The Public Company Accounting Oversight Board has published a new document highlighting conversations it has had with audit committee chairs on what has worked best for them in improving audit quality.
“Continuous dialogue with audit committees on areas of mutual importance helps us to advance our mission and may assist audit committees in fulfilling their duties,” the PCAOB said. “To that end, our conversations focused broadly on audit quality, with specific discussions around such topics as audit committee perspectives of the auditor, new auditing and accounting standards, and technology and innovation.”
According to the PCAOB, among the measures audit committee chairs said are working well for improving audit quality include:
- Asking the auditor if the audit firm has an annual audit quality or transparency report or other document that outlines how the firm measures audit quality;
- Understanding and discussing the processes the auditor has in place to address the previous year’s PCAOB inspections report;
- Reviewing other audit firms’ inspections reports to see if there are any lessons learned or questions about potentially similar issues that could be discussed with your auditor;
- Selecting relevant AQIs to discuss with the engagement team and use as part of an annual evaluation; and
- Discussing at least annually the audit procedures performed at shared service centers (when used), what controls are in place, the impact on the quality of the work product, and whether the audit firm is considering additional shared service centers.
Relevant to their relationship and communication with auditors, “most audit committee chairs were satisfied with their relationship with their auditors, the service from the audit firm and engagement teams, and the team’s skepticism and judgment,” the PCAOB noted.
What works especially well, the PCAOB noted, is:
- Holding a pre-call or meeting with the audit committee chair and lead engagement partner prior to an audit committee meeting to review and refine the meeting agenda and materials;
- Conducting an assessment, at least annually, of the engagement team and audit, including discussions around what went well and what could be improved;
- Asking the audit firm about any matters that arose during a PCAOB inspection;
- Having the audit committee chair visit the component location(s) for multilocation audits; and
- Dedicating some audit committee meetings to deep dives on specific topics—like governance processes or cyber-security—and having the auditor provide feedback on best practices or other trends they are seeing in those areas.
Most audit committee chairs evaluated audit quality with an emphasis on their engagement team and a lesser degree of focus on the characteristics of the audit firm. Many noted if their engagement team was performing well, firm-wide metrics often provided by audit firms in annual audit quality or transparency reports were less relevant to them. Others also noted they believe audit quality centers on the exercise of judgment, which they said is difficult to measure.
There were varying levels of familiarity with the term audit quality indicators (AQIs), with the majority of audit committee chairs having little to no familiarity with the term. Many, however, were familiar with metrics commonly thought of as AQIs, particularly related to the quality of the engagement team, including the engagement team’s:
- Communication (direct, clear, thorough, and timely)
- Industry expertise
- Knowledge of the issuer and issues
- Leadership ability of the lead engagement partner
- Location (i.e., key team members live near the issuer)
- Quality and continuity (i.e., good succession planning)
- Professional skepticism and judgment
- Project Management
- Training and continuing education
- Use of the firm’s national office
- Use of the work of specialists
Many were aware their audit firm used shared service centers and had virtually no concerns about them, particularly since the lead engagement partner is ultimately responsible for the quality and service of all aspects of the audit work. They noted with proper oversight and controls, shared service centers were a good way to concentrate and leverage expertise while providing quality and cost-efficient service.
New accounting standards
Not surprisingly, audit committee chairs “spent significant time discussing new accounting and auditing standards with their auditors and most felt like their auditors were proactive and timely in addressing new requirements,” the PCAOB said. One thing that has worked well, however, is “discussing new accounting and auditing standards with the auditor as early as possible, at least a year in advance of implementation deadlines,” the document states.
Other measures that have worked well included “creating a timeline to make sure the appropriate processes are in place and milestones are met for implementation of new standards, including the auditing of the implementation,” as well as “using outside consultants or experts to educate the audit committee on new or complex accounting standards.”
Most audit committee chairs the PCAOB said it spoke with “indicated that the audit committee is primarily responsible for cyber-security and it is a top priority for the committee and board. Many indicated that they are committing significant resources to cyber-security detection and prevention, including by hiring third-party consultants or dedicated internal resources or teams.”
From the perspective of audit committee chairs, the PCAOB said what is working well in this area includes:
- Using project management software or a site where the audit committee, auditor, and management can track the status of the audit plan;
- Discussing with the audit firm the technology and software tools being used and how they’re being used; and
- Learning more about technology and scheduling time on the audit committee agenda to do deep dives on new and emerging technologies.
The PCAOB’s comprehensive document goes on to provide an overview of its inspections process and staff responses to frequently asked questions in their conversations with audit committee chairs, including questions about how the PCAOB selects audits to inspect and what those inspections entail; what happens when deficiencies are identified in the inspection process; and more.