Home > Uncategorized > PCAOB’s Emerging Market Alert – A Helpful Review Of Auditor Requirements, But Not An Audit Committee Or Board Standard, Of Course

PCAOB’s Emerging Market Alert – A Helpful Review Of Auditor Requirements, But Not An Audit Committee Or Board Standard, Of Course

The Public Company Accounting Oversight Board’s recently issued twenty-two page Staff Audit Practice Alert No. 8 (Click Here) for audits of companies with operations in emerging markets offers a good summary of the standards that require auditors to test for and detect fraud during the performance of their audits.  But I am more interested in the Board’s Alert announcement (Click Here) which in part states “’While this practice alert is for auditors, it also is a good reminder to investors and audit committees of the heightened fraud risk found in some emerging market companies that trade on U.S. exchanges, especially those in countries where the PCAOB is blocked from conducting inspections of auditors’ work,” said PCAOB Chairman James R. Doty.’”  For the most part the Alert discusses fraud, internal control and governance problems with some companies and business cultures that operate in Asian markets (particularly the People’s Republic of China), and the audits of those companies.  Of course, by the time that an Alert is published, I must assume that auditors were already aware of those issues or problems, and they should already be addressing them.  Of more interest, it is not certain what an audit committee or board should do about the Alert, if anything, or even whether a particular audit committee or board will or should become aware of the Alert.  Certainly an audit committee or board must perform due diligence to retain qualified outside auditors, and should also discuss and explore with the auditor tests, findings and issues relating to fraud, internal control and governance.  Likewise, the outside auditor must discuss and explore those matters with the audit committee or board, and the board and the audit committee as a sub-committee of the board also have a due diligence oversight responsibility in those areas.  I would not, however, expect a board or audit committee member to study the Alert.

But we seem to have entered into a new paradigm wherein executive officers (CEOs and CFOs) and boards and their committees can face increased risks, penalties and public relations damage when something goes wrong even without personal fault.  For example, those increased risks are evidenced such as by some of the legal actions involving the banking and healthcare industries, the SOX Section 304 clawback, and mounting public discourse by some people who find it to their benefit to demonize supposed and sometimes vague or contrived categorizes or classes of people without actually establishing the propriety of the referenced category or class, or wrongdoing or personal fault by people who might fall within that category or class.  So, with that environment in mind, while the PCAOB’s Alert is a helpful summary of existing auditor requirements, it should also be acknowledged that the Alert does not create and should not be used as a standard of care or conduct for audit committees or boards.

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