Audit regulators delivered some rare praise to public company auditors in a new report describing compliance with a new auditing standard governing communication with audit committees.
The Public Company Accounting Oversight Board said it was “encouraged” that most firms had incorporated the requirements of Auditing Standard No. 16, which took effect in 2013, into their audit practices. In their 2014 inspection cycle, which reviewed 2013 financial statements, the PCAOB said inspectors found no failures to comply with the standard in 93 percent of the audits they reviewed. The board said preliminary results from 2015 inspections reflect similar results.
The PCAOB adopted AS 16 to establish more specific requirements for auditors to communicate the audit strategy and results to the audit committee before issuing the audit report. The PCAOB said the standard would improve audit quality by enhancing communication between auditors and audit committees.
"The communication between an audit firm and the audit committee is fundamental to a reliable and high quality audit,” said PCAOB Chairman James Doty in a statement. “I encourage auditors and audit committee members to read this report carefully.”
The PCAOB reports says its 2014 inspection cycle dug into portions of 789 audits across 219 firms. AS 16 applied to 70 percent of those audits based on the effective date of the standard. Of those 551 audits, 335 were performed by firms that are members of the six largest global audit networks.
In addition to the normal inspection procedures, the PCAOB also performed additional procedures to evaluate how 125 separate firms implemented the standard, looking for changes made to the firm’s audit methodologies, materials provided to audit staff during training, implementation guidance prepared by the firms, implementation tools, and monitoring procedures.
The PCAOB said inspectors also interviewed audit committee chairs and engagement partners on about 140 audits to gauge the relationship, any changes in their interaction, the audit committee’s effect on the scope of the audit, and the audit committee’s reaction to risks communicated by the auditor.
The PCAOB says it found lapses in 36 of the 551 audits where the standard was in effect, for a rate of 7 percent. Failures to comply “were more often identified in audits conducted by firms other than member firms of the six largest global networks,” the PCAOB reported.
The most common mistakes included instances where firms did not communicate an overview of the audit strategy, timing, or significant risks, or where firms did not communicate as applicable a substantial doubt in the company’s ability to continue as a going concern. Inspectors also found instances where firms did not sufficiently document oral communication with the audit committee.