AS2: when the pedal hits the metal; Although the costs and opportunity cost of the PCAOB's new audit standard are substantial, Financial Executives Research Foundation (FERF) finds that financial executives also view it as an opportunity to reinvigorate and reinforce the importance of internal controls.

• Author: Orenstein, Edith G.
• Position: Audit Standards - Public Company Accounting Oversight Board

In March, the Public Company Accounting Oversight Board (PCAOB) issued what may go down in history as one of the most significant auditing standards of all time: PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements (AS2). (PCAOB standards are subject to approval by the Securities and Exchange Commission, and as this article went to press, the SEC had not yet approved or disapproved AS2.)

The impact of the second auditing standard issued by PCAOB since its inception last year will be strongly felt--not only in the process and methodologies of public accounting firms, but also, in the corridors of corporate America, as managements look for the most efficient and effective way to implement the new standard.

Under AS2, the auditor will be required to provide two new audit opinions: one on management's assessment of the effectiveness of internal control over financial reporting, and one on the effectiveness of internal control over financial reporting itself.

In driving the implementation process, some believe the detailed requirements of AS2--combined with a flood of other rules and standards arising from The Sarbanes-Oxley Act, and competing so strongly for management's attention--can make it difficult to see the road ahead. Financial Executives Research Foundation (FERF) sought the early views of some leading financial executives closely involved in analyzing and implementing AS2 for their assessment of the standard and its anticipated impact.

How Much Will it Cost?

As detailed in the March/April 2004 issue of Financial Executive (page 76), a survey conducted by Financial Executives International (FEI) found that implementation of standards resulting from Section 404 of Sarbanes-Oxley, such as AS2, are estimated to cost the largest U.S. companies over $4.6 million each, and are expected to require companies to spend, on average, an additional $732,100 for external services other than the external auditors fee, plus over $592,100 (an average 38 percent increase) in audit fees. Some executives talk of receiving estimates from their auditors for fees rising by multiples of their current fee.

Jim Campbell, corporate controller of Intel Corp., is concerned with the cost/benefit of AS2. "We think the original intent of The Sarbanes-Oxley Act was pretty straightforward and focused on management accountability. Management was to acknowledge its...