Friday, October 28, 2016

PCAOB's Harris eyes threats to independence, plugs expanded auditor’s report

By John Filar Atwood

PCAOB board member Steven Harris is concerned that auditor independence is again being threatened by the rise of consulting and advisory services at audit firms. He reiterated that the Board is committed to holding auditors accountable, through enforcement actions if necessary, to high standards of independence and professional skepticism.

In remarks at the New York State Society of Certified Public Accountants conference, Harris discussed a number of PCAOB priorities, including the re-emergence of concerns about auditor independence, audit report reform, and the current state of audit quality. He also touched on technological innovation and how he hopes it will make audit reports more efficient and incisive.

Independence. Harris noted that revenue from consulting and advisory services currently is growing at a faster pace than audit revenue. He pointed out that at some of the largest firms, consulting revenue will soon surpass audit revenue, giving rise to concerns about whether the firms will be able to resist the temptation to cross-sell their advisory and consulting services to audit clients.

Harris is troubled by the fact that although the independence rules have been in place for more than a decade, the Board’s inspection staff continues to find instances of the provision of impermissible non-audit services. Other common issues include non-compliance with partner rotation requirements, impermissible financial relationships between the auditor and the client, and indemnification provisions in engagement letters, he added.

He emphasized that the PCAOB will hold auditors to high standards of independence. Independence matters are a priority for the PCAOB’s enforcement staff, he noted, which actively pursues independence violations in order to safeguard the integrity of the audit. He cited several recent instances where the Board brought enforcement actions against firms for prohibited relationships with clients.

He urged firms to review client relationships to determine whether a reasonable investor, with knowledge of all relevant facts, would conclude that the firm is capable of exercising objective and impartial judgment on the issues within the audit. The PCAOB is examining firms’ independence monitoring systems, he said, including whether those systems address the growth in consulting and other non-audit services across the profession.

Expanded audit report. Harris also discussed audit report reform, which the Board has been working toward since 2011. The goal of the reform effort is to improve the usefulness of the report for investors, but industry participants have not embraced the expanded report, he noted.

Much of the global community is accepting the move to an expanded auditor’s report, and Harris urged U.S. accountants and auditors to do the same. He believes that given the technological innovations in the auditing space, investors are right to expect that an auditor will provide more detailed information in an audit report.

Innovation in the audit. Harris said that the Board and industry participants cannot ignore the rapid change in the audit process as a result of the expanded use of technology. New tools have enabled auditors to examine all of a client’s transactions, track and analyze trends, identify problem areas or transactions, and benchmark a company’s financial information against others.

Harris cautioned that the benefits of innovation such as data analytics come with challenges that firms need to address. In his view, these include ensuring the integrity and security of client data, assessing the reliability of any data used in the analytics, determining how technological developments change the skill mix and structure of audit teams, and monitoring how the technologies influence auditor judgment.

He said that while analytical tools can be used to help auditors perform high quality independent audits, they should not be seen as replacements to inquiry and professional judgment. In addition, if the tools are used to further client relationships by providing deeper data analysis for management, he warned, then some could argue that audit firms once again will perceive the audit function merely as a springboard to more lucrative non-audit engagements.