions.
On Jan. 10, 2012, the SEC sustained
the Boards nal decision and order o
Oct. 6, 2010, imposing sanctions
against exas-based R.E. Bassie & Co.
and R. Everett Bassie ater nding that
Bassie and his rm had engaged in
conduct constituting noncooperation
with an investigation.
A PCAOB hearing ocer had previ-
ously issued a decision permanently
revoking the rms registration with
the Board and permanently barring
How Investigations Begin
Te PCAOB enorcement staf conducts inormal inquiriesas well as ormal investigations that arise rom severalsources including:
PCAOB inspections o registered rms
PCAOB research and analysis
Other regulators, including the Securities and Exchange Commission
Public disclosures o restatements and auditor changes
News reports
Condential tips provided to 800-741-3158 or [email protected]
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AdministrationTe PCAOB endeavors to use its
resources responsibly to protect
investors and serve the public interest.
Te PCAOB maintains this eort
through its daily operations.
Te Sarbanes-Oxley Act o 2002
established the PCAOB as a nonprot,non-governmental organization. As a
result, the PCAOB does not receive
ederal appropriations or its operations.
Under the provisions o the Sarbanes-
Oxley Act and the Dodd-Frank Act,
the PCAOB is primarily unded by
ees collected rom public companies,
mutual unds and brokers and dealers
registered with the Securities and
Exchange Commission.
In light o its accountability to the SEC
and the public, the PCAOB devotes
resources to analyzing the impacts o
its standards and rules; maintaining
and assessing the eectiveness o its
internal control over nancial reporting;
and monitoring its operations through
its Oce o Internal Oversight and
Perormance Assurance.
sEC overight
Te Sarbanes-Oxley Act gives the SEC
oversight authority over the PCAOB.
Te SEC is responsible or appointing
and removing Board members. On
Feb. 3, 2012, the SEC announced the
appointment o Jeanette M. Franzel
to succeed Board member Daniel L.
Goelzer, whose term had expired.
Board member Franzel began her term
March 5, 2012.
Te PCAOB is subject to rules and
orders promulgated by the SEC.
PCAOB rules, including its auditing
and related proessional practice
standards, are not eective unless
approved by the SEC. In addition,
adverse PCAOB inspection reports,
remediation determinations and
disciplinary actions against registered
rms and their associated persons are
subject to review by the SEC. Te SEC
also is responsible or approving the
PCAOBs annual budget and accounting
support ee.
Budget nd Funding
Te PCAOBs budget or 2012, as
approved by the Board Nov. 30, 2011,
was $227.7 million. Each year, the
PCAOBs budget-setting process is
subject to SEC oversight, including
review, comment and approval. Te
SEC approved the budget and
accounting support ee Jan. 11, 2012.
Te 2012 budget was 11.4 percent
above the PCAOBs 2011 budget,
largely attributable to stang and
associated expenses, such as travel, or
inspections. Te additional resources
accommodated an increase in the
number o non-U.S. inspections, while
maintaining the scope and pace o
U.S.-based inspections and imple-
menting the oversight o the audits o
SEC-registered brokers and dealers.
On Nov. 28, 2012, the Board approved
abudget o approximately $245.6 million
or 2013 along with astrategic plan or
20122016, which reairmed and
updated the plan adopted Nov. 30,2011. he strategic plan guides the
PCAOBs operations and programs, as
well as development o its budget and
its initiatives to enhance the relevance,
credibility and transparency o the
audit to better serve investors. Te
Chairmans message accompanying
the strategic plan sets orth the Boards
near-term priorities including improving
the timeliness, content and readability
o inspection reports, the timeliness oremediation determinations, a project
to identiy audit quality measures and
enhancing PCAOBs outreach to and
interaction with audit committees.
Under the Sarbanes-Oxley Act, as
amended by the Dodd-Frank Act, the
PCAOB budget provides the oundation
or the assessment o an accounting
support ee paid by public companies
and mutual unds, together reerred
to as issuers as well as SEC-registered brokers and dealers.
Te Boards unding rules are based
on two principles: that the issuer and
broker-dealer accounting support ees
must be allocated in a manner that
refects the proportionate sizes o
issuers, brokers and dealers, and those
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ees must be allocated in an equitable
manner. Te principles are based on
the premise that the size o an entity
may serve as an indication o the
complexity o an audit, which could be
an equitable measure on which to base
the allocation o the ee.
Te total accounting support ee or
2012 was approximately $215 million,
with $196.8 million allocated to
issuers and $18.2 million allocated to
SEC-registered brokers and dealers.
