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    Country by Country Financial Reporting and Auditing Framework

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    United States, Crowe Horwath LLP (prepared August 2013)



    Financial Reporting Frameworks


    The primary financial reporting framework utilized by non-governmental entities in the United States is U.S. generally accepted accounting principles ("GAAP") which is established by the Financial Accounting Standards Board ("FASB").  This financial reporting framework is used by public companies and most private companies.  Subsidiaries of public companies generally use this framework, although the parent may establish internal variations which are eliminated during consolidation.  The Securities and Exchange Commission establishes additional accounting standards applicable to public companies; such requirements are generally derivatives of specific GAAP issues.


    The primary financial reporting framework for state and local governmental entities in the United States is U.S. generally accepted accounting principles for governments, which is established by the Governmental Accounting Standards Board ("GASB").  Accounting standards for the U.S. Federal government are established by the Federal Accounting Standards Advisory Board ("FASAB").


    The following two financial reporting frameworks have been established to address the needs of small and medium sized entities, although large private companies might also utilize these:


    • A framework established by the Private Company Council ("PCC"), a body within the Financial Accounting Foundation which is also the parent organization of FASB.  The PCC will determine exceptions and modifications to U. S. GAAP applicable to private companies.
    • A framework established by the American Institute of Certified Public Accountants, the Financial Reporting Framework for Small- and Medium-Sized Entities ("FRF for SMEs").  This accounting framework is designed for the small business community and may be used when GAAP financial statements are not required.



    In addition to the above frameworks, U.S. companies may prepare their financial statements in accordance with International Financial Reporting Standards ("IFRS").



    Auditing Standards


    Crowe Horwath LLP, U.S. member firm of Crowe Horwath International, performs audit engagements to express an opinion on financial statements and, when applicable, on internal control over financial reporting.   The auditing standards used in the U.S. will vary depending on the requirements of the specific engagement.  Authoritative sources of auditing standards utilized by U.S. auditors include the following:

    • Auditing Standards ("AS"), promulgated by the Public Company Accounting Oversight Board ("PCAOB") are used in audits of public companies.
    • Statements on Auditing Standards ("SAS"), promulgated by the Auditing Standards Board ("ASB"), are used in audits of non-public companies.
    • Government Auditing Standards ("GAS"), promulgated by the Government Accountability Office ("GAO"), are used in audits of governmental entities and are additive to other auditing standards applicable to the engagement.
    • International Standards on Auditing ("ISA"), as promulgated by the International Auditing and Assurance Standards Board ("IAASB"), might be used when the audit is utilized outside of the U.S., or the audit is conducted outside of the U.S.

    Companies that offer securities for sale within the U.S. to the public ("issuers"), or are otherwise required by the Securities and Exchange Commission ("SEC") to have an audit, must have their annual audit performed on a timely basis by an audit firm that is registered with the PCAOB, which was established by the Sarbanes-Oxley Act of 2002.  Other companies may be required to obtain an audit by federal or state legislation or regulation.


    Subject to the above, private companies are not generally required to have an audit of their financial statements.  However, a requirement for an audit may be specified by third parties such as a lender or other stakeholder.



    Auditor Appointment


    The term of auditor appointments in the U.S. are generally not subject to legislative or regulatory requirements, so an auditor can usually be appointed or terminated at any time.  Auditors are appointed by an entity's audit committee or another group that is charged with governance.  The U.S. has independence rules providing for partner rotation for auditors of public companies and certain other regulated entities.


    Ethics and Independence Requirements


    Crowe Horwath LLP is subject to ethics and independence requirements established by professional organizations and regulatory bodies, and those may vary by engagement type.  The source of requirements includes the following:


    • Code of Professional Conduct, promulgated by the AICPA, which is applicable to all services performed by members of the AICPA.
    • Ethics and independence requirements established by applicable licensing bodies.
    • Regulations of the SEC which are applicable to audits that must comply with the requirements of the SEC.
    • Rules established by the PCAOB which are applicable to audits performed under auditing standards of the PCAOB.
    • Standards, regulations and rules established by regulatory bodies, applicable to audit engagements for entities in specific industries.
    • Code of Ethics for Professional Accountants, promulgated by the International Ethics Standards Board for Accountants, which is applicable when international auditing standards are used for an engagement.  This Code and the AICPA's Code of Professional Conduct are generally consistent.


    Audit Monitoring and Regulation


    Auditors are regulated by a licensing body which is generally a U.S. state or territorial board of accountancy, as well as other regulators.  Auditors of public companies must comply with the registration, inspection, and other rules established by the PCAOB.


    Audit firms in the U.S. are subject to various external and internal monitoring processes for their audit practice.  The major monitoring programs are described below.


    External Monitoring


    Crowe Horwath LLP is annually inspected by the Public Company Accounting Oversight Board (PCAOB). The PCAOB inspects registered public accounting firms to assess compliance with the Sarbanes-Oxley Act (Act), the rules of the PCAOB, the rules of the Securities and Exchange Commission, and professional standards, in connection with the Firm's performance of audits, issuance of audit reports, and related matters involving U.S. public companies, other issuers, and broker-dealers.  The PCAOB's most recent report on the firm is dated May 23, 2013, which discusses the inspection carried out during 2011.  PCAOB inspection reports are available on their website.


    Audit firms are required by state boards of accountancy and other governmental agencies to engage another auditor to conduct a peer review on a triennial basis of their accounting and auditing practices for non-issuer clients.  Firms that are registered with and inspected by the PCAOB have their peer review administered by the National Peer Review Committee ("NPRC") and all larger audit firms are administered by the NPRC.  Peer reviews include reviews of specific audit engagements as well as quality control processes.  Results of the peer review are published in reports in a public file maintained on the AICPA's website.  Crowe Horwath LLP received the highest rating at the conclusion of our most recent peer review.


    Crowe Horwath International conducts a Quality Assurance Review of Crowe Horwath LLP's audit practice at least once every three years.


    Internal Monitoring


    Crowe Horwath LLP performs an annual internal inspection, which includes review of selected quality control elements, including independence, audit client acceptance and continuance, personnel matters, and CPE compliance.  Internal inspection also includes intensive review of engagements selected using risk-based criteria, guidance for inspection of certain industries, and other criteria that may vary from year to year. Results of internal inspection are communicated to audit personnel during annual training sessions, and lead to changes in audit tools and guidance as appropriate.


    Other internal monitoring processes are in place to evaluate compliance with professional standards, regulatory and legal requirements, and firm policies.  These include evaluations of whether the firm's quality control system is appropriately designed and implemented, and if they have been operating effectively.


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