1. Setting Auditing Standards In The New Accounting Environment Panel Session Comments of Gary Holstrum Panel Session Comments of Gary Holstrum Professor, University of South Florida Professor, University of South Florida Consultant, Office of the Chief Auditor, PCAOB Consultant, Office of the Chief Auditor, PCAOB Mid-Year Auditing Section MeetingJanuary 17, 2004 Mid-Year Auditing Section MeetingJanuary 17, 2004

2. I.Introduction A.We were asked to comment on A.We were asked to comment on the future role, the future role, plans, plans, challenges and areas of concern, challenges and areas of concern, interaction with other auditing standard- setting groups (ASB and IAASB). interaction with other auditing standard- setting groups (ASB and IAASB). B.Caveat B.Caveat These are my own ideas, not necessarily those of the PCAOB or of the Office of the Chief Auditor. These are my own ideas, not necessarily those of the PCAOB or of the Office of the Chief Auditor. Ethics code requires confidentiality. Ethics code requires confidentiality.

3. II.Future role Mandated by Sarbanes-Oxley Mandated by Sarbanes-Oxley Establish all standards for auditing, quality control, ethics and independence for audits of public companies Establish all standards for auditing, quality control, ethics and independence for audits of public companies Standards must also be approved by the SEC Standards must also be approved by the SEC Require registration and inspections Require registration and inspections Conduct investigations and take appropriate enforcement action, when warranted Conduct investigations and take appropriate enforcement action, when warranted

4. III.Personal observations Difference between my experiences on the ASB and at the PCAOB (Caution: This is NOT at all the official or unofficial position of the PCAOB) Personal Anecdote: Personal Anecdote: Both groups have a concern for cost- effectiveness and balance as they see it Both groups have a concern for cost- effectiveness and balance as they see it

5. What would happen if the public indicated it wanted more demanding auditing standards, even if it raised the cost of audits? ASB pressures ASB pressures Strong concern to limit legal liability Strong concern to limit legal liability Management tends to blame them if they raise audit standards that warrant increased audit fees. Management tends to blame them if they raise audit standards that warrant increased audit fees. PCAOB--Ultimate mandate to consider the public interest PCAOB--Ultimate mandate to consider the public interest

6. IV.Actions and plans of the PCAOB (See www.pcaobus.org) A.Actions already taken A.Actions already taken Interim standards Interim standards SEC has approved* SEC has approved* Language of the auditors report Language of the auditors report In process for SEC approval In process for SEC approval B.Proposals B.Proposals Audit documentation Audit documentation Audits of internal control over financial reporting Audits of internal control over financial reporting

7. C.Future standards Communication with audit committees Communication with audit committees Concurring or second partner review Engagement quality reviews Concurring or second partner review Engagement quality reviews Quality control Quality control Review of existing standards Review of existing standards

8. V.PCAOB Communication and Interaction with IAASB and ASB This is more a matter of communication and interaction than coordination. This is more a matter of communication and interaction than coordination. IAASBPCAOB has been granted permanent observer status on the IAASB, with privilege of the floor, and without a vote. IAASBPCAOB has been granted permanent observer status on the IAASB, with privilege of the floor, and without a vote.

9. B.ASBThere is no formal working relationship at present 1.Both sides appear to be cautious to recognize the legitimate areas of interest of the other 1.Both sides appear to be cautious to recognize the legitimate areas of interest of the other 2.The issue of AICPA copyrights on existing standards is currently being worked out. 2.The issue of AICPA copyrights on existing standards is currently being worked out. What should be the policy regarding free public access to standards for a group that purports to issue standards in the public interest? What should be the policy regarding free public access to standards for a group that purports to issue standards in the public interest?

10. Should there be two sets (or multiple sets) of auditing standards? In a free marketplace, would higher (stronger) standards prevail over lower (weaker) standards? In a free marketplace, would higher (stronger) standards prevail over lower (weaker) standards?

11. VI. Key Challenge:maintaining appropriate Balance Balancing rational public expectations with what the auditor can meaningfully and reasonably deliver. Balancing rational public expectations with what the auditor can meaningfully and reasonably deliver. Avoid conflicts of interest and set standards in the public interest. Avoid conflicts of interest and set standards in the public interest.

12. Key Challenge: Finding the proper cost- effectiveness mix from a societal view What is the optimal level of societal resources to invest in the function of audits of public companies? What is the optimal level of societal resources to invest in the function of audits of public companies? What standards and mechanisms of auditor accountability bring about the best deployment of those resources? What standards and mechanisms of auditor accountability bring about the best deployment of those resources?

13. To accomplish this, the PCAOB needs to meet the challenges in two areas: listening and acting. 1.Challenge of listening 1.Challenge of listening Must listen openly and attentively …to Must listen openly and attentively …to a)Investing public a)Investing public b)Issuers b)Issuers c)Auditors c)Auditors 2.Challenge of acting 2.Challenge of acting Must act independently and decisively Must act independently and decisively

14. I believe the PCAOB has set the proper tone Consistent message throughout the PCAOB Consistent message throughout the PCAOB Chairman McDonough Chairman McDonough Individual members of the Board Individual members of the Board Chief Auditor, Doug Carmichael Chief Auditor, Doug Carmichael Deputy Chief Auditor, Tom Ray Deputy Chief Auditor, Tom Ray Entire staffhighly dedicated and professional Entire staffhighly dedicated and professional

15. PCAOB Goal: Restoring confidence in the auditing function through meeting rational expectations