A6/M8 Ethical Requirements of the SEC and PCAOB

Question 1

what is PCAOB (SOX Title I)?

Answer 1

• audit the auditors
• consist of 5 members: 2 CPA and 3 non-cpa
• objective:
  + register public accounting firms that prepare report for issuers
  + establish rules relating to the preparation of audit reports
  + conduct inspections, investigations, and disciplinary proceedings
• must conduct annual inspections of cpa firms that audit for >100 issuers
• must conduct every 3 years inspection of cpa firms that audit for 100 or less issuers
• established by Sarbanes-Oxley Act of 2002

Question 2

what standards should each registered firm must follow?

Answer 2

• audit docs must be kept for 7 years
• provide concurring or 2nd partner review for each audit report
• describe in audit reports the scope of the testing of client’s IC

Question 3

what are the penalties/sanctions of PCAOB to violated cpa firms?

Answer 3

• temporary suspension or permanent revocation of audit firm registrations with PCAOB
• bar of a person
• limit on activities or functions of a firm or a person
• civil monetary penalties of no more than $750k for individuals and $15M for registered firms. other penalties could be up to $100k for a person and $2M for registered firm
• censure
• require professional education and training
• any other PCAOB approved sanction

Question 4

what is SOX Title II (independence)?

Answer 4

auditor’s independence will be impaired by the following services?
- bookkeeping
- financial information system design and implementation
- appraisal and valuation services
- actuarial services
- management functions or human resources services
- internal audit outsourcing services
- services as broker, dealer, investment adviser, or investment banker
- legal services
- expert services unrelated to the audit

Note: tax services are permissible if preapproved by the audit committee such as doing corp. tax return service is not permitted for officers and their family members

Question 5

what are the requirements for audit partners?

Answer 5

• lead audit partner and concurring partner of the engagement team must rotate the audit every 5 year. other partners rotate after 7 years
• lead audit partner and concurring partner of the engagement team are subject to 5 year time out period. other partners are subject to 2 years “time-out” period.
• smaller cpa firms that have fewer than 10 partners may be exempted from this

note: auditor is required to have 1 year cool off before starting their employment with client or vice versa

Question 6

what is SOC Title III, section 303 (improper influence on conduct of audits)?

Answer 6

it is unlawful for client’s management person to fraudulently influence, coerce, manipulate, or mislead any independent cpa

Question 7

what are the tax services permitted and not permitted by PCAOB?

Answer 7

Permitted: tax compliance, tax planning, and tax advice

No permitted: confidential or aggressive tax transactions and tax services to client officers, and their families

auditor is allowed to provide tax services to individuals on board of directors and on audit committee