With a new focus on prevention of audit problems rather than detection and remediation, a newly seated audit regulatory board plans to retool its approach to audit inspections, enforcement, and standard setting.

The Public Company Accounting Oversight Board will begin a new approach to its controversial inspection process in 2019, says Chairman William Duhnke, who has focused the early months of his term on leading a “lengthy strategic planning process.” Duhnke and his four fellow board members, also newly appointed at the start of 2018, learned through the process they need to steer the audit regulatory approach more toward identifying and addressing root causes of audit failures to prevent them from occurring.

With respect to inspections, the board is pursuing a number of new activities to overhaul inspections including, “how we select audit engagements for inspection, what procedures we perform during an inspection, what data we collect and use as part of our inspections, and how, what, and when we report on our inspections,” said Duhnke, in one of his earliest speeches as the newly seated PCAOB chairman. “We are also revisiting our approach to remediation determinations, not only to ensure our process is more timely but also that it focuses on driving impactful improvements in the firms’ quality control systems.”

Some of the changes will occur “within a matter of months,” says Duhnke, while others may take a few years to complete. Beginning with the 2019 cycle, inspections will feature an increased focus on audit firms’ approach to their systems of quality control, he says, a change in inspection staffing to focus on issues across firms rather than specific firms, and increased interaction with audit committees.

The PCAOB will also make “incremental changes” to inspection reports, says Duhnke, focusing on timeliness and relevance. “First, we must report on our inspection activities in a timely manner,” he said. “The earlier we bring information to the marketplace, the better.” Long delays in inspection reporting have been common with the PCAOB, reports typically lagging inspections by years rather than months.

While the board is still working out exactly how it will handle reporting going forward, it will steer away from “simply reporting ‘failures’ we observe in individual audit engagements,” Duhnke said. Instead, reporting will focus more on the “nature and severity” of inspection findings.

“We also expect to take a more balanced approach to communicating, by publishing not only those audit deficiencies we observe but also those behaviors and practices we observe that promote or enhance audit quality,” he said. Ultimately, the board is hoping to “shift the public dialogue away from a mere quantification of audit deficiencies to a more balanced and meaningful assessment of audit quality.”

With respect to standard setting, the board plans to wrap up some outstanding projects and take up new projects with respect to audit quality control and changes in the uses of data and technology, Duhnke said. The board expects to finalize new rules on auditing accounting estimates, including fair value and auditors’ use of the work of specialists by the end of 2018. 

The board also is closely monitoring work the firms are doing to prepare for a new standard on reporting critical audit matters. “We are taking a proactive approach in this area because we want auditors to get the requirements right from day one,” said Duhnke. “In particular, we are engaging with audit firms to understand their experiences in performing dry runs with their clients and any implementation issues that may need to be addressed.” After initial reporting begins in mid-2019, the board will assess experiences and results to consider any further action required, he said.

Enforcement will focus on deterrence, said Duhnke. “Effective deterrence results in effective prevention,” he said. To that end, the board will prioritize cases that involve issues posing the greatest risk to investors and those most likely to drive audit quality improvements.

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