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Effects of the SOA on
the Co-Editors: T. Chris
Muirhead, CPA Author: Editor’s note: Mr. Holub is the former Chair of the AICPA Tax Division’s Tax Practice Management Committee. Mr. Muirhead is the Chair of the AICPA Tax Division’s Tax Practice Improvement Committee. Mr. Miller is a member of that Committee. For more information about this column, contact Mr. Holub at (813) 222-8555 or stevenh@apcpa.com. The enactment of the Sarbanes-Oxley Act of 2002 (SOA) enabled the establishment of a public oversight board for (1) audits of public companies subject to securities law and (2) related matters to protect the interest of investors and the public in general. Although not directly focused on tax, the following titles in the SOA will have a significant effect on the accounting profession:
This column discusses SOA Titles I and II. The following definitions in SOA Section 2 are important in understanding how the SOA affects tax practice: 1. Appropriate state regulatory authority: A state agency or other authority responsible for the licensure or other regulation of accounting practice in the state or states having jurisdiction over registered public accounting firms or associated persons, for the matter in question (SOA Section 2(a)(1)). 2. Audit: An examination of an issuer’s financial statements by an independent public accounting firm in accordance with PCAOB or Securities and Exchange Commission (SEC) rules (or, before PCAOB rules, in accordance with generally accepted auditing and related standards), for the purpose of expressing an opinion on such statements (SOA Section 2(a)(2)). 3. Audit committee: A committee (or equivalent body) established by and amongst an issuer’s board of directors or, if no such committee exists, the issuer’s entire board of directors, to oversee the issuer’s accounting and financial reporting processes and financial statement audits (SOA Section 2(a)(3)). 4. Audit report: A document or other record prepared after an audit performed to comply with securities law requirements, and in which a public accounting firm either expresses an opinion on a financial statement, report or other document, or asserts that no such opinion can be expressed (SOA Section 2(a)(4)). 5. Issuer: A company whose securities are registered with the SEC or one required to file reports with the SEC, or that files or has filed an SEC registration statement that has not yet become effective and has not been withdrawn (SOA Section 2(a)(7)). 6. Nonaudit services: Any professional services provided to an issuer by a registered public accounting firm, other than those provided in connection with an audit or a review of an issuer’s financial statements (SOA Section 2(a)(8)). 7. Person associated with a public accounting firm: Any individual proprietor, partner, shareholder, principal, accountant or other professional employee of a public accounting firm (or a registered public accounting firm), or any other independent contractor or entity that, in connection with preparing or issuing any audit report, shares in the profits of, or receives compensation in any other form from, that firm, or participates as an agent or otherwise on behalf of such firm in any of its activities (SOA Section 2(a)(9)(A)). 8. Professional standards: Accounting principles established by the standard-setting body described in Section 19(b) of the Securities Act of 1933 (’33 Act), as amended by the SOA, or prescribed by the SEC under ’33 Act Section 19(a), or the Securities Exchange Act of 1934 (’34 Act) Section 13(b); and auditing standards, standards for attestation engagements, quality control policies and procedures, ethical and competency standards and independence standards that, according to the PCAOB or SEC, relate to the preparation or issuance of audit reports for issuers; and are established or adopted by the PCAOB or promulgated as SEC rules (SOA Section 2(a)(10)). 9. Public accounting firm: A proprietorship, partnership, incorporated association, corporation, limited liability company, limited liability partnership or other legal entity (as well as any person associated with such entity, to the extent designated by PCAOB rules), engaged in the practice of public accounting or preparing or issuing audit reports (SOA Section 2(a)(11)). 10. Registered public accounting firm: A public accounting firm registered with the PCAOB in accordance with the SOA (SOA Section 2(a)(12)). 11. Rules of the Board: The PCAOB’s bylaws and rules (as approved, modified or amended by the SEC), and those stated policies, practices and interpretations of the PCAOB that the SEC, by rule, may deem to be PCAOB rules, as necessary or appropriate to protect investors or in the public interest (SOA Section 2(a)(13)). 12. Security: Has the same meaning as in the ’34 Act (SOA Section 2(a)(14)). 13. Securities law: The provision of law referred to in ’34 Act Section 3(a)(47), as amended by the SOA, and includes the rules, regulations and orders issued by the SEC thereunder (SOA Section 2(a)(15)). 