1. Categories of CPA firms Big 4Big 4 National firmsNational firms Large regional firmsLarge regional firms Local firmsLocal firms

2. Data for Largest CPA Firms Fiscal Year 2007 Revenue Prof. Revenue % Revenue Prof. Revenue % Rank Firm $ million Staff A&A Tax MAS/ Other 1 Deloitte & Touche 9,850 29,725 44 22 34 1 Deloitte & Touche 9,850 29,725 44 22 34 2 Ernst & Young 7,561 20,200 70 29 1 2 Ernst & Young 7,561 20,200 70 29 1 3 PwC 7,464 22,541 59 27 14 3 PwC 7,464 22,541 59 27 14 4 KPMG 5,357 15,164 48 23 29 4 KPMG 5,357 15,164 48 23 29 5 RSM McGladrey 1,389 5,949 42 33 25 5 RSM McGladrey 1,389 5,949 42 33 25 6 Grant Thornton 1,075 3,938 59 26 15 6 Grant Thornton 1,075 3,938 59 26 15 7 BDO Seidman 589 1,976 65 23 12 7 BDO Seidman 589 1,976 65 23 12 Source: Accounting Today

3. Consulting Units Separate  The Big 5 began disposing of their consulting practices well before Sarbanes-Oxley, partially to address concerns over independence and conflicts of interest  Dispositions  Deloitte Consulting had planned to go private and be renamed Braxton  PwC sold its consulting practice to IBM for $3.5 billion  Ernst & Young consulting sold to Cap Gemini in Feb. 2000  Andersen Consulting separated from Andersen in Aug. 2000, went public, and renamed Accenture  KPMG Consulting went public in Feb. 2001, and was renamed BearingPoint  Declared Ch. 11 in Feb. 2009 and units sold off, including sales to Deloitte and PwC

4. Changes in the Profession Mergers in the Big 8/6Mergers in the Big 8/6 Growth in consultingGrowth in consulting Spinoffs of consultingSpinoffs of consulting Demise of AndersenDemise of Andersen Reduction in non-Big 4 national firmsReduction in non-Big 4 national firms Fewer firms perform auditsFewer firms perform audits What forces are behind these changes?

5. Changes in the Profession GlobalizationGlobalization SpecializationSpecialization Growth in consulting; followed by dispositionGrowth in consulting; followed by disposition Legal liabilityLegal liability Sarbanes-Oxley ActSarbanes-Oxley Act –Increased audit fees to attest to internal control –Expanded tests for fraud

6. Role of PCAOB Public Company Accounting Oversight Board (PCAOB) established by Sarbanes-Oxley ActPublic Company Accounting Oversight Board (PCAOB) established by Sarbanes-Oxley Act –Responsible for auditing and quality control standards for public company audits –Also inspects registered accounting firms Auditing StandardsAuditing Standards –PCAOB sets auditing standards for public company audits –Auditing Standards Board (ASB) of AICPA sets standard for private companies –PCAOB adopted existing ASB standards as interim standards

7. International Standards on Auditing (ISAs) U.S. Generally Accepted Auditing Standards (GAAS) PCAOB Auditing Standards Applicable to U.S. Public Companies and other SEC registrants Applicable to entities outside the United States Applicable to private entities in the United States U.S. and International Auditing Standards

8. Training Independence Professional Care Planning and Supervision Understand Entity and Internal Control Sufficient Evidence GAAP Consistency Adequate disclosure Opinion on FS as a whole Generally Accepted Auditing Standards General Fieldwork Reporting

9. Relation of SAS to GAAS GAAS are the 10 standardsGAAS are the 10 standards –Measures of the quality of auditor performance Statements on Auditing Standards (SAS) interpret GAASStatements on Auditing Standards (SAS) interpret GAAS –Have the status of GAAS –Established by Auditing Standards Board of AICPA Auditing Standards for public companies now set by the Public Company Accounting Oversight Board (PCAOB)Auditing Standards for public companies now set by the Public Company Accounting Oversight Board (PCAOB)

10. MC 2-16 (b) Which of the following best describes what is meant by the term generally accepted auditing standards? 1. Acts to be performed by the auditor. 2. Measures of the quality of auditor performance performance 3. Procedures to be used to gather evidence to support financial statements. support financial statements. 4. Audit objectives generally determined on audit engagements. audit engagements.

11. Structure of the Profession Historically, self-regulated through voluntary membership in the AICPA and the Division of Firms – SEC Practice Section (SECPS) – Private Companies (PCPS) Auditors of public companies subject to oversight by PCAOB and SEC

12. Peer Review Every firm must have a system of quality control (SAS #25)Every firm must have a system of quality control (SAS #25) Peer review is a compliance audit of firm’s quality control systemPeer review is a compliance audit of firm’s quality control system –Firms in AICPA have peer review every three years –Other firms have quality review (lesser scope)

13. Government Regulation CPAs are licensed by the state in which they practice

14. Ways the Profession and Society Encourage CPAs to Conduct Themselves at a High Level GAAS and interpretation s GAAS and interpretation s CPA examination CPA examination Quality control Quality control Peer review Continuing education requirements Continuing education requirements Legal liability Legal liability Division of CPA firms Division of CPA firms Code of Professional Conduct Code of Professional Conduct PCAOB and SEC PCAOB and SEC Conduct of CPA firm personnel Conduct of CPA firm personnel Ch. 4 Ch. 5

15. MC 2-17 (a) A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by: 1. Adhering to generally accepted auditing standards. auditing standards. 2. Having an appropriate system of quality control. quality control. 3. Joining professional societies that enforce ethical conduct. ethical conduct. 4. Maintaining an attitude of independence in its engagements. its engagements.