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PCAOB Sets Sights on Revenue Auditing

Tammy Whitehouse | October 30, 2013

The audit of revenue is starting to appear on the horizon as a target area for tougher enforcement, according to recent remarks by Jay Hanson, a member of the Public Company Accounting Oversight Board.

It's not on the standard-setting agenda yet, but new accounting standards are expected to be final soon, so it's only natural that a new auditing standards should follow, said Hanson in a speech at a recent accounting conference. “It is my hope that the PCAOB will soon devote substantial resources to an audit standard project in this area, and that we will be able to issue a proposal on auditing revenue with sufficient lead time to allow new accounting and auditing standards to become effective at or around the same time,” he said.

The Financial Accounting Standards Board and the International Accounting Standards Board have spent years developing a comprehensive new approach for how companies should recognize revenue. FASB says it expects to issue its final standard by the end of the year, but anticipates setting an effective date of no earlier than 2017 for calendar-year companies. “Revenue is probably the most important number on the financial statements for most investors, and it is one in which our inspectors frequently find problems,” Hanson said. “Revenue recognition also is a complex accounting area. We are monitoring the development of these new accounting standards.”

At the moment, the PCAOB is focused heavily on developing a standard that would expand the current audit report to provide more information than the current pass-or-fail opinion on a company's financial statements. Auditors would be required to disclose the “critical audit matters” that arose in the course of the audit, which includes areas where auditors faced the most difficult judgments or encountered the greatest difficulty in obtaining audit evidence. “I see the proposed critical audit matters as a window into the audit,” said Hanson. “Perhaps you can think of it as auditors telling investors what kept the auditor up at night.”

The board also is putting a great deal of effort into a research project to define and measure audit quality. The project is focused on identifying the key indicators of audit quality that ultimately could become objective measures of audit quality. The board hopes to issue a concept release “in the coming months” to reveal what it has developed so far and seek feedback. If successful, the project could affect any number of PCAOB activities going forward. “It could affect the content or focus of inspections and inspection reports, influence potential future standard-setting projects, and may help firms to track their progress over time,” Hanson said. “In addition, measurable indicators of audit quality may provide important information to audit committees trying to evaluate the performance of their auditors.”