14. State: Any U.S. state, the District of Columbia, Puerto Rico, the Virgin Islands or any other U.S. territory or possession (SOA Section 2(a)(16)). Title I—PCAOB Section 101—Establishment; Administrative Provisions: Establishes the PCAOB, to oversee audits of public companies subject to securities laws, and related matters, to protect the interests of investors and the public in general as to the preparation of informative, accurate and independent audit reports for companies whose securities are sold to, and held by and for, public investors. The PCAOB is a nonprofit corporation and will remain in existence until dissolved by Congressional act. Subject to SEC actions, it registers public accounting firms that prepare audit reports for issuers; establishes and/or adopts, by rule, auditing, quality control, ethics, independence and other standards related to the preparation of audit reports for issuers. The PCAOB conducts inspections, investigations and disciplinary proceedings concerning registered public accounting firms and associated persons of such firms, and imposes appropriate sanctions when justified. It performs such other duties or functions as it deems necessary or appropriate to promote high professional standards among registered public accounting firms and associated persons, and to improve the quality of audit services offered by them, to protect investors or to further the public interest. It enforces compliance with the SOA, PCAOB rules, professional standards and securities laws on the preparation and issuance of audit reports and the obligations and liabilities of accountants, by registered public accounting firms and associated persons. Section 102—Registration with the Board: All public accounting firms preparing or issuing (or participating in the preparation or issuance of) any audit report for an issuer has to register with the PCAOB. To register, a firm has to submit the names of all issuers for which it (1) prepared or issued audit reports during the immediately preceding calendar year and (2) expects to issue audit reports during the current calendar year. The firm must set forth the annual fees it received from each issuer for audit services, other accounting services and nonaudit services. Other information required includes (1) current financial information; (2) a statement of quality control polices for its accounting and auditing practices; (3) a list of accountants associated with the firm who participate in or contribute to the preparation of audit reports, stating the firm’s license or certificate number and state license numbers; (4) information on criminal, civil, or administrative actions or disciplinary proceedings pending; (5) copies of any periodic or annual disclosures to the SEC on accounting disagreements between a firm and an issuer; and (6) other such information as deemed necessary by PCAOB or SEC rules. Section 103—Auditing, Quality Control, and Independence Standards and Rules: The PCAOB will set standards for the accounting profession, with the support of professional groups of accountants or advisory groups. The PCAOB will set requirements for (1) the retention of audit workpapers and related information (seven years); (2) quality control standards; (3) a firm’s monitoring of professional ethics and independence from issuers on behalf of which the firm issues audit reports; (3) consultation within such firm, on accounting and auditing questions; (4) supervision of audit work; (5) hiring, professional development and advancement of personnel; (6) acceptance and continuation of engagements; (7) internal inspection; and (8) such other requirements as the PCAOB specifies. Section 104—Inspection of Registered Public Accounting Firms: The PCAOB will conduct an ongoing inspection program to ensure that each registered public accounting firm and associated persons of such firm are in compliance with the SOA, and PCAOB and SEC rules or professional standards for performing audits and issuing audit reports and for related matters involving issuers. Firms that provide audit reports for more than 100 issuers will be inspected annually; firms that issue audit reports for 100 or fewer issuers will be subject to inspection at least once every three years. Section 105—Investigations and Disciplinary Proceedings: The PCAOB is responsible for establishing fair procedures for investigating and disciplining registered public accounting firms and associated persons of such firms. Section 106—Foreign Public Accounting Firms: Foreign accounting firms that prepare an audit report for any issuer are subject to the SOA, in the same manner and to the same extent as a public accounting firm organized and operating under U.S. law. Section 107—Commission Oversight of the Board: The SEC has oversight and enforcement authority over the PCAOB. Section 108—Accounting Standards: The SEC has the authority to create accounting standards for the standard-setting bodies it recognizes. Section 109—Funding: This section provides for (1) funding for the PCAOB and the designated standard-setting body and (2) the fees to which registered public accounting firms will be subject. Title II—Auditor Independence Section 201—Services Outside the Scope of Practice of Auditors: Under the SOA, a registered public accounting firm and any person associated with such firm that performs an audit for an issuer, is barred from providing to such issuer, contemporaneously with the audit, any of the following nonaudit services:
However, a registered public accounting firm may engage in nonaudit services other than those listed above (including tax services), for an audit client, provided such activity is first approved by the issuer’s audit committee. Further, on a case-by-case basis, the PCAOB may allow any person, issuer or public accounting firm to perform or cause to be performed, one of the listed services, provided such service is necessary or appropriate in the public interest, protects investors and is subject to SEC review. Section 202—Preapproval Requirements: All auditing services (including provision of comfort letters for securities underwritings or statutory audits required for insurance companies for state law purposes) and nonaudit services, other than nonaudit services that meet a de minimis exception, are subject to preapproval by the issuer’s audit committee. De minimis nonaudit services are those that (1) do not exceed 5% of the fees paid by the issuer to the auditor in the fiscal year in which the nonaudit services are performed; (2) were not recognized as nonaudit services by the issuer at the time of the engagement; and (3) are promptly brought to the attention of the issuer’s audit committee and approved before the completion of the audit by that committee or by one or more of its members who are board members and who have the authority to grant such approvals, as delegated by the audit committee. Audit committee approval of nonaudit services must be disclosed to investors in periodic reports. Section 203—Audit Partner Rotation: The SOA amends ’34 Act Section 10A to make it unlawful for a registered public accounting firm to provide audit services to an issuer when the lead (or coordinating) audit partner or the partner responsible for reviewing the audit, has performed audit services for the issuer in each of the issuer’s five previous fiscal years. Section 204—Auditor Reports to Audit Committees: The SOA amends ’34 Act Section 10A to require registered public accounting firms performing audits for an issuer to timely report to the audit committee the following: 1. Critical accounting policies and practices to be used; 2. Alternative treatments of financial information within generally accepted accounting principles that have been discussed with the issuer’s management officials; 3. Ramifications of the use of such alternative disclosures and treatments and the treatment preferred by the registered public accounting firm; and 4. Other material written communications between the registered public accounting firm and the issuer’s management, such as any management letter or schedule of unadjusted differences. Section 205—Conforming Amendments: The SOA amends ’34 Act Section 3(a) to conform the definitions of audit committee, registered public accounting firm and issuer to those of the SOA. It also requires amending ’34 Act: 1. Section 10A, by replacing “an independent public accountant” or “the independent public accountant” with “a registered public accounting firm” or “the registered public accounting firm,” respectively; 2. Section 10A(c), by replacing “No independent public accountant” with “No registered public accounting firm”; and Section 10A(d), by replacing “the accountant” or “such accountant” with “the firm” or “such firm,” respectively; 3. Section 12(b)(1), by replacing “independent public accountants” with “registered public accounting firm”; and 4. Section 17(e) and (i), by replacing “an independent public accountant” with “a registered public accounting firm.” Section 206—Conflicts of Interest: Under the SOA, it is unlawful for a registered public accounting firm to perform any audit/service for any issuer when the issuer’s chief executive officer, chief financial officer, chief accounting officer or any person serving in a similar capacity worked for that firm in any audit capacity, during the one-year period preceding the date of the initiation of the audit. Section 207—Study of Mandatory Rotation of Registered Public Accounting Firms: The SOA required the U.S. Comptroller General, within one year of enactment, to conduct a study and review of the potential effects of requiring the mandatory rotation of registered public accounting firms. A report of the study’s results was to have been submitted to the Committee on Banking, Housing, and Urban Affairs of the Senate and to the Committee on Financial Services of the House of Representatives. Section 208—Commission Authority: The SEC was charged with issuing final regulations within 180 days of enactment to carry out ’34 Act Section 10A(g)–(k). Under the SOA, it is unlawful for any registered public accounting firm or associated person to prepare or issue an audit report to an issuer when the firm or associated person engages in an activity with the issuer prohibited by ’34 Act Section 10A(g)–(k), or by any SEC or PCAOB rule or regulation issued thereunder. Section 209—Considerations by Appropriate State Regulatory Authorities: State regulatory authorities responsible for supervising nonregistered public accounting firms and their associated persons should make an independent determination of the proper applicable standards, taking into account the size and nature of the accounting firm’s business, as well as that of its clients. Small- and medium-sized nonregistered public accounting firms should not be assumed to be subject to the PCAOB standards under the SOA, with respect to Section 209. Conclusion The SOA is a comprehensive piece of legislation that will have a significant effect on the accounting profession, publicly held corporations and their advisers for many years. |