Issuer accunting Supprt Fee
Te issuer accounting support ee is
allocated annually to public companies
and mutual unds based on their
relative average, monthly U.S. equity
market capitalization during the
preceding calendar year.
Te allocation o the 2012 issuer
accounting support ee was based on
amendments to the PCAOBs unding
rules that were approved by the Board
in 2011. Te amendments increasedthe average, monthly market capital-
ization thresholds or entities eligible
to be assessed a portion o the ee and
resulted in a large reduction in the
number o smaller public companies
and mutual unds being assessed a
portion o the issuer accounting
support ee in 2012. Te amendments
also revised the basis or calculating an
issuers market capitalization to
include the market capitalization o all
classes o an issuers voting and
non-voting common equity rather
than just its common stock.
In 2012, public companies with an
average, monthly market capitalization
greater than $75 million during the
preceding calendar year and mutualunds with an average monthly market
capitalization, or net asset value,
greater than $500 million during the
preceding calendar year were invoiced
a proportionate share o the accounting
support ee. In 2012, public companies
were assessed approximately 93.3
percent o the total issuer accounting
support ee, and mutual unds were
assessed the remaining 6.7 percent,
similar to the allocations in 2011.
Administration continued
Issuer Accounting Support Fee
ISSUER FEE RaNGES
NUMBER oF ISSUERS
2012 2011*
$100500 191 2,138
$5011,000 1,481 1,752
$1,0015,000 3,037 3,054
$5,00110,000 922 900
$10,00150,000 1,331 1,321
$50,001100,000 279 279
$100,001500,000 329 285
$500,0011,000,000 31 30
$1,000,001+ 26 25
ToTal 7,627 9,784
* Fees in 2011 were allocated among equity issuers with an average, monthly market capitalization greater than $25 million and investment company issuers with an average,
monthly market capitalization, or net asset value, greater than $250 million. Te equity issuer and investment company thresholds were raised or the 2012 allocations to
$75 million and $500 million, respectively.
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Te PCAOB invoiced 7,627 issuers in
2012, compared to 9,784 issuers in
2011. Te reduction in the number o
issuers invoiced was mainly due to the
increased threshold or the average,
monthly market capitalization used to
allocate the issuer accounting support
ee. Approximately 21.9 percent o the
issuers billed received invoices or
$1,000 or less.
BrerDeer accunting Supprt Fee
Te PCAOB invoiced 687 brokers and
dealers approximately $18.2 million in
2012, compared to 681 brokers and
dealers that received invoices totaling
$14.4 million in 2011, the rst year
they were required to pay a portion o
the broker-dealer accounting support
ee. In 2012, approximately 33.2 percent
o the brokers and dealers billed
received invoices or $1,000 or less,
and the largest 100 invoice amounts
comprised approximately 91.4 percent
o the total ee.
As authorized by the Dodd-Frank Act,
the broker-dealer accounting support
ee was allocated to brokers and dealers
with an average quarterly tentative net
capital greater than $5 million during
the preceding calendar year.
Registrtin nd annu Fees
frm accunting Firms
Te Sarbanes-Oxley Act directs
the PCAOB to assess and collect a
registration ee and an annual ee rom
each registered public accounting rm,
in amounts that are sucient to
recover the costs o processing and
reviewing applications and
annual reports.
In 2012, the PCAOB assessed annual
ees totaling approximately $1.65 million
to 2,366 registered accounting rms
based on the rms headcount and the
number o issuer audit clients.
In 2012, the PCAOB collected
approximately $54,000 in registration
application ees rom 108 rms,
compared to $71,000 in registration
ees collected rom 143 rms in 2011.
Broker-Dealer Accounting Support Fee
BRokER-DEalER FEE RaNGES
NUMBER oF BRokERS aND DEalERS
2012 2011
$100-500 74 100
$501-1,000 154 159
$1,001-5,000 263 250
$5,001-10,000 69 65
$10,001-50,000 81 65
$50,001-100,000 12 17
$100,001-500,000 24 16
$500,001-1,000,000 5 6
$1,000,001+ 5 3
ToTal 687 681
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Annual Fees rom Accounting Firms
FEE aMoUNT
NUMBER oF aCCoUNTING FIRMS
2012 2011
$100,000 4 4
$25,000 3 3
$500 2,359 2,399
ToTal 2,366 2,406
stfng
In 2012, the PCAOBs sta grew
by a net increase o 76, including
64 sta in registration and inspections,
ending the year with 766 sta. More
than 60 percent o PCAOB sta work
in registration and inspections in
Washington and in 14 regional and
satellite oces, which allow or certain
savings in travel, relocation and realestate expenses.
Inrmtin Techngy
Under an enhanced I governance
ramework, the PCAOB established an
I governance program, drated and