A Brief History of Self-Regulation
In the modern financial era, self-regulation by the accounting profession can be traced to just after the Securities and Exchange Commission (SEC) was established by the Securities Act of 1933 and the Securities Exchange Act of 1934. These new laws were passed by Congress in response to the vast sums lost by investors in the stock market crash of 1929 and the subsequent financial depression.
At the outset, there were serious discussions in Washington about whether the federal government should establish standards for preparing and auditing financial statements of publicly held companies. The SEC was given statutory authority to set accounting standards and oversight over the activities of auditors. The role of establishing auditing standards was left to the accounting profession.
The AICPAs predecessor organization, the American Institute of Accountants, authorized the appointment of a standing committee on auditing procedure which issued the first auditing standards in 1939. Two years later, it released a series of statements designed to guide the independent auditor. In 1951, the committee consolidated the first twenty-four of these pronouncements, and in 1972 it codified all previous rules into a single presentation. The name of the committee was also changed in 1972 to the Auditing Standard Executive Committee (AudSEC) in recognition of its role as the AICPAs senior technical committee charged with interpreting generally accepted auditing standards (GAAS.)
In 1978, the Auditing Standards Board (ASB) was formed as AudSECs successor. The ASB is now the entity within the AICPA that sets the ground rules for how an auditor determines whether the information reported in a financial statement is reasonable and whether it conforms with generally accepted accounting principles (GAAP). It has 15 members, and as a senior technical committee it is authorized to make public statements without clearance from the AICPA Council or Board of Directors. As a practical matter, before promulgating auditing standards, the ASB carefully considers the views of the SECs Chief Accountant, as well as the views of many others invited to comment on the proposals.
In recognition of the expertise and resources of the accounting profession, the SEC has historically looked to private-sector standards-setting bodies to provide leadership in establishing and improving accounting principles and reporting standards. Between 1938 and 1959, the AICPAs Committee on Accounting Procedure (CAP) issued fifty-one authoritative pronouncements known as Accounting Research Bulletins that formed the basis of what became known as generally accepted accounting principles, or GAAP. In 1959, the CAP was replaced by another part-time body, the Accounting Principles Board (APB), which during the next fourteen years issued thirty-one new standards.
By the late 1960s, there was a growing recognition that in an increasingly complex business environment a part-time committee did not have the resources necessary to develop high-quality standards in a timely manner. It was also determined that a more independent body was needed to make investors, creditors, and preparers all part of the process. As a result, in 1972 primary responsibility for setting accounting standards was moved from the AICPA to a full-time independent body called the Financial Accounting Standards Board (FASB), which today sets the ground rules for measuring, reporting, and disclosing information in financial statements of non-governmental entities. These accounting standards cover a wide range of topics everything from broad concepts such as revenue and income recognition, to more specific rules such as how to report information about the company's different businesses. The FASBs accounting standards are officially recognized as authoritative by the SEC. The AICPA, through its Accounting Standards Executive Committee (AcSEC) works with the FASB in a collaborative process, based on common objectives, to issue authoritative guidance that supplements the work of the FASB
The method of appointing the members of the FASB is aimed at maintaining an infrastructure that ensures the standard-setting body of its independence while still keeping it within the private sector. It operates under the auspices of the Financial Accounting Foundation (FAF), which consists of sixteen trustees, twelve of whom are elected by representatives of FAFs sponsoring organizations -- the AICPA, the American Accounting Association; the Financial Executive Institute; the Securities Industry Association; the National Association of State Auditors, Controllers and Treasurers; the Institute of Management Accountants; and the Government Finance Officers Association. The other four at-large members are appointed by the FAF itself. The FAF, in turn, appoints the members of the FASB and its advisory council. It is also responsible for funding the FASB.
Peer review has been a mainstay at the largest firms since at least the early 1960s as a means for accounting firms to enhance audit quality. It was first introduced as a requirement by the AICPA in 1977, with the establishment of the division for CPA firms. Membership was voluntary, but those firms which chose to join the division agreed to follow certain standards, including peer review every three years.
