The Public Company Accounting Oversight Board apparently is taking seriously complaints that its inspection process is driving unnecessary audit work, and therefore a burden on companies answering unnecessary audit requests, although it's not yet offering any concrete answers.
At a recent conference of financial executives, PCAOB member Jay Hanson said the board has studied its inspection process to assure inspectors are reviewing audit work against applicable auditing standard and is comfortable that inspections are not imposing new audit requirements beyond those contained in auditing standards. Still, he said, “we cannot rule out” concerns that findings around internal control over financial reporting are driving too much audit work, or the wrong kind of audit work. “We need to be mindful about whether the audit effort pendulum has swung too far,” he said, according to his prepared remarks.
In 2012, PCAOB inspections found fault with the audit of internal control in 36 percent of all the audits selected for inspection at the largest firms. In 2013, the deficiency rate rose to 39 percent. In part, that’s because the board follows a risk-based process to search for audit problems, so it’s not selecting audits randomly for inspection. “Nevertheless, this area clearly remains a huge challenge for firms,” Hanson said.
The U.S. Chamber of Commerce called for meetings with the PCAOB and the Securities and Exchange Commission to discuss the issues, which occurred earlier in 2015 and in the fall. “Based on our discussions, it appears that some of the additional work being performed by auditors and the additional efforts required of management in some cases have increased management's focus on and understanding of controls and resulted in improvements in the control environment,” Hanson said.
The PCOAB member also acknowledged complaints that some audit demands require creation of documentation by management that isn’t useful or doesn’t provide any greater assurance about the state of controls. “We have also met with audit firms to better understand their approaches to auditing internal controls and how their methodologies and documentation requirements have evolved,” Hanson said.
PCAOB Chairman Jim Doty and SEC Chief Accountant Jim Schnurr earlier told a panel of PCAOB advisors that the board was open to the discussions, but wanted to hear meaningful anecdotes, not heresay, in granular detail. Schnurr said the exploration could lead to a conclusion that there are problems in any number of areas -- auditing standards, audit execution, interpretation either by auditors or inspectors, firm guidance, or even SEC guidance and its correlation to auditing standards.
Without offering a silver bullet, Hanson said the PCAOB, the SEC, audit firms, and management need to continue to monitor events “to achieve an appropriate balance between auditors doing sufficient and meaningful audit work to gather the right amount and the right type of audit evidence while not imposing unnecessary burdens on management or causing needless delays in the financial reporting process.” He said the Chamber-initiated meetings have provided “a great start to what I hope is a regular continuing dialogue.”