The Public Company Accounting Oversight Board (PCAOB) on Tuesday announced its approval of a rule creating a new audit standard and amending a handful of others regarding audits involving multiple audit firms.
The amendments mark the culmination of a rule first proposed in April 2016 and subsequently subjected to three separate comment periods. The determination to release the final rule represents the first standard-setting action undertaken by the new-look PCAOB, which was overhauled by the Securities and Exchange Commission (SEC) in November following the removal of former Chair William Duhnke III.
If the SEC, which oversees the PCAOB, approves the final rule, it will take effect for audits of financial statements for fiscal years ending on or after Dec. 15, 2024.
The details: The amendments include the adoption of new audit standard AS 1206, “Dividing Responsibility for the Audit with Another Accounting Firm.” Other rules affected include audit standards regarding due professional care (AS 1015), audit evidence (AS 1105), supervision (AS 1201), quality review (AS 1220), and more.
The amendments set out to establish the lead auditor as the clear go-to on audits involving multiple firms. “Enhancing the lead auditor’s supervision of other auditors, including through better coordination and communication, should result in increased investor protection by improving the lead auditor’s ability to prevent or detect deficiencies in the work of other auditors before the audit report is issued,” said PCAOB Chair Erica Williams in a statement.
Notable changes highlighted by the PCAOB include specifying certain procedures for the lead auditor to perform when planning and supervising an audit that involves multiple firms and applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility. Several board members also called attention to a requirement that the lead auditor understand, assess, and respond to other auditors’ knowledge, skill, and ability, including experience with independence and ethics requirements.
“The changes to our existing standards will better ensure that the lead auditor is sufficiently involved in, and evaluates, the procedures performed by other audit firms,” stated Board Member Anthony Thompson. “Such involvement should improve audit quality through better communication among auditors and increase the ability of the lead auditor to prevent or detect deficiencies in those procedures before the lead auditor issues its audit report and before harm to investors can occur.”
Among the driving forces behind the six-year project was the growing globalization of public companies and their reliance on multiple audit firms across international markets. Williams promoted the amendments to also be flexible regarding advances in technology, allowing firms to “develop and use technology that improves the overall interaction between the lead auditor and other auditors to the extent that these advancements in technology lead to improved audit quality.”
“The journey required to update this standard appears to have been long and laborious,” commented Board Member Kara Stein. “… However, this standard is a necessary complement to the Board’s oversight to address adverse audit outcomes, which can be driven by poor coordination and communication amongst auditors.”