The Board published a briefing paper highlighting the more significant requirements in the proposed auditing standard and related amendments.(1) Since there are important differences between prior published procedures relating to audit documentation, it is important for financial professionals to understand these new rules, and, if appropriate, send in their comments to the Securities and Exchange Commission by January 10, 2004.
 
The briefing paper focuses on audit documentation, which is the principal record of the basis for the conclusions in the auditor's report.  The Board's proposed standard, which sets a totally new requirement, establishes the general requirements for the appropriate documentation for the auditor to prepare and retain in connection with any engagement conducted in accordance with audit data and related practice standards. 

The proposed standard:

• Instructs that the documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the work that was performed, who performed it, when it was completed and conclusions reached. This requirement ties into the new Sarbanes-Oxley Act requirement that at least one member of the audit committee have the requisite accounting background to understand an audit and its procedures. 
  
  
• Creates a rebuttable presumption that corporate documentation must exist to establish the fact that the particular audit work was performed. The documentation should also include information that the auditor has identified relating to significant findings or issues that are inconsistent with or contradict the auditor's final conclusions. 
  
  
• Requires that back-up documentation be assembled within 45 days after the public release of the auditors' report. This type of substantiation documentation should be prepared in connection with a properly conducted audit. (The question then arises, why is the Board giving the auditor up to 45 days after the audit is completed and publicized to prepare all of the written documentation to support its final conclusions?)
  
  
• Contains a requirement that any changes to the working papers after the completion of the engagement be documented without deleting or discarding the original documents. This documentation must also indicate the date the information was edited, by whom it was added and the reason for adding it. This proposal is focusing on correcting the potential abuses that could result from altering the underlying working papers of the auditor.
  
  
• Focuses on the required audit documentation and disclosure if there is more than one accounting firm participating in the audit. The documentation requirements apply to accounting work and audit documentation performed by other firms working under the certifying firm's umbrella. Alternatively, the certifying firm can prepare and retain the documentation of the work performed by other firms as part of the review of such work, so long as the documentation complies with the requirements of this proposed standard. 
  
  
  • If there are other firms involved in auditing subsidiaries or affiliates, then the certifying auditor for the parent has two choices. It can either assume responsibility, or not. If it assumes responsibility, then it does not have to refer to the other firm(s) in its report. If it does not want to assume full responsibility, then the lead audit firm must indicate the division of responsibility between the principal auditor and the other auditor(s) in expressing an opinion on the consolidated financial statements. The underlying purpose of clarifying responsibility is to ensure that when the work is divided up among more than one firm, but only one firm is disclosed in the audit letter, adequate audit review and documentation of the work performed by the other auditor(s) is prepared and retained.
    

These new proposed rules must be read in context of the other requirements of the Sarbanes-Oxley Act, in general, and the mandate to the Board, in particular. In addition, it seeks to close up certain loopholes that were utilized by unscrupulous executives and financial professionals to manipulate the financial statements of publicly traded companies.

At the same time, this proposal can be viewed as nothing more than a formalized statement of proper auditing procedures, which obviously includes preparing and retaining the appropriate audit documentation to support each of the items of the publicly reported financial statements, and, where appropriate, findings or issues that may be inconsistent with a conclusion.

(1)  [Current Binder] CCH Fed. Sec. L. Rep. 87,114.

CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Mr. Hecht would appreciate any input on subject matters within the SEC accounting area that you believe would be appropriate for a future article.