On August 1, 2012, the Public Company Accounting Oversight Board (“PCAOB”) issued an informational report about its inspection process that is intended to serve as a guide for audit committees to learn more about the inspection process and offer questions the audit committee may ask the audit firm about its inspection results. The PCAOB issued the release with the goal of helping audit committees engage in more informative discussions with audit firms about the inspection process in order to aid audit committees in their oversight responsibilities related to financial reporting. PCAOB inspections of an audit firm examine both aspects of a limited number of audits performed by the firm (Part I of the inspection report) and elements of the firm’s overall system of quality control over its audit process (Part II of the inspection report, which is confidential). The release provides information about both parts of the PCAOB’s inspections and lists specific suggestions for initiating or enhancing discussions with audit firms about the inspection results.
Topic: Audit Committee
SEC Approves NASDAQ Rule Change for Independent Directors
On July 19, 2012, the SEC approved a proposed change to NASDAQ’s rules regarding membership on a listed company’s audit, compensation and/or nominations committee. NASDAQ sought to modify an exception to its Rule 5605, which allows a non-independent director to serve on such committees “under exceptional and limited circumstances” for up to two years. The amendment provides an exception allowing a non-independent director to serve on a company’s audit, compensation and/or nominations committee, where the director has a family member serving as a non-executive employee of the company, so long as the listed company’s board concludes that the director’s membership on the relevant committee is “required by the best interest of the company and its shareholders.”The SEC’s release is available at here.
FASB Votes Against Continuing Loss Contingency Disclosure Reform Project
At a July 9, 2012 meeting, the Financial Accounting Standards Board (“FASB”) voted against moving forward with its outstanding exposure draft to modify the accounting and disclosure requirements for loss contingencies. The FASB considered two alternatives at the meeting: (1) remove the loss contingency project from its agenda; or (2) continue to explore moderate changes to the loss contingency requirements. The FASB Staff recommended that the Board remove the project from its agenda. Chairwoman Seidman and Board members Buck, Golden, Schroeder and Smith voted to remove the project from the Board’s agenda. The majority agreed that the current requirements under Accounting Standards Codification Topic 450 are sufficient and that addressing any concerns with the adequacy of loss contingency disclosures is an issue of compliance and enforcement rather than standard-setting. Board members Linsmeier and Siegel dissented, with each noting that the project should continue with a focus on providing additional guidance on qualitative disclosures about loss contingencies.
Public Company Accounting Oversight Board Considers Mandatory Audit Firm Rotation
On August 16, 2011, the Public Company Accounting Oversight Board (“PCAOB”) issued a Concept Release on Auditor Independence and Audit Firm Rotation (“Concept Release”). The Concept Release, available at http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf, solicits public comment on steps it could take under its existing authority to enhance auditor independence, objectivity, and professional skepticism, including, most notably, imposing for the first time mandatory audit firm rotation on public companies.
Restrictions on Removal of Public Company Accounting Oversight Board Members Violate U.S. Constitution’s Separation of Powers Principle; Narrow Holding Excises For-Cause Removal Provision
Today, the United States Supreme Court issued its opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 08-861. The Public Company Accounting Oversight Board ("Board") was created by the Sarbanes-Oxley Act of 2002 to regulate accounting firms that conduct audits of public companies. The five members of the Board are appointed by the Securities and Exchange Commission ("SEC"), and are removable by the SEC only "for good cause shown" and "in accordance with" certain procedures. This "dual for-cause" removal regime–wherein a Board member is only removable for good cause shown by the SEC, whose Commissioners the President may not remove at-will–was described by the Court as "novel" and "highly unusual."