PCAOB Seeks Views on Revising Standards Regarding the Use of Specialists

By Jacquelyn Lumb

The PCAOB has issued a staff consultation paper on auditors’ use of specialists, which is one of the topics to be discussed at the June 18 Standing Advisory Group meeting. The consultation paper seeks input on the objectivity and oversight of specialists when their work is used during an audit and possible changes to the standards. The auditing of accounting estimates is also on the agenda for the upcoming SAG meeting.

Increased use of specialists. The work of specialists is often critical to auditors in the development of estimates such as fair value measurements. The consultation paper notes that the use and importance of specialists has increased in recent years, partly due to the increasing complexity of business transactions. Auditors may use valuation specialists, appraisers, actuaries, and others with specialized expertise. Companies also use specialists to assist in accounting estimates and in the preparation of their financial statements.

The PCAOB has found that the largest accounting firms extensively use the work of specialists. Many of these firms employ their own specialists, while other firms use the work of third party specialists or use the work of companies’ employed or engaged specialists.

If a specialist participates in an audit, the standards require that the auditor have sufficient knowledge of the subject matter to communicate the objectives of the specialist’s work, determine whether the work meets the auditor’s objectives, and evaluate the results of the work. If the auditor does not properly oversee or evaluate the specialist’s work, it may increase the risk of failure to detect a material misstatement, whether by error or by fraud. The consultation paper identifies areas in which the standards could be improved and poses a series of questions for interested parties to consider.

Specialist’s objectivity. The staff is considering whether to strengthen the requirement in AU Section 336 with respect to the auditor’s evaluation of the objectivity of an engaged specialist to reduce the risk that the specialist’s objectivity may be impaired. The consultation paper notes that a company’s specialist may be influenced by the same factors that can lead to bias by those who prepare the financial statements.

Inspection findings. During inspections, the Board has found instances where auditors used the work of a company’s specialist without performing the procedures required by AU Section 336. The consultation paper also cites both SEC and PCAOB enforcement cases where companies, with the involvement of their specialists, materially misstated their financial statements and where auditors did not comply with the existing standards.

Based on its observations, the staff believes that auditors may benefit from more specificity about how to supervise specialists than the principles-based requirements in Auditing Standard No. 10. The staff is also concerned that AU Section 336 is not rigorous enough to address the risks of material misstatement.

Options under consideration. The staff has considered alternatives to standard setting, including additional staff guidance. However, the staff does not believe additional guidance or the use of more resources for inspections and the enforcement of existing standards would solve the underlying issues with the standards.

One option under consideration is to develop a separate standard for using the work of an auditor’s specialist, but this would require the auditor to consult two standards with respect to its supervision of the specialist’s work.

The consultation paper also offers two alternatives for revising the performance requirements for the auditor’s use of the work of a company’s specialist, including the rescission of AU Section 336 without issuing new requirements. Auditors instead would look to other applicable PCAOB standards.

The staff is also considering new approaches for evaluating the relationship between an auditor’s specialist and the company to require a more rigorous evaluation of the business, employment, and financial relationships that may impair the specialist’s objectivity. One approach would apply the PCAOB’s independence rule to engaged specialists. Another approach would include enhanced requirements for evaluating the objectivity of the auditor’s specialist.

Data sought on costs. The consultation paper notes that some of the requirements that are under consideration would reflect a change in practice and would impose additional costs. The staff has requested, to the extent possible, that commenters provide estimates, examples, and aggregated data to help determine the potential economic impact of the alternatives posed in the consultation paper.