Here’s a call to attention for audit committees. Audit regulators are rolling out a powerful gift they worked hard to win that will help you better assess the quality of your external auditor.
A second component of Form AP filings is taking effect this summer to give audit committees some visibility into how much of their audit work is performed by firms other than the principal audit firm they hired. Regulators estimate virtually every multinational company will begin to see the names of at least one or two additional audit firms that are performing key parts of their audits.
The Public Company Accounting Oversight Board adopted a new filing requirement for all registered audit firms that compels firms to name both the engagement partner on each public company audit and the names of any outside participants who contributed to the audit work. The transparency initiative is meant to give audit committees more information about who is performing the work they are relying on.
The PCAOB began the effort several years ago, aspiring to compel engagement partners overseeing audits to take pen in hand and sign off on their audit work, much the way CEOs and CFOs must certify financial statements under Sarbanes-Oxley. After much legal resistance over liability concerns, the PCAOB sought to have firms name engagement partners in audit reports, but hit the same legal walls. Ultimately, the PCAOB settled on requiring firms to provide the names of engagement partners in the separate filing. While it requires stakeholders to do a little more research, the separate filing provides the benefit of assembling all the information into a searchable database.
In addition to naming the engagement partner, firms also are required to identify outside firms who participated in the audit, which is common practice when U.S. firms rely on overseas affiliates to audit the overseas subsidiaries or divisions of multinational companies listed on U.S. exchanges. While the engagement partner identifications began in early 2017, that second component of the Form AP filing requirement kicked into effect in mid-2017, so those names are just starting to roll out on the PCAOB website.
The PCAOB is not even sure itself how multinational operations are being audited, says PCAOB member Lewis Ferguson in a recent article on the new information now gathering in Form AP filings. “For the first time in the United States, we are about to see how much of an audit is being performed by foreign affiliates of the lead auditor,” writes Ferguson in partnership with his special counsel, Zoe Sharp.
While it will take time for information to accumulate in the PCAOB database that will be meaningful to audit committees, Ferguson says audit committees should plan to use this information in dialogue with their external auditors to assess the audit firm’s work.
Ferguson says he’s observed audit committees in the United States are not terribly focused on or even aware that components of their audit are being performed by other firms. In some cases, those firms may be located in jurisdictions where the PCAOB has had no access to perform regulatory inspections, giving U.S. audit clients no real way to know what the quality of that work might be like.
“Audit committee members should be asking their auditors about these global inspections and whether there are findings in the inspections of their lead auditor’s affiliates,” Ferguson wrote. “If they are not asking that question already, I believe this new disclosure will draw audit committee attention to the magnitude of the percentage of the audits performed by affiliates or other component auditors rather than by the United States firm and therefore to the significance of their participation.”
Ferguson says the global networks are making improvements in assessing the work of affiliates abroad, but clients and investors can play a role in calling for continued improvement by demanding more information. “The networks face challenges of data privacy within certain jurisdictions, and a lack of central control over their affiliates, and in some instances, the lack of a path for information to flow regarding regulators’ findings from one jurisdiction to another,” Ferguson says. “As greater focus is trained on group audits, we expect that both firms’ and audit committee processes will evolve so that greater focus will be placed on inspection results, by both the firms’ own internal inspections as well as those of outside regulators in evaluating component auditors.”