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Is the PCAOB Turning Back Towards AS2?

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One of the most controversial parts of the Sarbanes-Oxley Act was section 404(b), which required audits of internal controls over financial reporting. The 404 audits were conducted pursuant to the Public Company Accounting Oversight Board's Auditing Standard No. 2. Guided by this standard, auditors began a lucrative practice of auditing companies' internal controls with a bottom-up, check-the-box approach. Companies objected that the approach cost far more than regulators had anticipated--enough to make some public companies rethink their decision to go public. In 2007, a reluctant PCAOB issued Auditing Standard No. 5 to replace the earlier standard. Its approach allowed auditors to use their judgment to focus on critical areas, rather than requiring them to conduct procedures just to say that they had. Yesterday, the PCAOB staff issued a lengthy practice alert directing auditors to be more thorough. The alert's issuance was prompted by the problems that the PCAOB has identified in its inspections of internal control audits. The length and relative inflexibility of the guidance suggest that companies may want to brace themselves for another upsurge in audit costs as auditors seek to prove themselves to the PCAOB.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.