Audit News Briefing: 26 July 2016

Audit-is-cool is pleased to accumulate and provide its readers with the news on audit and related topics:

July 20, 2016

Accounting Today (Debits&Credits)

Internal Auditors Move to Combat Cyberattacks

New Report – Institute of Internal Auditors: Growing Role of Internal Audit Profession in Cybersecurity

The kind of support needed:

·         Not simply focused on prevention.

·         Setting and management of expectation.

·         Helping the company assess readiness in dealing with the inevitable.

IIA President and CEO Richard Chambers: “What we continue to find is that cybersecurity is recognized almost universally as one of the most significant risks that organizations face … It’s one that internal auditors have increasingly begun to recognize they have to help address. But what we also find is that in a lot of instances the focus can’t just be on trying to prevent a cyberattack because cyberattacks are virtually inevitable. Anyone who tells their board or their customers that they are immune from a cybersecurity attack is just not being truthful.”

Please follow link for details: http://www.accountingtoday.com/blogs/debits-credits/news/internal-auditors-move-to-combat-cyberattacks-78732-1.html

July 19, 2016

Accounting Today (Accounting Technology)

Internal Audit Function Varies Globally

19-July REPORT – Internal Auditors Research Foundation: Found a variety of factors affecting the maturity levels of internal audit in different parts of the globe, including the:

-       age and size of the internal audit function,

-       the type of industry,

-       the size of the organization, and

-       other variables.

Highlight: technological variation across regions – regions still relying on manual systems and processes (13%) North America (36%) East Asia and Pacific.

Please follow link for details: http://www.accountingtoday.com/news/audit-accounting/internal-audit-function-varies-globally-78716-1.html

June 29, 2016

Accounting Web

PCAOB Issues Staff Guidance for Firms on the New Form AP

(AP) Audit Participants NEW FORM requires disclosure of the following:

·         The name of the engagement partner for all public company audits issued on or after Jan. 31, 2017.

·         Information about other audit firms participating in the audit for all public company audits issued on or after June 30, 2017. That information will include the names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours. It also will include the number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.

Written Statement of Martin Baumann (PCAOB chief auditor and director of professional standards) – “Form AP will provide transparency to investors about the engagement partner and other accounting firms that took part in the audit… The guidance issued today (29-Jun) will help firms implement the processes required to deliver that information.”

Please follow link for details: http://www.accountingweb.com/aa/auditing/pcaob-issues-staff-guidance-for-firms-on-the-new-form-ap  

Audit Firm: US PCAOB regulation of US Audit Firms

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation established by the U.S. Congress to oversee the audits of public companies in United States in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. In U.S in early 2000, when the Enron and WorldCom Scandal came to surface, the congress felt the need for more strict regulations for the audit firms and thus promulgated the Sarbanes Oxley Act on July 30, 2002. This act mandated the formation of PCAOB to oversee the audit of public companies that are subject to the securities laws, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by public investors.

Before the Sarbanes-Oxley Act of 2002, the audit profession was self-regulated in U.S., but after its promulgation, it required that auditors of U.S. public companies be subject to external and independent oversight for the first time in history. In passing this Act, Congress sought to restore investor confidence and address serious gaps in the U.S. regulatory framework that were identified through the financial scandals of 2001-2002. The PCAOB comprises of five members, including the Chairman and are appointed to staggered five-year terms by the Securities and Exchange Commission (SEC).

The PCAOB has five primary responsibilities:

·         Registration of public accounting firms (including non-US firms) that audit public companies (including non-US issuers) trading in US securities markets;

·         Inspections of registered public accounting firms;

·         Establishment of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms; and

·         Investigation and discipline of registered public accounting firms and their associated persons for violations of specified laws or professional standards.

·         Enforcing compliance with Sarbanes-Oxley Act.

