The Public Company Accounting Oversight Board will soon give companies and auditors a sneak peek at 2014 inspection findings, and it won’t show wholesale improvement over disappointing results of prior years, said Chairman James Doty.
“We are going to be putting something out soon on what we are seeing in the field,” said Doty, speaking to members of the media at a national conference of the American Institute of Certified Public Accountants. In some cases, that will show improvements both in audit work generally and in internal control audits specifically, but not across the board, he said. “We can see some improvement, but some are not improving,” he said.
The PCAOB has delivered consistently poor marks to the major audit firms in recent years, calling for better audit work particularly in the audit of internal control over financial reporting, revenue recognition, and auditing estimates and fair value. The board has reported most of its findings on major firms stemming from 2013 inspections of 2012 financial statement and internal control audits, but has not yet published findings from its 2014 inspection cycle. That will be the focus of a soon-to-be-provided summary, said Doty.
James Schnurr, only four months on the job as chief accountant at the SEC since retiring from Deloitte, said he believes inspection findings remain persistently high because of improvements to the inspection process itself. “Certainly the quality of inspectors has improved over time, as well as their process of identifying the risky engagements and the risk areas that they select for inspection, which is why we have seen a significant increase in the number of comments,” said Schnurr.
Doty acknowledged the board’s inspection process is becoming more targeted at identifying problem areas in audits. “We continue to find unacceptably high rates,” he said. “Are we raising the bar for audits? The standards are the standards. The audit procedures are the audit procedures. They’ve been there for a long time. If we’re better at finding where are auditors are not doing their job, we’re not raising the bar. We’re refining where the audit firms need to address their efforts. We think the findings will come down as the audit firms come to grips with what they have to do.”
On the standard setting side, the SEC is applying some new pressure to the PCAOB to focus on updating its auditor performance standards. Schnurr said he wants to see the PCAOB move forward on projects that “for quite some time” have been on the board’s standard setting agenda. “When you look at the number of projects that have been on the agenda for such a long period of time, to me that raises the question of whether or not there’s an underlying problem in the standard setting process,” he said.
SEC Commissioner Daniel Gallagher said at the same conference he is pleased to see the PCAOB tying its inspection findings to its standard setting work, but he’d like to see more progress on professional standards as well. He mentioned mandatory rotation and audit transparency as examples of initiatives that should get less priority. “I was pleased when Chairman Doty mentioned rotation was not a front-burner issue,” Gallagher said. “I don’t think it should be when there are so many other things to do.”
Doty acknowledged SEC pressure to address what prevents more expeditious standard setting at the PCAOB, but he also urged caution. “He didn’t say he wanted it to be reckless indifference to the complexity of the issues,” he said. “This is a complex area, and we have to get it right. It should be both deliberate and deliberative.” Doty said he looks forward to working with Schnurr to identify possible changes to the PCAOB’s standard-setting process.
At the same time, Doty said the PCAOB expects to issue new proposals in 2015 on providing some visibility to who performs the audit and on revising the auditor’s report. Doty said he expects the board in early 2015 to issue a supplemental request for comment on a proposal to require auditors to identify engagement partners in public company audits along with a revised proposal on overhauling the standard auditor’s report.
The board has issued two proposals already in 2011 and 2013 on how to get more transparency in who performs the audit, and issued a proposal to expand and revise the audit report in 2013. The transparency proposal will be issued “shortly,” said Doty, to seek comment on a refinement of the proposal to give audit firms an option to name engagement partners either in the audit report or in a separate form provided to the PCAOB at the conclusion of the audit. The proposal on revising the audit report is expected in the spring or summer of 2015, he said.