These requirements were made mandatory as part of a package of sweeping changes to the professions self-regulatory structure enacted by the AICPA in a 1989 membership vote. As part of this Plan to Restructure Professional Standards, the AICPAs bylaws were changed so that all members who audit publicly-held companies are required to work for a firm that belongs to the AICPAs SEC Practice Section (SECPS).
One of the requirements of SECPS membership is a review every three years by another accounting firm of comparable size. The purpose of the SECPS peer review program is to provide assurance to the public that a firm performing auditing and accounting services for SEC registrants has an effective quality control system that provides reasonable assurance that its auditors and accountants are complying with general accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). Peer reviews are aimed at evaluating quality control by testing compliance of a sample of the firms auditing and accounting engagements.
The results of the most recent peer review for firms that audit SEC registrants are made available to the public. Each public file includes the firms peer review report and, if applicable, a comment letter identifying matters for improvement, the firm's response to such a letter, and a description of any follow-up action deemed necessary by the SECPS.
In addition to the peer review program administered by the SECPS for firms that audit SEC registrants, a peer review program for firms that perform auditing and accounting services for non-SEC registrants is administered by state CPA organizations. Like peer review for SECPS members, it is also overseen by the AICPAs Peer Review Board.
Oversight Board (POB)
The Public Oversight Board (POB) was created in 1977 and oversees the peer review and quality control inquiry processes of the SECPS, as well as the SECPS other activities and the Auditing Standards Board. The POB has maintained its independence from both the profession and the regulatory process by being self-perpetuating. Although funded by SECPS member firm dues, the POB elects its own board members, hires its own staff, and sets its own budget without challenge from the SECPS.
POB staff members participate in field reviews of all firms with 30 or more SEC audit clients, as well as a sampling of about one of every five reviews of firms with less than 30 SEC clients. As a further safeguard, SEC staff members randomly inspect a sample of peer review files. The POB also issues an annual report that makes public all of the POBs important actions from the previous year.
As a result of recent statements by the Chairman of the SEC concerning
proposed changes in the accounting professions system of self-regulation,
the members of the Public Oversight Board have announced their intention
to terminate the Boards existence no later than March 31, 2002.
Further details as they occur will be communicated to AICPA members
on State CPA Society and AICPA Web sites, and elsewhere.)
Rotation of Auditors and Concurring Review
Other SECPS membership requirements include rotation of audit partners and concurring review by a fellow partner. In any instance in which an audit partner within a firm that has five or more SEC clients and ten or more partners has been in charge of a SEC audit engagement for a period of seven consecutive years, a new audit partner must be assigned. The audit report and financial statements of publicly held companies are also subject to a concurring review by a partner other than the audit partner-in-charge of the engagement.
Control Inquiry Committee (QCIC)
The QCIC was established in 1979 to promptly investigate alleged audit deficiencies of a firms quality control systems and to provide reasonable assurance that firms are complying with professional standards by identifying corrective actions when appropriate. Each member firm of the SECPS must report to the QCIC any litigation or proceeding by a regulatory agency that alleges deficiencies in the conduct of an audit of a present or former SEC registrant client. All such reports must be made within 30 days.
QCIC investigations are normally completed within 5-6 months of the matter being reported. If the QCIC observes any deficiencies or weaknesses in the firm's system of quality control, it will require the firm to make immediate changes to those systems and may insist on an independent review to determine that new procedures have been put into place and are being applied effectively. Although the objective of a QCIC investigation is to determine whether there are firm-wide systemic problems, if in the course of its investigation it observes individual performance issues of the auditors involved, those matters are referred to the AICPAs Professional Ethics Division.
