The Public Company Accounting Oversight Board released an overview Thursday of its inspection priorities and areas of focus as the newly revamped board signals a tougher enforcement stance.
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“We developed our 2022 inspection procedures to focus on anticipated financial reporting and audit risks that are primarily driven by the recent economic environment,” said the publication. The PCAOB specifically called out increased IPO and M&A activities, including transactions with special purpose acquisition companies, or SPACs, as areas of heightened scrutiny.
Other focus areas include widespread disruptions in supply chains; the continued negative effects of the COVID-19 pandemic, especially in high-risk industries; increased volatility in financial and commodity markets due to fluctuations in interest rates and inflationary trends; and audit firm-wide risks, such as the heightened amount of staff turnover and risks arising from auditing in a remote environment, including the risk that auditors won’t identify misstatements that could be material.
The PCAOB is also going to look out for fraud and other risks. “The current economic environment changes the risk landscape and may increase existing financial reporting and audit risks or create new ones — including fraud risks — for public companies and broker-dealers,” said the staff.
The PCAOB will continue to put emphasis on audit procedures that address the risks of material misstatement, including the risk of fraud at companies due to accounting complexities, and significant judgments and changes involved in audits of financial statements and internal controls, such as those related to an IPO or significant M&A activities, including transactions with SPACs. The inspectors will also be on the lookout for the negative effects of supply chain disruptions in industries such electronic components and equipment, automobile, retail and materials, and the COVID-19 pandemic in the airline, hospitality and entertainment industries, for example. The PCAOB will also keep an eye out for volatility in the financial market due to fluctuations in interest rates and inflationary trends.
“We will select for inspection audits of public companies in industries — such as banking, energy, and information technology — that inherently pose higher audit risks due to the complexity and judgmental nature of the financial statement accounts and related internal controls,” said the PCAOB staff.
PCAOB inspectors will also focus on how auditors address a number of auditing and accounting risks, including unreasonable assumptions affecting the timing and amount of revenue recognition due to the negative effects of the pandemic and supply chain disruptions (such as delivery delays in the supply chain, reduced demand for services, for example in the hospitality industries, and contract modifications and estimation of contract costs). The PCAOB inspectors will look out for unreasonable assumptions used in projections to account for business M&A combinations or impairment of goodwill and intangible assets due to changing economic conditions, evaluating for example whether assumptions based on historical results are reasonable, along with changes to useful lives of assets, to ensure cost and revenue projections reflect the effect of supply chain disruptions and inflation, and whether discount rate and cost of capital assumptions have been adjusted for interest rate fluctuations.
Other areas of scrutiny will look for signs of earnings manipulation as a reaction to, for example, margin pressures driven by rising costs; complexities regarding the existence and valuation of inventory, such as challenges with observing in-transit inventory and its valuation due to supply chain disruptions and rising costs. PCAOB inspectors will also keep an eye out for financial, economic and business uncertainties that affect the required assessment to evaluate threats and uncertainties about a public company’s ability to continue as a going concern.
