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During the course of their work, auditors can come across instances of non-compliance with laws and regulations (NOCLAR) in their work with companies. Last year, the Public Company Accounting Oversight Board (PCAOB) proposed amendments to its auditing standards related to an auditor’s consideration of a company’s noncompliance with laws and regulations (NOCLAR) in the performance of an audit. Stay up-to-date on the latest in this area. Explore the CAQ’s resources.

In March 2023, the Public Company Accounting Oversight Board (PCAOB) issued a proposed new standard - AS 1000, General Responsibilities of the Auditor in Conducting an Audit. The CAQ analyzed the comment letters submitted to the PCAOB while the PCAOB...

In March 2023, the Public Company Accounting Oversight Board (PCAOB) issued a proposed new standard - <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-049/pcaob-release-no.-2023-001-as-1000---proposed.pdf?sfvrsn=28304d26_2">AS 1000, General Responsibilities of the Auditor in Conducting an Audit</a>. The CAQ analyzed the comment letters submitted to the PCAOB while the PCAOB works toward adopting a final standard in 2024.

What is AS 1000?

Since AS 1000 was adopted two decades ago the auditing environment has evolved to include changes to auditing requirements, new or revised independence requirements, and rapid advancements in technology affecting electronic audit tools and software.

Currently, the general principles and responsibilities are addressed across four standards:
<ul>
 	<li>AS 1001, Responsibilities and Functions of the Independent Auditor;</li>
 	<li>AS 1005, Independence;</li>
 	<li>AS 1010, Training and Proficiency of the Independent Auditor; and</li>
 	<li>AS 1015, Due Professional Care in the Performance of Work.</li>
</ul>
These standards have not been updated since they were adopted on an interim basis in 2003 at the PCAOB’s inception. Since then, the auditing environment has evolved to include changes to auditing requirements, new or revised independence requirements, and rapid advancements in technology affecting electronic audit tools and software.

The proposal would combine the general principles and responsibilities into one standard while adding updates to reflect developments in the auditing environment. The proposal sets out to eliminate outdated and inconsistent language and incorporates updates to make the standards more timely, relevant, and easier to understand and apply.

Do we support the proposal? The objectives – definitely. But, we expressed concern about some of the details and so did other stakeholders based on our review of comment letters.

The CAQ’s Perspective on AS 1000

In<a href="https://www.thecaq.org/comment-letter-pcaob-as-1000"> our comment letter to the PCAOB</a>, we include the following comments:
<ul>
 	<li>The proposed standard and related amendments will result in more significant changes than what the Board describes within the release text. Certain aspects of the proposed AS 1000 go beyond current standards and expand the auditor’s responsibilities.</li>
</ul>
What do we mean here? The Board states clearly that AS 1000 is not fundamentally changing the general responsibilities of auditors. We disagree. If the intent is to fundamentally change the auditor’s general responsibilities, we can have a debate on that. We agree with the Board’s stated intent, which is to update and modernize the current standards.
<ul>
 	<li>We agree with the auditor’s fundamental role to serve the public interest within the financial reporting ecosystem and enhance the confidence and trust of investors in financial reporting. However, the auditor’s role should not be confused with a legal duty owed to investors.</li>
</ul>
AS 1000 creates a new legal duty and new liability for auditors. Auditors are certainly held responsible for their work and stand behind it.
<ul>
 	<li>It is not appropriate for the auditor to be required to make an evaluation of fairness that goes beyond the evaluation of whether the financial statements are presented in conformity with the applicable financial reporting framework.</li>
</ul>
It seems innocuous to suggest that the auditor should make this evaluation at first blush. The audit report currently states that the financial statements present fairly, in all material respects, the financial position of the company and the results of its operations, etc. in conformity with GAAP. Is this “clarification” meaningful? We think it is. The term “fairness” could be misconstrued to go beyond the current financial reporting framework. We don’t think that’s what is intended and, to promote consistency, we suggest keeping the requirements anchored to the financial reporting framework.
<ul>
 	<li>We support the Board’s proposed amendment to accelerate the documentation completion date by reducing the maximum period of time to assemble a complete and final set of audit documentation for retention from 45 days to 14 days from the report release date.</li>
</ul>
What is the documentation completion date? A complete and final set of audit documentation should be assembled for retention as of a date not more than 45 days after the report release date. What does this mean in practice? Nowadays, the report release date is generally the audit report date. For a public company, this is often the date the Form 10-K is filed.  Most firms use automated audit software systems and once the audit is complete, the database or electronic binder is “archived.” When archived, it’s frozen in time and no alterations can be made. In my experience, the best practice here is for the audit file to be completely done and dusted on that audit report date. Push the archive button and you’re done. Auditors have 45 days to finalize and assemble workpapers. We think shortening the period from 45 days to 14 days is a good idea. If this isn’t already a firm’s practice, it could take some changes in culture or behavior to adjust, but ultimately, it’s easier to  complete the file in real-time, to the extent possible.

Comments from Stakeholders on AS 1000 

As of November 2, 2023, the PCAOB received <a href="https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-049-responsibilities-auditor-conducting-audit/comment-letters">28 comment letters</a> submitted in response to the AS 1000 proposal. In <a href="https://www.thecaq.org/comment-letter-analysis-as-1000">our analysis</a> of these comment letters, we found that more than half are from accounting firms and related groups. Four letters are from investors and three from academics. The “other” group includes the U.S. Chamber of Commerce, the American Bar Association, and three individuals.

