AS5 Could Trim Audit Bills by 10%

The PCAOB revised Auditing Standard No. 2 mainly for small companies' benefit. But large companies tell the regulator the new AS5 will also reduce their audit costs.

The revised auditing standard for internal control over financial reporting could bring cheaper auditing bills for large companies. Some publicly traded companies are estimating that their audit fees could be reduced by 10 percent if the proposed rule is adopted by the Public Company Accounting Oversight Board, Laura Phillips, the regulator’s deputy chief auditor, said Friday.

Much of the focus on the revisions to Auditing Standard No. 2 has been on how it can be made scalable for the 6,000 so-called nonaccelerated filers that have yet to comply with the Sarbanes-Oxley Act. Those publicly traded companies with a public float of $75 million or less don’t have to have their auditor attestation reports completed until their 10-Ks are filed for fiscal years ending after December 15, 2008.

With up to three years of complying with Sarbox’s Section 404 under their belts, larger companies haven’t expected their auditing processes to change much once the Securities and Exchange Commission adopts the PCAOB’s new standard. However, knowing that AS5 (as the PCAOB has dubbed its proposed standard) could make their external auditors’ work more efficient, they’ve been predicting that the number of hours they’re charged by their audit firms will decrease. Some issuers have told the PCAOB that their auditors have agreed with that forecast, said Phillips during an accountant-liability conference sponsored by the American Law Institute and the American Bar Association.

Companies and their audit firms are basing their prediction on the version of AS5 presented to the public last December. In addition to scaling the standard for small companies, AS5 uses simpler language and turns auditors’ focus onto only the areas that could potentially lead to a material misstatement. AS2 had inadvertently encouraged auditors to “do more work than was necessary,” said Phillips.

Indeed, those companies that are Sarbox-compliant have said their audit bills have gotten more expensive since AS2 took effect. They have noted to regulators several instances in which auditors seemed to have taken an overly conservative approach and sometimes focused on areas that had little or no connection to financial statements. By adopting a top-down, risk-based approach with AS5, the PCAOB has said it hopes auditing bills will be cheaper.

Last December the PCAOB and the SEC proposed revisions to their internal-control standards simultaneously, giving the public 70 days to comment. They each received nearly 200 letters. The SEC is aiming to make a decision on its proposed management guidance for Section 404 by May 23, but AS5 apparently needs more extensive revisions, as the SEC recently directed its staff to work with the PCAOB staff on several changes. SEC chairman Christopher Cox has said he wants to see a PCAOB-approved standard by late May or early June so that the audit firms can reference it for their 2007 financial-statement audits. (The PCAOB was created by Sarbox as a nongovernment, corporate agency that falls under the SEC’s purview, and all of its rules need the commission’s approval.)

Currently deeply entrenched in making revisions to AS5, Phillips — who is leaving the PCAOB later this year — said the breadth of changes will not be extensive. “You won’t see that magnitude of movement” that was made between AS2 and the original AS5 proposal, she said. The final version will likely be about 60 pages, which is nearly a third of AS2′s length. The staffs are working to match the tone and wording of AS5 with 404, clarify how the standard can be scaled for small companies, use more principles-based language, and adopt a less-prescriptive approach for how auditors will decide to use the work of others, such as a company’s internal auditors.

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