Additional Thoughts

Although the Sarbanes-Oxley Act, through establishment of PCAOB, introduced much strict regulations for the audit profession, but the WorldCom and Enron scandal alongwith the dissolution of the then big five firm Arthur Andersen which was found guilty of fudging Enron accounts, brought a great disrepute for the profession. Audit firms need to develop a sense of self-regulation and high ethical standards so that the investors and public in general endow trust upon the profession.

Reference: https://goo.gl/YU1dgc

                  https://goo.gl/mpKGaX

Audit Firm: Audit Quality Indicators

The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation in USA established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The Sarbanes-Oxley Act of 2002, which created the PCAOB, required that auditors of U.S. public companies be subject to external and independent oversight.

The PCAOB has recently issued a concept release on Audit Quality Indicators (AQI). It has sought the public comment on the content and possible uses of a group of potential "audit quality indicators." The indicators are a potential portfolio of quantitative measures that may provide new insights about how to evaluate the quality of audits and how high quality audits are achieved.

The 28 potential Audit Quality Indicators are:

AUDIT PROFESSIONALS

Availability	Competence	Focus
1. Staffing Leverage 2.Partner Workload 3.Manager and Staff Workload 4.Technical Accounting and Auditing Resources 5.Persons with Specialized Skill and Knowledge	6.Experience of Audit Personnel 7.Industry Expertise of Audit Personnel 8.Turnoverof Audit Personnel 9.Amount of Audit Work Centralized at Service Centers10.Training Hours per Audit Professional	11.Audit Hours and Risk Areas 12.Allocation of Audit Hours to Phases of the Audit

AUDIT PROCESS

Tone at the Top and Leadership	Incentives	Independence	Infrastructure	Monitoring and Remediation
13.Results of Independent Survey of Firm Personnel	14.Quality Ratings and Compensation 15.Audit Fees, Effort, and Client Risk	16.Compliance with Independence Requirement	17.Investment in Infrastructure Supporting Quality Auditing	18.Audit Firms' Internal Quality Review Results 19.PCAOB Inspection Results 20.Technical Competency Testing

AUDIT RESULTS

Financial Statements	Internal Control	Going Concern	Communication between Auditors and Audit Committee	Enforcement and Litigation
21. Frequency and Impact of Financial Statement Restatements for Errors 22.Fraud and other Financial Reporting Misconduct 23.Inferring Audit Quality from Measures of Financial Reporting Quality	24.Timely Reporting of Internal Control Weaknesses	25.Timely Reporting of Going Concern Issues	26.Results of Independent Surveys of Audit Committee Members	27. Trends in PCAOB and SEC Enforcement Proceedings 28.Trends in Private Litigation

Additional Thoughts

Quality control for audit is very important as only with an effective Quality control mechanism, the public interest can be served through independence, integrity, ethics, objectivity and quality performance. The aforementioned quality indicators can prove to be a useful benchmark for auditors to gauge their performance.

Audit in Politics: Russia vs Yukos vs PwC

There have been two events in recent days which triggered me to write post on this subject. First, last week The Economist published the article about auditing in China. Second, the recent decision of European Court of Human Rights (ECHR) regarding the Yukos vs. Russia case.

The article in The Economist considers the issue which happened between Deloitte and Longtop, a Chinese company once listed in NYSE. Here is remarkable abstract:

     “… After signing off Longtop’s financial statements for several years, the firm smelled trouble during its audit for the financial year that ended in March. Its subsequent questions did not go down well at Longtop, which seized some of Deloitte’s papers and threatened to keep Deloitte staff from leaving company premises. Deloitte quit as auditor, and Longtop’s shares ended up being delisted from the New York Stock Exchange in August.”

Subsequently, SEC issued subpoena for Deloitte’s audit working papers in relation to Longtop. After Deloiite’s refusal to cooperate the PCAOB threatened to decertify its Chinese division.

