1. PCAOB Historical Perspective St. Louis University Presented by: Jim Castellano, CPA Chairman, RubinBrown LLP April 13, 2009

2. Challenges to the Profession

3. How did we get there? Enron announces bankruptcy (12/2/2001) Andersen discloses document shredding (1/10/02) SEC news conference and proposals (1/17/02) CPA profession supports SEC reforms (1/17/02) AICPA Chairman testifies before House Commerce Sub-Committee (2/14/02) and Senate Banking Committee (3/14/02)

4. How did we get here? Indictment of Andersen (3/14/02) Arthur Andersen found guilty of obstruction (6/15/02) WorldCom restatement (6/26/02) WorldCom declares bankruptcy (7/21/02) Sarbanes/Oxley Act of 2002 enacted (7/30/02)

5. What went wrong? Corporate culture and reporting model Simple greed or arrogance. Market pressure on short term earnings. Failures in corporate management. Failures in corporate governance. Too many rules leading to “connect the dots accounting.” Some analysts biased.

6. What went wrong? The work of auditors Some auditors did not step up to their responsibilities to serve the public interest. Inadequate emphasis on fraud detection – “Expectation Gap.” Possibly failure to implement audit approach or simply an inadequate audit approach. Possible auditor dependence on fees from major clients.

7. Current Global Financial Crisis

9. What Went Wrong? Fannie Mae and Freddie Mac pushed by Congress into making imprudent loans Consumers take on extraordinary debt House speculators and “flippers” Failure of bond rating agencies Insufficient regulation of new debt instruments Federal Reserve monetary policy Bankers originating mortgages with unworthy borrowers, then selling them to investors Credit default swaps sold to hedge investor risk Imprudent investors

10. Wall Street's Latest Downfall: Madoff Charged with Fraud FBI makes first arrest in Stanford fraud case

11. Restoring Confidence Post Enron Sarbanes/Oxley Act of 2002 Public Company Accounting Oversight Board created Accounting firms registered with PCAOB Inspections of firms US auditing standards set by PCAOB Scope of service restrictions Section 404

12. PCAOB Five-member Board: Only two can be CPAs Mark Olson, Chairman Staff Budget Responsibilities

13. Accounting Firm Registrations Requirements for registration Responsibilities of registered firms Firms registered 1953 total firms registered as of 3-31-09 Including approximately 900 foreign firms

14. Inspections Scope of inspections Inspection reports

15. Inspections Inspection shall include at least the following components Selected audit engagements Evaluation of the sufficiency of the firm’s quality control system Testing of the audit, supervisory and quality control procedures Limitations on public disclosure

16. Inspections “…the inspection team identified matters that it considered to be audit deficiencies. Those deficiencies included failures by the Firm to identify or appropriately address errors …..including, in some cases, errors that appeared to be material…..In some cases, the deficiencies identified were of such significance that it appeared to the inspection team that the Firm had not, at the time it issued its audit report, obtained sufficient competent evidential matter to support its opinion…”

17. US Auditing Standards PCAOB sets standards for public companies Initially adopted all existing GAAS PCAOB standards 1-6 Implications for standard setting

18. Scope of Service Restrictions Prohibited services Audit Committee approval requirement Implications for the profession and marketplace

19. Section 404 Requirement for internal control assessment by the issuer and report by external auditor Audit standard – AS 5

20. Impact on Companies and the Accounting Profession Increased value of the audit: Audit Committees interested in the scope of the audit first, cost of the audit second Quality counts – no longer “cross-selling”

21. Impact on Companies and the Accounting Profession Opportunities in public accounting abound: Accounting is the most popular course of study in US colleges and universities today

22. Looking to the Future Value of auditing services continues to increase, but innovations needed Balance of independence and reliability Effective regulation and marketplace control balanced Liability reforms must be addressed

23. Looking to the Future International business capabilities increasingly important IFRS will be the standard Demand for accountants remains high Quality counts and will be rewarded: People, Quality, Growth, Profit

24. Thank you! Questions?