The Public Company Accounting Oversight Board (PCAOB) on Thursday published its annual report highlighting feedback received from its discussions with audit committee chairs during the previous year.
The PCAOB in 2021 spoke with 244 audit committee chairs at U.S. public companies regarding their perspective on the current landscape of the audit profession, areas in need of improvement, and new and emerging trends. Discussions touched on use of technology; cybersecurity; environmental, social, and governance (ESG); and more.
Below are five key points shared in the PCAOB’s report.
1. Concerns with technology
The PCAOB noted audit committee chairs’ comments were “not uniformly positive or bullish” regarding the impact of technology on audits. While praise was largely paid to the value of data analytics and automation, audit committee chairs stressed their concerns for cybersecurity, noting technology systems are often vulnerable to hackers. Another worry expressed was that use of technology “might weaken the audit by eliminating critical human interaction.”
One audit committee chair told the PCAOB “automation can make people lazy, which is why checks and balances are essential as automation becomes more prevalent.” Multiple audit committee chairs stressed the word “emerging” when discussing technology, highlighting that the potential of artificial intelligence and other tools is just beginning to be tapped.
2. ESG on the radar
Roughly 70 percent of audit committee chairs cited ESG matters as a key area of discussion, according to the PCAOB.
“[J]udging by our conversations, matters related to ESG are either already at the top of many audit committee agendas or they are gaining such prominence,” the regulator continued. “‘Huge issue,’ ‘hot topic,’ (and) ‘pressure from investors’ were recurring phrases.”
Conversations with audit chairs in 2022 will likely increase focus on ESG matters after the Securities and Exchange Commission proposed its highly anticipated climate-related disclosure rule early last week.
3. Hot accounting areas
Topics consuming the most amount of time during audit committee meetings in 2021 included goodwill accounting and impairments, revenue recognition, and recording credit losses, the PCAOB noted.
Absent was any mention of lease accounting, another area the agency flagged in its 2020 report. The Financial Accounting Standards Board’s leases standard took effect for public companies in 2019; private companies are now on the clock after the standard became effective on their end for fiscal years beginning after Dec. 15, 2021.
4. Covid-19 remains ‘big topic’
The first full year of the Covid-19 pandemic continued to weigh heavy on the mind of audit committee chairs regarding company liquidity, going concern assessments, relevant disclosures, and management of the audit in the remote environment and the audit risk assessment, according to the PCAOB.
An Audit Analytics study from September on aspects of public company financial reporting and financial health impacted by Covid-19 found the pandemic caused a significant increase in impairment charges but did not change the number of companies reporting going concerns.
5. Areas for improvement
“More than any other factor, audit committee chairs indicated that their satisfaction with the auditor’s work was driven in large part by comprehensive, timely communication,” the PCAOB stated. That said, committee chairs flagged last-minute pileups and communication shortfalls among their biggest pet peeves.
Also cited was management of costs and fees and turnover on engagement teams.