The Public Company Accounting Oversight Board is planning to issue a concept release on revisions in quality control standards while making extensive changes in its inspections and audit reports.
A panel of all the members of the recently reconstituted board appeared onstage Monday at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C., alongside the Center for Audit Quality’s new executive director, Julie Bell Lindsay, who posed a series of questions to them. The PCAOB also announced Monday that it will hold an
PCAOB chairman William Duhnke III acknowledged the extensive changes have provoked some controversy: “Some of those changes can be hard,” he said. “Sometimes change can be difficult, but you have to move past the difficulty that change represents.”
The PCAOB’s newest board member, Rebekah Goshorn Jurata, pointed to the impact of the PCAOB’s work to address audit quality, which has led to historic lows in restatements. However, she noted there’s still room for improvement to provide greater consistency. She sees several ways to improve, including the concept release on quality controls, which will be in line with standards from the International Auditing and Assurance Standards Board.
“The other way is to improve quality controls through our inspections program,” Jurata added. “We want to make sure there’s consistency.” She also wants to see better consistency with respect to inspections.
Board member Duane DesParte said the PCAOB looks at quality control systems as being an integral part of an audit and the standards haven’t changed substantially since the PCAOB adopted them in 2003. “Since then the firms have spent a lot of time focusing on quality control,” he said. “Audits are being performed in different ways than 16 or 17 years ago. It’s really time to take a look at it.”
The board decided to issue a concept release first instead of an exposure draft to get feedback from both large and small firms to make sure any new standards will scale appropriately with their size.
DesParte noted that the PCAOB has established new teams for inspections and quality control. The quality control team looked at control objectives across the audit profession. “What we have found is probably not surprising,” he said. “The firms have invested a lot of time and focus on beefing up their quality control systems. It’s not surprising [that] the firms are in various stages with respect to their quality control systems. In 2020, this team is going to go out and do a little more testing of the firms’ controls to see how they’re operating in practice.”
The PCAOB is also putting together a target team to look across firms at targeted areas of focus, DesParte noted. It will initially focus on the six largest firms and what their methods are with group audits of multiple-location engagements to see how the methodologies are being executed. The board is also taking a closer look at its own inspections of audit firms and its quality control procedures across inspection teams.
The PCAOB is planning to add a new section to its inspections report. “It will have comparative data over time,” said PCAOB board member James Kaiser.
The new report format will include findings such as whether a firm obtained sufficient information to support its audit reports and if a database wasn’t archived in the appropriate time frame. “Our original plan was that we would issue this for all the firms resulting from our ’18 inspections,” said Kaiser. “It’s taking a little more time than we had planned for the six largest firms, and all the other firms we had inspected in ’18. All the firms for ’19 inspections will have the same new template. We anticipate that we will issue the new reports in late winter or early spring of next year. This is the first step and we will ask for feedback and adapt it over time based on feedback to address the format of the report and the timeliness of how we issue the reports.”
Audit committee members want to know more about the inspection program. “They’re interested in seeing the biggest challenges the firms are having with their auditing,” said DesParte. “They’re interested in where we see potential issues to make their oversight more effective.”
Board member J. Robert Brown Jr. said the PCAOB is also looking at the Form AP, which is used for auditor reporting of certain audit participants, and making sure that firms are actually filing it: “We’re emphasizing high-impact cases,” he said. “We brought our first case of violations of Form AP.”
The PCAOB is also seeing increased use of the auditor search function on its website, which ties into Form AP. It found over a million individual searches on Form AP, not counting the PCAOB’s own internal searches. “A lot of people are hitting up that database,” said Brown.
The PCAOB has been issuing more guidance on its new audit report requirements for disclosure of critical audit matters, or CAMs. Later this week, the PCAOB will be publishing its initial observations and feedback on the new audit reports. It has been finding approximately two CAMs per audit, typically in areas such as goodwill impairment and revenue recognition. The PCAOB will also be giving more advice on the use of CAMs. “There should not be a gap between what’s in the CAMs and in the audit workpapers,” said Kaiser.
The PCAOB plans to get more involved in hearing from investors and audit committees. So far, the new board has met with more than 400 audit committee chairs and has set a goal of talking to 100 percent of them. “We’re pushing ourselves to make sure we’re involving ourselves with investors,” said Duhnke. “We’re getting the word out that we’re reachable and can be communicated with.”
The new PCAOB has not had a meeting with some of its standing advisory groups yet, however, including its investor advisory group. Duhnke said the board is currently reevaluating the advisory groups. “We continue to have discussions and ongoing conversations about advisory groups,” he said. “As soon as we get to a happy place, the advisory groups will be reconstituted and they will meet again.”
