PCAOB inspectors plan to prioritize fraud, crypto, financial sector

Inspectors with the Public Company Accounting Oversight Board listed their top priorities for inspections this year in a new PCAOB staff report Monday. 

The report describes the PCAOB's plans to increase the focus of its inspectors on fraud-related audit procedures, while continuing to prioritize risks related to material digital assets, and to continue selecting audits in the financial services sector for inspection, among other priorities.

"Increased deficiencies in 2021 inspections and increased comment forms in 2022 inspections revealed a troubling trend in audit quality, which we are tackling head-on in 2023," said PCAOB Chair Erica Williams in a statement. "By staying ahead of new and emerging risks, our inspections plan will hold firms accountable and drive improvements in audit quality for investors."

Last year, the PCAOB found a year-over-year increase in the number of audits with deficiencies at audit firms that the board inspected in 2021. Williams said higher deficiency rates in 2021, coupled with increased comment forms for 2022, were a warning signal. She challenged the audit profession to sharpen its focus on improving audit quality and protecting investors.

The list of 2023 inspection priorities outlined in the report includes:

• Risk of fraud;
• Auditing and accounting risks;
• Risk assessment and internal controls;
• Financial services-specific considerations;
• Broker-dealer-specific considerations;
• M&A, including de-SPAC transactions;
• Digital assets;
• Use of the work of other auditors;
• Quality control (particularly talent retention and its impact on audit quality, and independence); and,
• Other areas of inspection (critical audit matters, cybersecurity, and use of data and technology in the audit).

The report added that the target team of inspectors, who conduct in-depth reviews across audit firms each year, will focus its work this year on audits that include risks related to digital assets, first-year audits, multilocation audits, and significant or unusual events or transactions.
As part of the PCAOB's ongoing efforts to improve inspections, the report also says inspectors will expand the number of audits they review for certain annual firms.

The report noted that the 2023 inspection plan considered overall business risks present in 2022. A few of these business risks included:

• Disruptions in supply chains;
• Volatility in financial and commodity markets due to such factors as inflation, interest rates and currency fluctuations;
• The trend of deal cancellations and redemptions related to special purpose acquisition companies;
• Mergers and acquisitions activities, including de-SPAC transactions; and,
• The ongoing impact of the remote/hybrid work environment.

"Global financial conditions, fiscal and monetary tightening, and economic uncertainties have increased existing financial reporting and audit risks that public companies, broker-dealers and their auditors needed to consider," said the report. "These conditions have heightened the need for auditors to exercise professional skepticism in identifying and assessing risks of material misstatement and to plan and perform audit procedures in response to their assessments of the risks of material misstatement and fraud in the financial statements."

The report can be found on the PCAOB's Staff Publications page, along with other resources explaining the board's and its staff's activities and observations.