Thursday, December 05, 2019

PCAOB chair discusses efforts to better the quality of audit services

By John M. Jascob, J.D., LL.M.

PCAOB Chairman William D. Duhnke recently offered his views on the agency’s efforts to drive improvement in the quality of audit services. Noting the significant changes that occurred at the PCAOB over the past two years, following the SEC’s decision to reconstitute the entire five-member board, Duhnke said that he and his fellow board members have committed to transform the PCAOB into a trusted leader that promotes high quality auditing through forward-looking, responsive, and innovative oversight. The chairman’s remarks came during his keynote speech at Baruch College's 14th Annual Audit Conference in New York.

Inspections. Duhnke began by discussing some significant changes being undertaken by the PCAOB as part of its multi-year effort to improve its inspections program. In response to feedback that its inspection reports are difficult to read and include too much boilerplate, the PCAOB will release a redesigned report next year, beginning with its 2018 inspections for the largest U.S. firms. The agency hopes that the initial changes to the report will provide more relevant information to stakeholders and expects to seek input on them as well as on potential future changes. The PCAOB has also made progress on communicating more comprehensively about what it observes during inspections, moving away from simply reporting "failures" to also publishing "good practices" that it believes promote or enhance audit quality.

Duhnke said that the PCAOB has also devoted substantial resources to understanding how the largest U.S. firms define their quality control objectives and manage the risks associated with achieving those objectives. The PCAOB will begin testing firms’ quality control systems in greater depth next year to determine whether they are operating effectively. The board will also continue to use "target teams" of inspectors that conduct horizontal reviews by looking at specific issues across the entire profession, rather than having different teams at individual firms. The PCAOB also made it a point this year to speak with every audit committee chair of the firms selected for inspection. The agency expects to publish soon a report concerning what it heard in those approximately 400 conversations.

Enforcement. Regarding enforcement, Duhnke said that the PCAOB has placed renewed emphasis on investigating significant audit failures, issuing several settled orders in 2019 covering violations in priority areas such as auditor independence, ICFR audits, quality control systems, and engagement quality reviews. The PCAOB has also issued sanctions in a number of instances where firms and their associated persons failed to cooperate with board inspections and enforcement activities. The agency will continue to focus on this area moving forward.

Standard-setting. In Duhnke view, the PCAOB's current quality control standards do not adequately prompt firms to focus on identifying and mitigating the risks they face in effectively executing audits. Duhnke observed that the agency uses the quality control standards issued by the AICPA in 1997, and the board feels concerned that those standards are now outdated and do not adequately promote audit quality. For example, since that time firms have modernized their corporate structures and governance approaches, increased the scope and scale of their complex international footprints, and have have changed their audit methodologies. Accordingly, the PCAOB is finalizing a concept release to seek input on potential changes to its quality control standards and will hold an open meeting later this month on the proposed concept release.

In other activities involving standard-setting, Duhnke noted that the PCAOB has finally begun to see the first audit reports that include critical audit matters (CAMs). PCAOB inspection teams have examined a sample of CAMs from large accelerated filers, and the board will publicly report its observations as soon as possible. The agency will also continue to focus on any implementation issues that arise, including as it inspects CAMs during the 2020 inspection cycle. The agency is also preparing an interim analysis of the economic and other effects of CAMs in order to evaluate whether early evidence from CAM implementation suggests significant costs or unintended consequences.

Changing audit environment. Duhnke said that the board has focused significant resources on understanding technologies that are most affecting auditing and financial reporting. A team within the agency’s Office of the Chief Auditor monitors the development and implementation of emerging technologies and analyzes the implications of the PCAOB’s auditing standards. While the PCAOB has heard that its current standards do not impede the use of technology, the agency has also received comments that those standards do not explicitly encourage the use of technology and that they do not illustrate how technology may be used and what the related risks and considerations are if it is used. The PCAOB will continue to monitor technology advancements aggressively, with an intent to stay ahead of the curve, Duhnke said.