Please reply of at least 200 words to the discussion below.
Support your assertions with at least 2 scholarly citations in APA format.any sources cited must have been published within the last five years.
Case 6-8 Disclosing Material Weaknesses in ICFR
- What are the main arguments that the partner from PwC will need to counter when he meets with Billy? That is, what are the reasons and rationalizations he should expect to hear from Billy as to why a material weakness in the ICFR does not exist?
He should expect to hear from Billy that the internal control weaknesses should not be recorded as material weakness because they are “individually immaterial”, as the auditor stated. (Mintz & Morris, 2020). Billy can argue that they do not, in all, represent a material weakness, and instead, be considered as insignificant. The main argument that the partner from PwC will need to counter when he meets with Billy are material weakness in compliance with PCAOB and SOX Section 404. He can state that SOX Section 404 requires that management reports be accompanied by a public report from the company’s financial statement auditor attesting to the accuracy of management’s internal control report. This section “seeks to build on this correlation by requiring that every public company annually issue and file with the SEC a management report concerning the effectiveness of the company’s internal control over financial reporting.” (PCAOB, 2005). SOX established the PCAOB and charged it with the responsibility of overseeing the audits of public companies that are subject to the U.S. Federal securities laws. The PCAOB’s duties include the establishment of auditing, quality control, ethics, independence and other standards relating to public company audits. (PCAOB, 2022).
- What is at stake for both Billy and PwC should the partner be unable to convince Billy to accept the material weakness disclosure? Consider the requirements of certification under SOX 302 in your response in addition to those of SOX 404. Address the potential liability to both PwC and Billy’s company for failure to follow AS 2201.
Failure to comply with these standards can result in penalties for both Billy and PwC. Both sections state that the company is obligated to maintain internal records and other processes for financial reporting. Under section 302, the CEO and CFO of the company certify and assert to investors that SEC disclosures, including the financial statements of the company and all supplemental disclosures, are correct and reliable, and that they have taken all the necessary steps to ensure that the disclosure processes and controls in the company are capable of consistently producing financial information investors can trust and rely on. Under section 404, the company’s external auditor must report on the reliability of management’s assessment of internal control. This is in line with AS 2201, which states that “effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. If one or more material weaknesses exist, the company’s internal control over financial reporting cannot be considered effective.” (PCAOB, 2007).
- What levers does the partner have? Where can he go to for support?
The partner can go to for support to this audit team and the audit manager, who would be the most experienced about the internal control system. He can explain why PwC concluded this is a material weakness rather than a significant, and provide detailed support for how they came out with that conclusion. He can share PwC’s ways to analyze ICFR systems and, more in particular, classifying the weaknesses discovered.
- Assume Billy suggests the opinion on ICFR be changed from material to significant? Should the PwC partner go along? What is at stake for PwC, Billy, and the company of characterizing the deficiency as significant if it is, in fact, material?
If the internal control flaws are considered to be substantial, there is no need to make them public. The auditors must inform the audit committee of the flaws, but no additional public information is required. The auditor must use his judgment to conclude whether the deficiencies are material or substantial individually or all together.
As professional accountants, we should be one marked with integrity and honesty. An honest life is important on so many levels in our workplace, with internal and external customers. “We are careful to be honorable before the Lord, but we also want everyone else to see that we are honorable.” (2 Corinthians 8:21). We should strive to be examples of God by living lives of integrity and honesty.