The AICPA also maintains a professional ethics division. The ethics team is responsible, through its independence and behavioral standards committees, for maintaining, interpreting and enforcing the AICPA Code of Professional Conduct and, when appropriate suggesting changes to the Code. The Division investigates any allegation of wrongdoing by members made by the public, federal or state regulatory bodies, other AICPA members, or the QCIC. The Division also initiates investigations if it becomes aware of allegations of wrongdoing through media reports or federal or state regulatory action.
The Professional Ethics Division has 25 professional and support staff and a number of committees of experts specifically established to enforce the AICPAs Code of Conduct. It is headed by the AICPA Professional Ethics Executive Committee (PEEC), 25% of which are public members who are not CPAs, but rather prominent men and women of integrity and impeccable reputation. In instances where it finds prima facie evidence of a violation, it assesses the severity of the violation and imposes one of several sanctions, including:
· The presentation of a hearing before a trial board, made up of 36 members from a broad range of specialties throughout the United States. The chair of the Trial Board appoints a five-member panel to hear each case.
· A private letter of required corrective action.
· Disciplinary actions which may include suspension or expulsion from the AICPA.
· The publishing by the AICPA of any determination of guilt or any settlement by the trial board so that it becomes public knowledge.
The Professional Ethics Division attempts to investigate matters promptly, but because the investigatory process is not protected from discovery in legal or regulatory actions, investigations are deferred while any litigation or regulatory investigation is pending. In order to mitigate such delays, beginning in 2001 the AICPA, through the SECPS, requires that, in exchange for a deferral of an investigation, a firm take one of three actions regarding the individual in charge of the engagement:
1. Terminate or retire the individual
2. Prohibit the individual from performing any further audits of SEC registrants until the PEEC concludes its investigation
3. Require a senior technical partner to monitor the work of the individual for a period of time to assure the quality of his or her work
Professional Education (CPE)
The AICPA has been involved in promoting CPE to its members since 1958. In 1981 the concept became a national priority after the Institute published a report called A Pathway to Excellence, which divided the Institutes CPE curriculum into six fields of study. The idea was that only after CPE programs were available in virtually every conceivable area in which CPAs worked would it be practical to make CPE mandatory for all AICPA members.
That set the stage for the provision within the Plan to Restructure Professional Standards that made CPE mandatory for all AICPA members effective January 1, 1990. In addition to these AICPA membership requirements, most states have their own CPE requirements which must be met in order for a CPA to retain his or her license.
In the 1990s the number of required CPE hours to comply with the AICPA membership required varied for those in public practice and those in industry. A subsequent amendment to the bylaws put in place our current requirement, effective January 1, 2001. For each three-year reporting period, all AICPA members must complete 120 hours or its equivalent, of continuing professional education. Compliance can be achieved either by a formal program of education or by any other means, however measured, that would be reasonably expected to maintain professional competencies in the member's area of practice or employment.
need to report compliance with such requirement to the AICPA each year
and must keep appropriate records and submit copies of such on request
of the Institute. Retired, unemployed and members who have temporarily
left the workplace are exempt from CPE. Members who place their license/certificate
on inactive status with their state board of accountancy and do not hold
themselves out as CPAs are exempt from the AICPA's CPE requirement as long
as their state board does not require CPE while on inactive status.
For the past sixty years, the accounting professions system of self-regulation has helped create the most respected financial markets in the world. This year it will result in almost 17,000 public company audits that will be completed without restatement or any allegations of impropriety. At the same time, the professions self-regulatory framework is now about 25 years old. Although it has been continually enhanced and improved since its inception, the profession recognizes that it needs to be overhauled and modernized.
SEC is now in the process of making its own proposals to create a new oversight
body made up of a majority of public members and operating outside the
AICPA. At the same time, the AICPA, Big Five, and the 1,200 firms
that are members of the SECPS are forging ahead on implementing improved
audit standards for detecting fraud and new measures for deterring fraud
such as expanded internal control procedures for management, boards, and
audit committees. Reforms also need to be made in the financial reporting
model, the analyst community, boards of directors and audit committees,
and in the corporate culture of companies."
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