Audit regulators are preparing to issue a proposed new requirement around firms relying on others outside the principal firm to assist with audit work.
The PCAOB has scheduled an open meeting to consider the proposal, where board members typically question staff members about a prepared proposal and then vote to issue it for public comment. The new proposal would address the lead auditor’s responsibilities with respect to those other auditors from outside the principal audit firm who participate in the audit.
The PCAOB has already approved a new standard requiring audit firms to identify firms or individuals from outside the principal audit firm who have a hand in the audit, along with the name of the engagement partner on each audit. That rule must be approved by the Securities and Exchange Commission before it can become final and effective.
In its standard setting agenda, the PCAOB says the role of outside auditors has become more significant as public companies have become more global. It’s not unusual for the global audit networks to rely on network firms in other countries to perform audit work on information that originates in those countries, for example when a company has operations or subsidiaries overseas. The PCAOB has toiled mightily to gain regulatory access to overseas audit firms that are registered to do work that flows into U.S. capital markets, but inspectors remain shut out of certain countries, most notably China.
“The lead auditor often involves other auditors at various locations of the company, including in areas of the audit where there is a high risk of material misstatement in the financial statements,” the PCAOB notes in its agenda. “In light of observations from the board's oversight activities and other developments, the staff is drafting, for the Board's consideration, proposed amendments to improve the auditing standards that govern the supervision of audits involving other auditors.”
Separately, the PCAOB also is asking for public comment on the effectiveness of a standard adopted in 2009 governing the engagement quality review. Auditing Standard No. 7 established new requirements for the review firms are required to perform internally. The PCAOB is performing its first-ever post-implementation review of the standard.
The PCAOB is planning to analyze internal and external data in performing its review, but the board also is posing a series of open questions and asking for comment on the overall effectiveness of the standard. The board is asking, for example, if the standard has led to reviews that increase the likelihood of catching a mistake before an audit report is issued. Has it affected the credibility of financial statements? Has it produced unintended consequences? How has it changed practice?
The board is accepting comments through July 5.