Officials from the Public Company Accounting Oversight Board and the Financial Accounting Standards Board discussed their work on upcoming auditing and accounting standards as they adjust to changing agendas and expectations.
"We still have our job to do to protect investors, which is our mission," said PCAOB board member Duane DesParte during a session Tuesday at Financial Executives International's Current Financial Reporting Insights conference in New York. "Our strategic plan is really focusing on all of our programs to ensure that we are meeting that mission."
DesParte is the longest serving board member at the PCAOB, but the board recently went through a radical overhaul after the Securities and Exchange Commission at the behest of its chairman Gary Gensler decided to oust the former PCAOB chairman and replace several of the other members last year (
"We have put out an ambitious standard-setting agenda, partly because we have to do a lot of catchup," said Ho. "We haven't had a lot of the standard-setting activities in the past, so we've got a lot on our plate, and we have been working very hard to do that. Inspection has been one of the primary tools in the past 20 years that we use to improve audit quality. More than half of our resources are devoted to inspecting firms' audits. That is a very important program, and we need to continue to enhance that."
Gensler has been urging the PCAOB to increase its enforcement activities as well as inspections, while updating auditing standards that were inherited with the passage of the Sarbanes-Oxley Act of 2002 from the American Institute of CPAs.
"We are strengthening our enforcement, and we want to make sure that the enforcement program reinforces our inspection and standard-setting program as well," said Ho. "The fourth strategic goal is more internally focused, which is very important. It's to improve our organizational effectiveness. That includes improving our employee experience. I'm sure all of you are dealing with talent challenges, and it's very important for us to make sure that we can recruit and retain talent, especially during a time when we have such accountant shortages. Without talent, we can't do anything."
The PCAOB has also been reviving two of its outside advisory groups that had largely gone dormant in recent years.
"We have reconstituted two advisory groups after the full board was assembled," said Ho. "We want to continue to engage our stakeholders to give us feedback on all the work that we're doing. Part of the organizational effectiveness is improving our internal processes. We are like any organization that has processes that are not great, and we need to be able to streamline those internally so that we can be efficient. That goes hand in hand with improving employee effectiveness because processes can be frustrating to employees, and we want to continue to improve on that."
Inspections are helping the PCAOB monitor how firms are doing and encourage them to enhance their audit quality. "We conduct inspections on about 250 firms every year across the globe," said DesParte. "We look at about 900 audit engagements every year and we also look at the quality control system at each of the firms we inspect. So each year we get a pretty good view of how auditors are applying our standards and where our standards may need to be strengthened. We get a good view of where maybe we need to give more guidance to auditors to help them do the job more appropriately. We also identify good practices and over the past several years we've been trying to do a better job of sharing what we're seeing in terms of good practices so other firms can pick those up as well."
He agreed with a comment from panel moderator Brian Croteau, a partner at PwC and a former deputy chief accountant at the SEC, about how the PCAOB inspections program can be a key driver of continuous improvement in audit quality over time.
"We're engaging with the firms, giving them our perspectives," said DesParte. "Sure, we also have findings, but we are also giving them our perspectives on where they can do better. To make it work, you need to have a constructive open dialogue between the inspectors and the audit teams and the firms. We've worked hard to not have a gotcha approach, but more of a constructive engagement approach. At times, when we're performing inspections or in other ways, we may learn of violations of our rules that warrant enforcement response. When firms and/or auditors violate our rules, they need to be held accountable so enforcement is also a very important tool. It helps to hold people accountable, but it also helps to drive deterrence for similar behavior in the future."
During a press conference following the session, Accounting Today asked about the audit quality project that the PCAOB has been working on for years but seemed to put on the back burner. More recently, it has been returned to the agenda, at least the research agenda.
"I think that audit quality indicators have been something that our stakeholders have been asking for for a number of years now," Ho responded. "We've heard more from investors wanting audit quality indicators. We are aware of the challenges of coming up with something like that that's comparable. In the Standards and Emerging Issues Advisory Group we've heard them asking for things that are engagement specific and comparable. We are continuing to try and evaluate what would make the most sense and that's why it's in our recent agenda, but as Chair [Erica] Williams mentioned, we don't intend for things to stay on our research agenda forever. We hope that based on our feedback and engagement, we have determined what the best next steps are."
Like the PCAOB, FASB has also been rejiggering its research and standard-setting agendas this past year after an agenda consultation last year under chairman Richard Jones. "The technical agenda is the active projects we're working on, and the research agenda is controlled by me," he said. "I do not use it as parking lot. I use it when I think we would benefit from additional information with which our board can then make a more informed agenda decision. That can be different things. That can be not only the different perspectives of different stakeholders, but it can also be a path to what I would call achievable standard setting, so how do we appropriately scope a project. That way when the board adds it to the agenda, we can see an end point. We can see a completion. The research agenda is not a place where projects simply go to sit."
One of the most heavily requested projects for FASB to tackle was accounting for digital assets, particularly cryptocurrency. FASB first added the digital assets project to its agenda and then decided to narrow it to crypto assets, whose drastic declines in value over the past year have been prompting calls to change the current accounting treatment. Last month, FASB decided to require companies to measure crypto assets at fair value and is preparing to issue an exposure draft to stakeholders (
"To be fair, the reactions we've gotten to date have been anecdotal," he responded. "That's part of the reason why we go to an exposure draft, and I'm sure we'll hear more. But I will tell you that a lot of the input we got as we went through the agenda outreach and starting this project has been the criticism about the current model, which isn't a mark down to fair value, but a mark up. People overall think a fair value model would be more reflective of the economics and provide better transparency. That's why we've headed the direction we have so far, but obviously we need to get that exposure draft out and get broader input into our decisions."
