Friday, November 30, 2018

PCAOB advisory group members advocate greater communication between Board and stakeholders

By Amanda Maine, J.D.

Members of the PCAOB’s Standing Advisory Group (SAG) echoed sentiments expressed in a recent PCAOB survey about improving the Board’s communication with auditors, investors, audit committees, and other stakeholders. Several members urged the Board to disseminate more information relating to the inspections process, while others would like to see more communications between the PCAOB and audit committees.

Survey results. Barbara Vanich, acting director of the Office of the Chief Auditor, presented the results of a PCAOB survey on communications to the SAG. Respondents were surveyed about the types of PCAOB communications they use. Coming in first was the staff’s Audit Practice Alerts at 79 percent. According to the survey, 71 percent used implementation guidance, 63 percent used inspection observations, 50 percent used inspection briefs, and 46 percent used PCAOB Q&As on rules and forms. In addition, 58 percent cited communications with audit committees.

The survey also reported that almost all respondents desire more communication from the PCAOB regarding standards. Some respondents expressed concerns about the risk of using guidance to impose “de facto” requirements beyond the auditing standards, and in particular regarding parties not regulated by the PCAOB such as issuers and preparers. Too much reliance on guidance might inhibit innovation by auditing firms, according to some survey respondents.

A majority of respondents to the PCAOB’s survey want the PCAOB to engage all constituencies, including registered firms, audit committees, investors, and preparers. However, they feel that communication should be targeted to each group separately to describe what the standard means to them.

Regarding timing, there was a general preference that the PCAOB should communicate about new auditing standards before they become effective. However, some were concerned that issuing guidance too close to the effective date could cause confusion or disruption.

When asked to rank attributes in the order of importance about communicating PCAOB standards, the final tally was: (1) timely; (2) responsive to specific questions raised by stakeholders; (3) comprehensive; (4) detailed technical explanations; and (5) plain English that can be understood by non-accountants.

Audit committees. A number of SAG members expressed support for more Board communication with audit committees. Former SEC CorpFin Director John White, now at Cravath, Swaine & Moore, brought up the PCAOB’s project on developing audit quality indicators (AQIs), which has languished in the concept release and discussion stage since it was first pondered in 2013. According to White, there is a lot of information available regarding AQIs that could be useful to audit committees in understanding and identifying the mechanisms that accompany an effective audit.

Guy Jubb of the University of Edinburgh called the communication between audit committees and investors one of the weakest links in the chain. While he acknowledged that this area may fall more under the SEC’s jurisdiction, he stressed that there is a need to integrate what audit committees are doing into the investor relationship.

Former IAASB Chair Sir David Tweedie said there is a deeper problem in the system itself with respect to audit committees. For audit firms, the tension between being professional and skeptical and keeping their clients is very difficult. An auditing firm that says, hire us because we’re the toughest, most mean-spirited firm in town is not going to get the job, but that is exactly what investors are saying they want, he lamented. Citing cuts in audit fees, he wondered if an audit committee represents management or the investors, because lowered fees pressure the auditor to get the job done cheaper and to cut corners.

Sandra Peters of the CFA Institute agreed with Tweedie, stating that when she has been on audit committees, she cringes when there is talk about lowering audit fees. “You get what you pay for,” she said.

Communicating about inspections. Peters was one of several SAG members who voiced support for more communications about the results from the PCAOB’s inspections. She noted that while the top responses to the PCAOB’s survey indicated a desire for more communication regarding auditing standards, most of the respondents were auditors. Investors are more interested in inspections findings than the standards themselves, she said.

Liz Murrall of The Investment Association also encouraged the PCAOB to increase the transparency of its inspections findings and communicating them. She observed that in the U.K., the Financial Reporting Council (FRC) issues both thematic reports and individual firm reports where the audited entities are not identified. However, the confidential reports on the audited entity are sent to audit committee chairs and the audit committee is required to state in its report whether or not its audit has been subject to an inspection and what they’ve done in relation to those inspection findings. Investors have found this to be very helpful, Murrall said.

Other methods of communication. PCAOB Member Jay Brown asked if SAG members were interested in other mechanisms the PCAOB could use to communicate with stakeholders. He mentioned as an example the SEC’s “Dear CFO” letters sent by the Division of Corporation Finance. He observed that entities do read and study these letters and that they do have an impact.

Drawing on his experience as CorpFin director, White compared PCAOB inspection reports to comment letters that are issued by the Division and sent out one by one and after the fact. In contrast, when Dear CFO letters and Compliance & Disclosure Interpretations are issued prior to the 10-K season, “you can affect the entire universe of public companies,” which is a much more effective method of guidance, according to White. Robert Knetchel of the University of Florida agreed with White, advising that using this kind of constructive, proactive intervention can be more effective than “naming and shaming.”