PANEL BACKGROUND

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PRESS RELEASES

September 9, 2000 - Panel on Audit Effectiveness Releases Final Report

June 6, 2000 - Panel on Audit Effectiveness Releases Exposure Draft

PANEL ON AUDIT EFFECTIVENESS RELEASES EXPOSURE DRAFT

NEW YORK, NY, June 6, 2000 - Today the Panel on Audit Effectiveness released an Exposure Draft of its Report and Recommendations, available on the Panel's website, www.pobauditpanel.org, at 3:00 PM today. The Panel's recommendations are addressed to many constituencies: the Securities and Exchange Commission (SEC), standards-setters, firms, the American Institute of CPAs, corporate audit committees and others.

At the request of SEC Chairman Arthur Levitt, the Public Oversight Board (POB) appointed a Panel of eight members in 1998, charging it to thoroughly examine the current audit model. The Panel and its staff completed a comprehensive review and evaluation of the way independent audits are performed and assessed the effects of recent trends in auditing on the public interest.

The result of this evaluation is the Report and Recommendations being released today. The Report¹s goal is to foster effective audits that improve the reliability of financial statements, enhance their credibility, contribute to investors' confidence in the profession, and improve the efficiency of the capital markets. Implementation will require the efforts, support and cooperation of the profession, various standard-setting and oversight bodies and the SEC.

"I would like to emphasize that, while many specific recommendations are made for improvements in the conduct of audits and the governance of the profession, our report demonstrates that both the profession and the quality of its audits are fundamentally sound," said Shaun F. O'Malley, Chair, Panel on Audit Effectiveness. "The Panel is satisfied that the model underpinning financial-statement audits generally is appropriate, although in need of updating, enhancing and implementing more consistently."

"The Panel's perspective, however, is that, even in the face of strengthened auditing standards in recent years, the audit firms may have reduced the scope of their audits and level of testing, at least in part, as a result of redesigning their audit methodologies. The Panel is concerned that the auditing profession has not kept pace with a rapidly changing environment, and that the profession needs to address vigorously the issue of fraudulent financial reporting, including fraud in the form of illegitimate earnings management."

Among the Panel's major recommendations are:

• Auditors should perform some "forensic-type" procedures on every audit to enhance the prospects of detecting material financial statement fraud.
• The Auditing Standards Board should make auditing and quality control standards more specific and definitive; in certain specified areas, audit firms should review, and where appropriate, enhance their audit methodologies, guidance, and training materials; and peer reviewers should "close the loop" by reviewing those materials and their implementation on audit engagements and then report their findings.
• Audit firms should put more emphasis on the performance of high quality audits in communications from top management, performance evaluations, training, and compensation and promotion decisions.
• The POB, the AICPA, the SECPS, and the SEC should agree on a unified system of governance under a strengthened, independent POB that oversees standards setting (for auditing, independence, and quality control), monitoring, discipline, and special reviews.
• A majority of the members of the Independence Standards Board (ISB) should be from outside the profession, and the SEC should encourage and support the ISB to carry out its mission.
• The SECPS should strengthen the peer review process, including requiring annual reviews of the largest firms, and the POB should increase its oversight of those reviews.
• The SECPS should strengthen its disciplinary process.
• Audit committees should pre-approve non-audit services that exceed a threshold amount, and should consider certain specified factors when doing so. The ISB should identify the factors.
• The International Federation of Accountants should establish an international self-regulatory system for the auditing profession.

"The report contains strong, bold recommendations to improve the quality of audits and make them more penetrating, to hopefully reduce the incidence of undetected fraud," said O¹Malley. "I also believe the recommendations should result in a unified system of governance under a strengthened POB."

The members of the Panel were drawn from industry, public practice and academia and include two former SEC Commissioners. Chairing the Panel is Shaun F. O¹Malley, former Chairman of Price Waterhouse LLP. The other members are:

• Dennis H. Chookaszian, Chairman, Executive Committee, CNA Financial and Chairman and CEO, mPower
• Paul Kolton, Chairman, Steering Committee, FASB Business Reporting Research Project and former Chairman and CEO of the American Stock Exchange
• Bevis Longstreth, Counsel to Debevoise & Plimpton and former Commissioner of the SEC
• Louis Lowenstein, Simon H. Rifkind Professor Emeritus of Finance and Law, Columbia University
• Zoe-Vonna Palmrose, PricewaterhouseCoopers Professor of Auditing, University of Southern California
• Aulana L. Peters, Partner of Gibson, Dunn & Crutcher and former Commissioner of the SEC
• Ralph S. Saul, former Chairman of the Board of CIGNA Corporation

The Public Oversight Board is an independent private sector body that oversees the self-regulatory programs of the SEC Practice Section of the American Institute of Certified Public Accountants.

© 2002 Public Oversight Board