Public Company Accounting Oversight Board Chairman William Duhnke III and board members discussed the organization’s current-year activities and plans for next year at the American Institute of Certified Public Accountants’ (AICPA) conference last week. The foundation of the PCAOB’s efforts has been driving continuous improvement in audit quality and oversight through its inspection program, along with extensive outreach to auditors, audit committees, investors, and preparers.
The PCAOB is in Year 2 of its transformation of the inspection program, which includes a focus on audit firm quality control, especially at the largest firms. It intends to target certain important issues across the profession on a timely basis, including multi-location audits and COVID-19 risks.
PCAOB Board Member Rebekah Jurata shared her view that the overall state of audit quality has improved. Accounting firms are taking inspection report findings seriously. However, the PCAOB still sees recurring deficiencies in the areas of revenue recognition, internal controls over financial reporting, estimates, and independence.
In June, the organization made significant changes to its inspection report format, intended to communicate results more effectively and clearly. Duhnke expects it will continue to refine reports based on feedback received; issuing timely inspection reports is one of his top strategic focus areas for 2021.
Consistent with most of the presenters at the conference, the PCAOB’s activities this year were affected by COVID-19. Its inspection program became 100 percent remote for the first time, using video conferencing in place of on-site inspections. To address how the pandemic was affecting audit quality, it reviewed a sample of June 30 year-end audits early rather than waiting for 2021 and looked at some first- and second-quarter 2020 interim reviews, which is not usually done. It also continued international inspections despite the global pandemic.
The pandemic did not have any impact on the Board’s enforcement activities, according to Jurata. It was able to take testimony remotely and prioritized audit risk violations affecting investors and independence violations.
Fellow Board Member Megan Zietsman discussed the importance of auditors having knowledge of their clients’ businesses and internal controls and how they have changed in the COVID-19 environment. Because of new and exacerbated risks of material misstatement and fraud, auditors may need to modify procedures and do more work. She noted procedures may have to be modified each quarter as situations evolve. The Board conducted roundtables with preparers and investors that highlighted increased risks from the pandemic relating to cyber-security, changes in internal controls over financial reporting, working remotely, estimates, and the use of specialists. In December, it issued a COVID-19 Spotlight with insights from recent inspections and reminders for auditors.
Critical audit matters (CAMs) are a new area of focus, as auditors have begun to include them in audit reports. Board Member J. Robert Brown noted there has been some discussion about the lack of value of CAMs to investors and users of financial statements. He encouraged auditors writing CAMs to ask themselves if the CAM provides useful information rather than generic, standardized disclosure. He encouraged auditors to show their expertise in their CAM communications and emphasize how different each audit can be as a way to close some of the expectation gap about audits. He is hopeful CAM disclosures will increase in value and become more integrated into public decision-making over time.
Zietsman said the PCAOB updated its standard-setting agenda to focus its attention and resources on projects with public milestones in the next 12-18 months. Projects added to the agenda include “data and technology” and “audit evidence,” to assess the need for guidance or potential changes to standards in response to increased use of technology-based tools by auditors and preparers. The Board is preparing proposed rules on firms’ systems of quality control. It has removed going concern from the agenda because it does not see a need to change the standard at the present time, despite the fact the existing going concern requirements are being tested now like never before.
For 2021, there will be a significant increase in the percentage of inspections selected randomly and the addition of more nontraditional areas of scrutiny, intended to introduce unpredictability to improve audit quality. Zietsman cited COVID-19 effects and related changes in internal controls as two areas of attention, particularly for industries like manufacturing, retail, and transportation that have experienced significant operational disruptions. Audit issues in focus include risk assessment, obtaining audit evidence, access to management in a remote environment, and documenting procedures, along with recurring areas of audit deficiencies.
The PCAOB has been focused on outreach to improve access to the Board and expand the open flow of information. Duhnke calls stakeholder engagement a two-way street, as the Board increases its communications to make sure its work is understood, and stakeholders respond and identify issues for the Board to address.