By Jacquelyn Lumb
The comment period has closed on the PCAOB’s proposal to strengthen the requirements that apply to audits that involve other accounting firms and individuals other than the firm that issues the audit report. The proposed amendments are intended to improve the quality of audits and to align the requirements with the Board’s risk-based supervisory standards.
AngloGold Ashanti Limited. AngloGold Ashanti Limited, a South Africa based gold mining company, wrote in support of the PCAOB’s proposed amendments. As a foreign private issuer and a well-known seasoned issuer registered with the SEC, AngloGold said it views any audit that is not high quality to be an audit failure. However, the company raised concerns about certain unintended consequences with respect to the audit committee’s supervisory role, the increased costs, and the risk of leaking material market-sensitive information.
AngloGold supports enhancements to the lead auditor’s role, but does not support processes that refer to other auditors in the audit report, which may create an impression that the lead auditor is not to blame if the referred-to auditor’s work is in error. Instead, the company suggested that any reliance on the work of other auditors be included as a critical audit matter. If the lead auditor has concerns about the work performed by other auditors, AngloGold said it should be reported to the audit committee.
California Society of CPAs. The California Society of CPAs wrote in support of the Board’s proposal. However, in response to one specific question, the Society said it does not support a tiered audit process for emerging growth companies and seasoned issuers—the lead auditor should follow the same standard to ensure the adequacy of the audit.
The Society also strongly opposes any prohibitions on the use of a divided responsibility model and urged the Board to let the audit profession use its professional judgement in this area. The lead auditor’s communication to the audit committee should include the name of other auditors used in the engagement, their role, and whether any issues arose as a direct result of their participation, according to the Society. If any issues arose, the communication to the audit committee should include how they were resolved by the lead auditor.
The Society also echoed AngloGold’s suggestion that the need to use other auditors could be considered a critical audit matter under the PCAOB’s proposed auditor’s reporting standard. The Society recommended that the Board provide 12 to 18 months for firms to implement the requirements.
Texas Society of Certified Public Accountants. The Texas Society of Certified Public Accountants said the Board must consider the economic impact of the cost increases that will result from its proposal. For example, it is likely that both the lead auditors’ and issuers’ costs will increase. Some auditors may choose to no longer perform audits if another firm is required. If a firm chooses to do an entire audit itself, it will likely incur additional personnel, travel, and overhead costs. The pool of auditors available to smaller issuers may decrease, which will increase the costs of capital if larger firms must be used.
The Texas Society urged the Board to commission research on the issues related to shared audit responsibilities given the current lack of accessible data on international audits involving multiple firms, and recommended that the Center for Audit Quality fund research in this area. The Texas Society also recommended that auditors be given a minimum of 18 months to implement the new requirements.
Institut der Wirtschaftsprufer. The Institut der Wirtschaftsprufer urged the PCAOB to work closely with the IAASB, which has also sought comment on the use of work performed by other auditors. The Institut also raised concerns that the proposal could lead to more rules-based, rather than principles-based requirements, and suggested that the Board align the revisions with the international accounting standard rather than the proposed piecemeal changes to existing standards to avoid multiple cross-references within standards.
Federation of European Accountants. The Federation of European Accountants agreed that it would be helpful if the revised standards were compatible with IAASB standards other than where jurisdictional matters would require otherwise. The Board and the IAASB should learn from each other’s work in order to identify a common approach, in FEA’s view. FEA also urged the Board to include a reference to the other auditor’s quality control system in the proposal, given how critical these systems are within firms and across networks.
FEA said that the proposal appears to reflect a belief that lead auditors should trust no one, except when obligated to do so, which is not workable in today’s audit environment. The proposal gives insufficient emphasis to the concept of delegation, in FEA’s view.