Jury is out on impact of AS5: while hopes are high that Auditing Standard 5 will sharply reduce audit costs, no one knows for sure. And success at multinational giants won't necessarily carry over to smaller companies.

• Author: Barlas, Stephen
• Position: AUDIT - Auditing Standard No. 5

The corporate financial reporting world is holdings its collective breath as companies begin to talk to their auditors about Auditing Standard 5 (AS5), the tool that is supposed to whittle down excessive Sarbanes-Oxley auditing costs. The Public Company Accounting Oversight Board (PCAOB) developed AS5 to replace the reviled Auditing Standard 2 (AS2), the very prescriptive standard that had guided outside auditors as they did their attestations of corporate evaluations of internal controls over financial reporting.

Companies and auditors alike had argued that AS2 forced companies to test too many insignificant controls for fear of having overlooked what the auditor, looking into each tiny crevice in each corner of the corporate books, would later deem important minutia during its attestation audit.

The transition to a "principles-based" AS5 for integrated audits conducted for fiscal years ending on or after Nov. 15, 2007, and the associated management guidance approved in July by the U.S. Securities and Exchange Commission (SEC), allows companies to break the chains of AS2 and, ideally, embrace the new "risk-based, top-down" approach ushered in with much ballyhooing by both the PCAOB and SEC. But no one really knows whether AS5 will actually lower Sarbanes-Oxley Section 404 auditing costs significantly. Hopes are high. Yet significant skepticism abounds, too.

Greg Starr, middle-market practice director, Accounting Management Solutions Inc., explains that AS5 enhances management's ability to rely on effective entity-level fraud prevention and computer controls. The auditor gains an enhanced ability to rely on the work of others and to include consideration of its previous experience with the client.

This new path leads down a road to what SEC Chief Accountant Conrad Hewitt describes as "tailoring and scaling of evaluations and audits according to the relevant facts and circumstances."

"While auditors and companies are still grappling with AS5, we are clearly moving in the right direction," Starr states. "Although true savings have yet to be seen, there is a strong indication the revised standard will have a positive impact both practically and economically."

Big Four auditors also sound a note of caution on costs. Craig Crawford, partner in charge of the audit group at the Department of Professional Practice at KPMG, says, "The standard is sound. It effectively achieves its stated objectives." But, he adds, "Professional audit fees are influenced by many variables, one of which is...