As inspectors begin fanning out to inspect 2014 public company audit files, they will be tuning in to emerging market risks around mergers and acquisitions, falling oil prices, undistributed foreign earnings, and the quality of audit work as firms grow other business lines.
The Public Company Accounting Oversight Board published a new paper reaching out to audit committees, Audit Committee Dialogue, to help explain how its inspections of public company auditors can be helpful to audit committees in their duty to oversee external auditors. The paper aims to highlight key areas of recurring concern in inspections as well as the emerging risks the board has identified that may affect audits, like M&A trends, oil prices, foreign earnings, and audit firms’ focus on consulting services.
The paper provides audit committees with a series of question they can pose to auditors on some of the key issues that recur in inspection findings, like the audit of internal control over financial reporting, fair value and other accounting estimates, and auditor assessments of and response to risk, as well as the emerging market risks that are on the board's radar. The PCAOB is actively looking for ways to help audit committees in their oversight of auditors. “To help audit committees champion the audit, the PCAOB aims to better equip them with information about the audit, our inspection reports, and the auditor’s strengths and weaknesses,” said James Doty, chairman of the PCOAB, in a speech at Baruch College as the paper was published.
Doty worries that investors don’t adequately value or place confidence in audits. “An audit report can’t be informative unless it is relevant,” he said. “Thus we are thinking about how well the audit report is serving the investing public.” Companies may not like being audited, but Doty believes they will respect it if the market does as well.
“There well could have been new demand for audit services in the last several years, had public confidence in audits been greater,” said Doty. “But for nearly a generation of professionals coming of age since Enron, it has not materialized. Why is there not greater demand for auditor assurance on XBRL data? Why hasn’t the public turned to the audit profession for auditor assurance on environmental reporting, or cyber-security?”
In a separate speech recently, PCAOB member Jay Hanson acknowledged that the PCAOB is well aware of complaints coming from some public companies that audit inspections are driving excessive demands from auditors. Preparers and audit committees tell the PCAOB that audit costs are rising because fees are rising and companies are incurring additional cost to respond to increasing information requests from auditors, he said.
Hanson said while the number of findings continues to be high, the nature of the deficiencies called out by inspectors is narrowing. “Findings have become more nuanced, such as in the area of internal controls,” he said. “We are seeing better compliance overall with applicable standards but finding deficiencies when we look deeper at whether auditors fully understand and appropriately test certain types of controls.”
Hanson said he’s concerned about claims or perceptions that the PCAOB’s approach to inspections is driving unnecessary auditing procedures “To the extent we learn that auditors go to unreasonable extremes by conducting audits in a way that drives up costs without providing benefits, we want to hear about it so that we can consider an appropriate response,” he said.