Synopsis of Rule 3100
Rule 3100 deals with the follow-up of professional auditing standards set up by PCAOB for the registered public accounting firms. According to this Rule a registered public accounting firm has to follow professional accounting standards set up by the PCAOB, during their auditing processes. The auditing as well as accounting personnel needs to comply with PCAOB Standards in their dealing with issuers, and non issuers of financial statements. (Statement Regarding the Establishment of Auditing and Other Professional Standards, 2003).
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- Synopsis of Rule 3101: Rule 3101 was adopted by the PCAOB on June 9 2004. As per this Rule, auditors are subjected to the following prescriptions, which are intended to be formed with the intention of bringing uniformity in requirements of the auditing processes. The following requirements are envisaged under this Rule:
- Unconditional responsibility: Auditor is responsible to meet the requirements in circumstances. In case of default with discharge of responsibility it is treated as violation of relevant standard and Rule 3100.
- Presumptive mandatory responsibility: This provision imposes responsibility on the auditor to comply with requirements in Board Standards. In case he is not performing accordingly, he has to produce a Declaration Statement claiming the importance of alternative action followed by him, for fulfilling the objective standards. In case of default in discharging the responsibility related to this rule it will be treated as violation of the rule.
- Responsibility to consider: -By applying professional judgment in circumstances, the Auditor has to select suitable actions for ensuring the objectives of the standard.
Rule 3101 (a) (2) deals with presumptive mandatory responsibility of the auditor towards the demonstration of the effectiveness of alternative actions taken by him for fulfilling the objectives of the standard. He has to produce verifiable, objective and documentary evidence regarding the suitability of alternative action in the specified circumstances. The documentation requirement will provide integrity in audit report. By providing complete and relevant record of the audit process will support documentary evidence on the conclusion derived from audit. It increases the quality of the audit process. It will ensure follow –up of professional standards of the audit process and in variation it can justify.
As per Rule 3101 (a) (2) of the PCAOB Standards, Auditor has to follow absolute and broad audit documentation in working papers in case he is not following the expected mandatory responsibility. Rule 3101(C) prescribes the effective date for the documentation requirements. Though this auditors get responsible time for submitting the documents. (Public Company Accounting Oversight Board, 2004).
2008 proposed and adopted Auditing standards
The Board proposes to amend the auditing standards with seven new auditing standards. The new proposed standards are “Audit risk and materiality, audit planning, and supervision, consideration of internal control, Audit evidence and performing tests of accounts and disclosures before year end.” (Proposed and Adopted Standards and Related Rules, 2008).
Proposed Auditing standards: As per Sec 103 of the Sarbanes-Oxley Act of 2002, PCAOB has to include the following requirements in its auditing standards – Review and approval of the audit report by a concurring or second partner together with approval of an independent reviewer.
Adopted standards are discussed below:
- Auditing standards no.1: Auditors report has to contain references with regard to standards of the PCAOB board.
- Auditor Standards no.2: Together with audit of financial statements, financial reporting should also subject to an internal control audit.
- Auditing standard no.3: It deals with audit documentation.
- Auditing standards no.4: It deals with reporting on the continuance of the weakness of the previous report on the new report.
- Auditing standards no.5: Integration of the Auditing of internal control and financial reporting with the audit of financial statements.
- Auditing standards no.6: This rule deals with evaluation of the financial statements for identifying its consistency. (Standards and Related Rules, 2008).
Sampling of Articles of SEC relaxing Rule 404 for small businesses
As per Sec 404 of the Sarbanes Oxley Act, internal and external audit attestations have to be required by business firms. The report shows that it costs $ 500,000 a year for firms and it is expected to increase in future. From the point of view of Wall Street experts’ Sec. 404 is badly influencing the capital markets. In 2005, out of 24 firms which plan to acquiring finance of more than $1bn from the global capital markets, 23 were not interested in US market. They are not ready to register as US firms because they view the SOX’s restrictions and requirements will act as barriers in their regular business operations. New Yorker magazines explore that most of the large scale firms in the global industry are not in interested to register as a US firm. Small public firms having capital of less than $ 75million will be badly affected organize. (Galuszka, 2008).
