Thursday, December 29, 2022

PCAOB Chair stresses need to regain handle on audit quality

By Anne Sherry, J.D.

PCAOB Chair Erica Y. Williams emphasized the importance of audit quality in a keynote address at the AICPA & CIMA Conference on Current SEC and PCAOB Developments. Williams warned that audits are trending in the wrong direction, with a third of those inspected showing insufficient evidence to support their opinions. The Chair also spoke about a proposal on the confirmation process, which was scheduled to be taken up at an open meeting of the Board on December 20.

Audit quality. Williams discussed how the Enron and WorldCom scandals led to the enactment of the Sarbanes-Oxley Act, which in turn established the PCAOB. While audit quality has improved over the 20 years since, companies face challenges and uncertainties due to the pandemic, and there are more incentives for fraud. Yet audit quality is declining, Williams said.

Inspections in 2021 found that audits with Part I.A deficiencies—where staff believe the audit firm failed to obtain sufficient appropriate evidence to support its opinion on the financial statements or internal control over financial reporting—increased 4 percentage points over 2020. Fully a third of audits contained Part I.A deficiencies. For 2022, the PCAOB is also seeing increased comment forms, which usually result in inspection findings.

Williams said that while the reasons for deficiencies likely vary from firm to firm, some firms said that the pandemic, remote auditing, the Great Resignation, and competition for talent make it difficult to maintain stable audit teams and train new hires. “As we near the end of 2022, these factors are no longer new, and no one should be caught off guard by the challenges they present,” Williams warned. Furthermore, some of the auditing deficiencies have been recurring since well before COVID-19.

The Chair also highlighted some unethical behavior that the PCAOB has sanctioned this year, including exam cheating, modifying work papers, noncooperation with investigations, using confidential PCAOB information, and quality control failures. Firms have a responsibility to enforce the highest ethical standards, and the PCAOB will not tolerate unethical behavior, Williams said. The Board will use its enforcement tools, as evidenced by this year’s imposition of the highest total penalties in PCAOB history.

PCAOB projects. The PCAOB is now working from the most ambitious standard-setting agenda in its history, Williams said, involving the updating of 30 standards within 10 standard-setting projects. The new quality control standard, which is open to public comment through January, was a “watershed moment” because quality control systems are the foundation of how firms approach audits.

The Board also finalized stronger requirements for audits involving multiple audit firms and is on track to issue a proposal on the confirmation process. This proposal was scheduled to be taken up at an open meeting on December 20.

After confirmation, the PCAOB is on track to update requirements on illegal acts by clients, going concern, attestation standards, and due professional care. There are also four projects on the midterm standard-setting agenda and several projects on the separate research agenda. Specifically, the Board will leverage what it learned from its 2015 concept release on firm and engagement performance metrics while evaluating the current environment around this topic. The plan is to move this to the standard-setting agenda in 2023.

Williams quoted Senator Sarbanes as saying, “Trying to maintain high standards is a difficult job.” It is the PCAOB’s job, and the Board is driven by its mission to protect investors. The official asked the audience to keep investors in mind when upholding high standards in audit quality: “Resist complacency, sharpen your focus and meet your responsibility to verify the honesty our system depends on with a vigilance that is worthy of their trust.”