<img class="alignnone size-full wp-image-14183" src="https://thecaqprod.wpenginepowered.com/wp-content/uploads/2023/11/AS-1000-Blog-Post-Picture-1.png" alt="" width="266" height="288" />

Key themes include:
<ul>
 	<li>The proposal expands the auditor’s responsibilities in contrast to the Board’s stated intent. The U.S. Chamber stated,In its current form, the Chamber cannot support the Proposal as fit for purpose. The Chamber strongly urges the PCAOB to withdraw it and substantially reconsider, recraft, and re-expose a revised proposed standard on the general responsibilities of the auditor in conducting an audit.</li>
 	<li>The proposal eliminates key concepts and principles from the extant standards which are important to retain.</li>
 	<li>The proposal creates confusion about the auditor’s role and will have other unintended consequences. Investors are highly supportive that the language should be further specified regarding the roles and responsibilities of the auditors.</li>
 	<li>Accounting firms and related groups, among other commenters, oppose the clarification of the meaning of fair presentation and state it is important that the auditor’s evaluation of the presentation of the financial statements be applied within the applicable financial reporting framework. Investors strongly support the amendments to clarify the meaning of present fairly; however, they express that additional guidance may be needed for auditors to meet this responsibility.</li>
 	<li>Accelerating the document completion date:
<ul>
 	<li>Accounting firms and related groups are largely supportive of the accelerated documentation completion date; however, some recommend that additional time should be provided for smaller firms to comply with the requirement.</li>
 	<li>Investors also support accelerating the documentation completion date, but some recommend that it should be further accelerated to two days.</li>
 	<li>Academics are not supportive of the accelerated documentation completion timeline, noting that costs for firms (not already in compliance) would be nontrivial.</li>
</ul>
</li>
</ul>
For additional information and to read the full CAQ analysis, click <a href="https://thecaqprod.wpenginepowered.com/wp-content/uploads/2023/11/caq_comment-letter-analysis-as-1000_2023-11.pdf">here</a>. As the PCAOB considers the next steps of the AS 1000 proposal, the CAQ will continue to monitor and engage where necessary. Stay tuned and follow us on <a href="https://twitter.com/TheCAQ">Twitter</a>, <a href="https://www.linkedin.com/company/2859773">LinkedIn</a>, and <a href="https://www.facebook.com/thecaq/">Facebook</a> for the latest updates.

&nbsp;

<hr />

Author: <a href="https://www.thecaq.org/about-us/our-people/vanessa-teitelbaum-cpa">Vanessa Teitelbaum, CPA</a>, Senior Director, Professional Practice

What You Need to Know About the PCAOB’s AS 1000 Proposed Rule

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In an effort to engage capital market stakeholders and better understand their information expectations, the CAQ commissioned KRC Research to conduct qualitative research with institutional investors whose portfolio consists primarily of equities in North America, working in a range of...

In an effort to engage capital market stakeholders and better understand their information expectations, the CAQ commissioned KRC Research to conduct qualitative research with institutional investors whose portfolio consists primarily of equities in North America, working in a range of investment settings from family offices to pensions and large banks.

The research was primarily designed to:
<ul>
 	<li>Understand what information institutional investors seek regarding public company auditing and the audit process, and</li>
 	<li>Explore attitudes toward potential standards and regulations related to additional reporting or audit requirements.</li>
</ul>
This research was also commissioned to understand how institutional investors perceive the state of corporate reporting and what they are looking for when it comes to existing and emerging types and sources of information.

<a href="https://thecaqprod.wpenginepowered.com/wp-content/uploads/2023/11/caq_perspectives-on-corporate-reporting-the-audit-and-regulatory-environment_2023-11.pdf">Download the full report</a> now to explore perspectives of institutional investors, who utilize the work of public company auditors, on corporate reporting, audit quality, and potential standard setting topics.

Perspectives on Corporate Reporting, the Audit, and Regulatory Environment: Institutional Investor Research Findings

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The CAQ appreciates the opportunity to share some high-level observations related to the Securities and Exchange Commission (SEC), Notice of Filing of Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies...

The CAQ appreciates the opportunity to share some high-level observations related to the Securities and Exchange Commission (SEC), <a href="https://www.sec.gov/files/rules/sro/nyse/2023/34-98665.pdf">Notice of Filing of Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies</a> (Proposed Rule Change or Release). Our comments focus on the proposed requirements regarding 1) examination and attestation by independent reviewers and 2) corporate governance. Given the limited timeframe to evaluate the specifics of the reporting framework, and the fact that this will represent a new type of company with novel license arrangements, we believe additional questions could arise as entities begin to apply the Reporting Framework. We recommend the NYSE continue to monitor developments, including relating to the operability of the reporting and examination requirements, and propose changes to the Reporting Framework should the need arise. As noted in the proposal, such changes would be considered changes to the listing standards and thus would be subject to approval by the SEC.

Read the full comment letter <a href="https://thecaqprod.wpenginepowered.com/wp-content/uploads/2023/11/NYSE-NAC-Comment-Letter-for-Filing-10-25-23_Final_Signed.pdf">here</a>.

Comment Letter | File Number SR-NYSE-2023-09; Notice of Filing of Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies

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In June 2023, the Public Company Accounting Oversight Board (PCAOB) proposed amendments to its auditing standards related to a company’s noncompliance with laws and regulations, or NOCLAR for short. The proposed amendments garnered the attention of a diverse group of stakeholders, resulting in 139 individual comment letters. Several comment letters were also submitted on behalf of a group of individuals or organizations, including close to 300 additional signatures captured in those letters.

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