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The review of information on the Sarbanes-Oxley Act reveals that it the existing provisions are capable of establishing quality and reliability in auditing process of public firms. But it imposes further financial burden on small business firms. Thus together with keeping the auditing standards, it needs some relaxations on its provisions, especially for smaller firms.
Setting up of PCCAOB (Public Company Accounting Oversight Board) is for establishing auditing and other professional standards in the working of the Auditors of registered public accounting firms. According to AICPA, the significant responsibility of PCAOB will be helpful for re-establishing the confidence of the public in audited financial statements of the public enterprises. By establishing highly standardized auditing in the public firm will be helpful for ensuring regular working of the enterprise together with meeting its objectives. High quality auditing standards will reduce the harmful acts of public firm’s personnel. It also supports clarity in the working of the auditors as they are required to keep documents showing their programs. It also provides greater transparency in the process of PCAOB which is essential for the successful launching of the new regulations. The board is required to establish adequate transparency and public participation in the standard setting process.
The PCAOB is in the introduction stage. It needs further development in its standards setting process. It has to modify the standard setting with some flexible options. (Proposed Auditing Standard – Engagement Quality Review and Conforming Amendment to the Board’s Interim Quality Control Standards, 2008).
The provisions in the PCAOB’s auditing standards are not taking into consideration actual need of the users of the financial statements. They only take in to account the audit of issuers of auditing of firms in the US capital markets. These auditing standards are not significant or appropriate for audits of non issuers. The standard setting process would have to take all possible users of the financial statements. Thus only the goals of such enhancement in standards can be met. Efficient and accurate working of business enterprise can be ensured with quality auditing programs.
Future direction of the PCAOB’s pronouncements
From the analysis of the different aspects of the Sarbanes –Oxley Act and its impact on the U.S. capital market, it is derived that in future the PCAOB pronouncements will be relaxed to reduce financial burdens arises from existing regulations on business enterprises.
For complying with new regulations, Business enterprises are required to follow financial restatements. The cases of financial restatements by firms have increased and this shows that the new regulation provides advantages to investors to get better financial information about enterprises in which they have invested or are proposing to invest.
The financial restatement of U.S. public companies for correcting accounting errors has increased at a compound annual rate of 27% between 1993 and 2005. This may be due to simple accounting errors. As per the sections of Sarbanes –Oxley Act, Public companies have to hire the services of independent Auditors for testing the efficiencies of preparing internal reports as well as external financial statements. Along with this, top management has to review the reliability of their internal reporting system in meeting the objectives of the Act and to submit report on this together with copies of their Annual Reports. This ensures reliability of financial statements. But in case of smaller firms, the new regulation imposes a higher degree of financial burden.
For employing effective internal control system in the organization, there is need for reasonably qualified and well experienced accounting and auditing personnel.
In order to reduce financial overburden of smaller firms resulting from the introduction of provisions in the SOX Act, we can expect relaxations in provisions of appointment of independent internal auditor as well as internal control personnel. Relaxation on requirements of Auditor related to documentation can also be expected as it is seen that this increases the unnecessary documentation burden of the Auditor.
By prescribing the Auditors to produce documentary evidence clarifying the suitability of alternative action adopted by Auditors in special circumstances, will help to promote discipline of thought in the organization together with a uniform base for the evaluation of compliance with the standards. But there is also conflicting opinion regarding the documentation requirements will result in documentation burden to the auditors. Sometimes the documentation seems to be less significant value in auditing process.
- Statement Regarding the Establishment of Auditing and Other Professional Standards. (2003). AICPA.
- Public Company Accounting Oversight Board; Notice of Filling of Proposed Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standard. (2004). U.S. Securities and Exchange Commission. Web.
- Proposed and Adopted Standards and Related Rules: Proposed: Proposed Auditing Standards — Auditor’s Assessment of and Response to Risk. (2008). PCAOB Public Company Accounting Oversight Board.
- Standard and Related Rules. (2008). PCAOB Public Company Accounting Oversight Board.
- Galuszka, Peter. (2008). Sarbanes- Oxley in Retrospect: Fear and Loathing. BNET. Web.
- Proposed Auditing Standard – Engagement Quality Review and Conforming Amendment to the Board’s Interim Quality Control Standards.(2008). PCAOB Public Company Accounting Oversight Board.