Medvedev and Putin

Several features of the above case look like Yukos-PwC affair which I would like analyse in several following articles. Yukos-PwC matter is perfect case for audit, accounting, tax and business ethics studies. It is rather complicated and requires accurate consideration of all facts. I am going to cover audit related professional and ethical issues. In this post I will give brief overview of the issue.

Essence of Issue

Yukos was one of the largest Russian oil companies with successful growth strategy and was listed on the LSE. However the company eventually had to file for bankruptcy (2006) after the Russian Ministry of Taxation proved in court (in 2003) that Yukos’ tax evasion amounted around $28 billion. The hypotheses standing behind this case are as follows:

1.      Tax evasion. This is obvious: company tried to pay less taxes using illegal schemes;

2.  Politically motivated expropriation of the company. The major shareholders and top-managers of Yukos, Mr. Khodorkovsky and Mr. Lebedev, were arrested in 2003 with criminal charges including tax evasion, fraud, forgery and embezzlement of assets. Meanwhile it is believed that Khodorkovsky and Lebedev had political ambitions and tried to influence state parliament by financing both left-wing and right-wing parties. Eventually, Mr. Putin being the president of Russia (now prime minister) decided to punish these independent oligarchs.

Khodorkovsky and Lebedev

The issue is that both hypotheses might be truthful partially. The fact is that similar tax evasion models were used at those time (and now used also) by almost all oil and gas companies in Russia and the only company which carried its part of punishment was Yukos. Nevertheless, I do not want to focus on this dispute, I am interested in the role of auditors in all this mess and here they come…  

Involvement of the Russian PwC firm

Unfortunately, PwC was an auditor of Yukos, acted as advisor on tax strategy, worked closely with Kodorkovsky on financial and accounting issues. After years of cooperation with client, PwC decided to withdraw its audit opinions in 2007 issued in respect of Yukos consolidated financial statements for 10 years from 1995 to 2004!

The Russian PwC office claimed that during tax investigation the prosecutors revealed new facts, which managers of Yukos misrepresented during previous audits. So what facts were revealed? The level of cooperation with client on tax issues was so close that there are significant doubts about this?

The other peculiar matter is that PwC-Cyprus has not withdrawn its audit opinions in respect of Yukos Cuprus subsidiaries.

Third, there are beliefs that Russian PwC was a coerced into opinion revocation by the Russian authorities.

Questions

Finally, based on the above overview I would like to raise following questions in my further blog posts:

·      What were the audit evidences, which had dramatic impact on PwC’s opinion?

·      Could Yukos case raise the same concerns of PCAOB about reliability of the Russian PwC audit working papers as in case Deloitte-Longtop affair?

·      Might the significant share of audit fees incoming from state owned giant company, Gazprom, somehow impact PwC’s decision?

·      What are ethical stances behind PwC deed?

The specialists, blogers who would like to contribute to the discussion of this issue and probably post their own article in “Audit is Cool” blog are welcomed (please send me message) or you can just leave your comment.

PS: Funny Reality

Here is the real phrase from Russian court ruling on the second case against Khodorkovsky and Lebedev (p. 613):

“… Khodorkovsky and Lebedev kept two sets of financial accounts (reporting per Russian Accounting Principles and US GAAP) and concealed from shareholders consolidated financial reports, by publishing them only in English language…”

This funny words were noticed by my friend in Livejournal, tema57 J

Sources:

The Economist. 2011. Auditing in China.September 17

The Wall Street Journal.2010. Oil Tycoon Says PWC Caved to Pressure. September 7

Financial Times.2010. Russia:Chain retraction. September 6.

Khodorkovky and Lebedev Communication Center:

·       http://www.khodorkovskycenter.com

·       http://www.khodorkovsky.ru/

Q&A from the defense team on the PwC investigation - A Q&A with the defense team inrelation to PwC's withdrawal of 10 years of its YUKOS audits

ECHR. 2011. Case of OAO neftyanaya kompaniya Yukos v. Russia. Applicationno. 14902/04

Second Case Ruling Khodorkovsky and Lebedev.2010