Wednesday, October 23, 2019

PCAOB officials outline inspections trends, best practices

By Amanda Maine, J.D.

Top officials in the PCAOB’s Division of Registration and Inspections recently addressed ALI-CLE’s 2019 Accountants’ Liability Conference in Washington, D.C. The officials gave advice on how to prepare for an inspection and identified the most common deficiencies the staff has encountered during recent inspections.

Areas of focus. George Botic, director of the Division of Registration and Inspections, advised that the Board’s five-year strategic plan, which was issued as a draft in August 2018, and approved by the PCAOB in November 2018, emphasized that the inspections program should seek to prevent audit failures and not just detect them. The staff has kept this is mind in its approach to quality control by taking what it has learned from the inspections of the six largest firms and applying these lessons to inspections of smaller firms, he said.

According to Botic, the staff has maintained an external focus on issues such as updating what goes into an inspection report. Inspection reports as they exist now are very long, so the staff is thinking about how to make them more user-friendly. Botic said the staff hopes to issue a draft of an improved inspection report later this year or early next year.

The staff has also taken a more proactive approach to communications with audit committee chairs, Inspections Deputy Director Christine Gunia said. Compared to previous years, the staff engaged with all audit committee chairs of audits selected for inspection in 2019, instead of just some of them, according to Gunia. She also said that the staff has been engaging in two-way dialogue with audit committee chairs rather than simply asking them questions. As of September 30, the Board’s inspection teams had dialogues with over 325 audit committee chairs, Gunia stated.

Preparing for an inspection. Gunia also gave tips on how to prepare for an inspection, the most important of which is clear and timely communication. Gunia advised that beginning in 2019, as part of responding to comment forms, firms are being asked to link the stated deficiency to their system of quality control. According to Gunia, this will help inform and possibly identify where in a system of quality control the failure occurred and detect or prevent a deficiency from occurring.

One effective way of communicating with inspections staff is through the use of visual aids, such as process flow diagrams and whiteboarding, Gunia recommended. She added that communication does not end when the inspectors leave. For example, post-inspection communication occurs in the context of written replies to the comment forms, Gunia said.

Frequent findings. Inspections Deputy Director Timothy P. Sikesoutlined several recurring findings that arise during inspections that can negatively impact audit quality. One common practice that continues to arise is the alteration of audit work papers. Sikes warned that altering work papers can result in sanctions, including the revocation of a firm’s registration and barring individuals from the industry. Firms are also failing to timely archive their audit documentation within 45 days of the inspection, he noted.

The staff has noted that some firms are not meeting their obligations under Form AP. Some Forms AP contain incomplete or inaccurate information or are not filed at all, Sikes stated. He encouraged auditors to review the Board’s guidance on Form AP, which was issued in February 2017.

Independence issues continue to be a problem, according to Sikes. The staff frequently identifies deficiencies that suggest some firms and their personnel either do not understand independence requirements or do not have controls in place to prevent independence violations. Other common inspections findings the staff has encountered include those related to internal control over financial reporting, revenue recognition, accounting estimates, and evaluating the risk of material misstatement, he added.

Good practices. Sikes also highlighted a number of good practices the staff has observed. These include extending accountability to key firm leaders, developing guidance to identify and assess risks of material misstatements, revising training programs and providing support from experienced personnel, and enhancing audit tools in areas of significant judgement.