Audit committee chairs weigh in on audit quality, standards

By Amy Leisinger, J.D.

In an effort to increase transparency and engage with audit committees, the Public Company Accounting Oversight Board had conversations with the audit committee chairs of almost all of the U.S. issuers inspected in 2019 (nearly 400). Engagement with audit committees helps the PCAOB to advance its mission and may assist audit committees in fulfilling their duties, the Board noted. The Board shared the executives’ comments and provided perspectives from them on measures that have been taken to improve audit quality. In response to requests from audit committee chairs, the PCAOB also provided an overview of its inspections process and responded to frequently asked questions.

Audit quality. According to the PCAOB report, most audit committee chairs evaluated audit quality by heavily focusing on their engagement teams and less so on the characteristics of the audit firm. If the engagement teams were performing well, firm-wide metrics regarding audit quality or transparency were less relevant, they explained. Some executives also noted that audit quality centers on the exercise of judgment, which can be a challenge to measure. The PCAOB also found varying levels of familiarity with "audit quality indicators" but explained some audit committee chairs were familiar with metrics such as diversity, experience, issuer knowledge, quality and continuity, professional skepticism and judgment, and responsiveness.

Many of the executives also stated that, with proper oversight and controls, shared service centers were a good way to leverage expertise while providing quality and reduced costs. Most audit committee chairs also were satisfied with their relationships with their auditors and the information they received regarding auditor independence. The executives also generally deemed communications with auditors "very good and thorough," the PCAOB noted.

New standards. In conversations with the PCAOB, the audit committee chairs also addressed new accounting and auditing standards, and some expressed concern regarding the effects that the overlapping implementation of several standards could have on resources. They also indicated that preparations to implement Critical Audit Matters (CAMs) were generally going well and expressed a desire that, going forward, conversations would focus on how CAMs affect the audit process.

What’s working well. According to the audit committee chairs, several approaches have been effective in maintaining audit quality. Among other things, the executives suggested:

• asking if the audit firm has an annual audit quality or transparency report;
• discussing how the auditor will address a previous PCAOB inspection report;
• selecting relevant audit quality indicators to discuss with the engagement team;
• conducting ongoing assessments of the engagement team;
• dedicating portions of audit committee meetings to deep dives on topics such as governance and cybersecurity;
• discussing new accounting and auditing standards directly with the auditor and with consultants as necessary; and
• discussing how the audit firm uses technology in its work.

Inspections. In the report, the PCAOB staff also provided responses to common questions related to the basics of its inspection process. The staff noted that they use both risk-based and random methods when selecting audits for review and focus on risk factors that include economic trends, industry developments, capitalization changes, and inspection history. During an inspection, the staff explained, inspectors may focus on an auditor’s risk assessment processes, areas affected by economic trends or that present significant risks, and other quality control issues. The fact that the staff includes a deficiency in a report does not necessarily mean that financial statements are materially misstated or that material weaknesses are undisclosed, the report stated. However, the PCAOB does use the information collected during inspections to inform its inspection reports, standard-setting activities, and economic and research analysis work, the staff explained.

The report also noted that PCAOB has resources and training for audit committee members and remains committed to robust economic analysis to understand the effects of its standard-setting and oversight activities.