A newly seated Public Company Accounting Oversight Board is taking a hard look at its approach to regulating the public company audit process, including whether its most visible and controversial activity—audit inspections—is in need of an overhaul.
In his first public remarks since becoming chairman of the PCAOB nearly six months ago, William Dunhke said the new board is conducting a “comprehensive organizational assessment” via an external survey, internal questioning of staff, and direct stakeholder outreach to develop a new, five-year strategic plan.
Formed under the Sarbanes-Oxley Act, the PCAOB can no longer be regarded as an organization in its infancy, said Duhnke. “While the PCAOB is no longer a nascent organization, many of our operations and programs maintain their original design,” he said. “It is time we give them a fresh look to consider whether their design continues to meet our needs in a rapidly changing environment and to support us in achieving our mission.”
The new, five-member board has identified “substantial opportunities” to improve on policy making and external engagement, said Duhnke. “Based on our initial internal and external outreach, it appears that much of our workforce and many of you perceive similar opportunities,” he said in a speech at the University of Kansas. “We look forward to defining the contours of changes that are responsive to what we've learned.”
With extensive data on more than 3,500 inspections examining more than 13,000 engagements over its history, much of the self-examination appears focused on the inspections process. Noting concerns expressed earlier by the PCAOB about a plateau in improvements in inspection outcomes, Duhnke said “now is an excellent time for us to consider the potential reasons for those plateaus, including considering the continuing effectiveness of our current inspection approach in driving further improvement in audit quality.”
The board is exploring a long list of questions along those lines, he said, including whether there are targeted actions that could drive improvements in specific areas of concern, whether research efforts can help shape inspection priorities and approach, whether historic inspections data can identify insights that would further improve audit quality, and whether such data should be shared more publicly.
The PCAOB is also exploring whether the inspection process should be more targeted on the role of quality control systems to prevent audit deficiencies and whether a change in approach to selecting engagements for inspection would provide a different perspective. The examination is considering whether to decrease the number of audits inspected where firms have shown improvement and whether to modify the timing or frequency of inspections at certain firms.
“Is there additional guidance or transparency that we can provide about our remediation decisions?” Duhnke asked. “Finally, does our inspection approach introduce unnecessary and unexpected costs into the financial reporting system, without achieving corresponding benefits to audit quality and thus investor protection?”
Duhnke’s remarks follow closely the announcement that Helen Munter, the board’s longtime director of inspections, will leave the PCAOB at the end of May. In a prepared statement, Munter said she was proud of the inspections process that has been established. She did not indicate what she plans to do after departing the PCAOB. Earlier staff departures since the announcement of an all-new PCAOB have included Gordon Seymour as general counsel and Samantha Ross, the board’s original chief of staff who served as special counsel to its most recent former chairman, James Doty.
The PCAOB plans to publish a draft strategic plan in July that will be open to public comment, then finalized as the board submits its budget to its overseer, the Securities and Exchange Commission, in November, Duhnke said.