PCAOB representatives spoke during two sessions on Monday and Tuesday of the Conference, highlighting several key projects in their ambitious standard-setting agenda. Financial executives are well served to stay abreast of these activities and have meaningful dialogues with their audit committee and auditor. Here we discuss the topics we think may be of most interest.
“While the use of data and technology in the audit has been discussed previously, we were pleased to hear the coverage on this subject given it is becoming increasingly important as issuers and independent auditors continue to make significant investments in new tools and advanced technologies.”
— Jamie Lynch, KPMG Deputy Chief Auditor
Digital transformation
The use of data and technology is on the PCAOB’s agenda and the Board recently established a Technology Innovation Alliance (TIA) working group, with Board Member Christina Ho leading the efforts. She stated that the TIA working group will take a holistic approach to analyzing the impact of technology on audits and the PCAOB’s activities, and make strategic recommendations to the Board.
Chief Auditor Barbara Vanich shared that the Board intends to consider proposing a revised confirmation standard at its December 20 open meeting. Consistent with the PCAOB’s Strategic Plan to modernize standards, the proposal is expected to consider changes to the confirmation process, including how to address changes in the use of technology.
Quality Control (QC) standard seen as critical
The PCAOB highlighted its recently proposed quality control standard, open for comment through February 1, 2023. The PCAOB believes this standard will be a ‘watershed moment’ because getting QC right at an audit firm improves audit quality.
The proposed standard includes requiring:
- an annual assessment of the audit firm’s QC system with the audit firm’s CEO signing off;
- communications by auditors to the audit committee about the firm’s most recent annual evaluation of its QC system; and
- firms auditing more than 100 issuers having at least one independent individual overseeing the audit practice.
Firm and engagement performance metrics
On the PCAOB’s research agenda is ‘Firm and Engagement Performance Metrics’, which considers the development of key indicators of audit quality and effectiveness, and potentially requiring audit firms to disclose these indicators. Updates on this agenda item are anticipated during the coming year.
Based on the PCAOB’s 2015 concept release, indicators may fall into the following three groups:
- audit professionals – availability, competence and focus of those performing the audit;
- audit process – audit firm’s tone at the top and leadership, incentives, independence, attention to infrastructure, monitoring and remediation; and
- audit results – financial statements, internal control, going concern, communications between auditors and audit committees, and enforcement and litigation.
Developments in multi-national audits
"By the end of the month, the PCAOB is expected to make this year’s determination of whether it has been able to inspect and investigate completely audit firms located in China and Hong Kong. Issuers audited by those firms would be subject to trading prohibitions as determined by the SEC if, after three years of determinations, complete access is not provided."
— Laurel Hammer, KPMG Deputy Chief Auditor
Update:
On December 15, the PCAOB announced that it had secured complete access to inspect and investigate Chinese firms.
Recent PCAOB developments that may affect multi-national companies if other auditors are involved in the audit, include:
Inspection of audit firms in China and Hong Kong
Chair Erica Williams provided an update on the PCAOB’s ability to inspect Chinese firms based on an agreement with Chinese officials. The agreement grants the PCAOB complete access to the audit work papers, audit personnel and other information needed to inspect and investigate Chinese audit firms.
The PCAOB sent an inspection team to China earlier this year, and Williams mentioned that the PCAOB is evaluating the information the team obtained to determine if it was able to completely inspect the Chinese audit firms. At stake is the potential US trading prohibitions of the issuers on the SEC’s list of ‘Commission Identified Issuers’.
Update: On December 15, the PCAOB announced that it had secured complete access to inspect and investigate Chinese firms.
Other Auditors’ PCAOB standard
Recent amendments to this standard strengthen a lead auditor’s oversight requirements in audits involving other accounting firms. The amendments were made as part of the PCAOB’s standard modernization efforts and were in response to the increasingly global operations of issuers.
Effective in 2024, the amendments will likely lead to increased work by the lead auditor through additional communication and supervision efforts.
Other standard-setting projects
Two other short-term standard-setting projects of interest include:
- Noncompliance with laws and regulations – enhanced requirements for auditors’ identification, evaluation and communication of possible illegal acts are being considered by the Board; and
- Going concern – the Board is considering strengthening requirements for auditors’ identification of conditions and events that could indicate financial distress, evaluation of the company’s plans to alleviate substantial doubt, and related auditor reporting considerations.
Enforcement
Consistent with the SEC’s enforcement results, the PCAOB is approaching enforcement with renewed vigilance; it is rethinking the types of cases it pursues, how it identifies those cases and the sanctions it imposes. This renewed vigor by both the SEC and PCAOB is one of the many tools they are using to showcase their continued focus on quality throughout the financial reporting supply chain.