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PCAOB Broadens Outreach to Audit Committees

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PCAOB Broadens Outreach to Audit Committees

Highlights key areas of recurring concern in PCAOB inspections of large audit firms as well as certain emerging risks to the audit

Monday, May 11, 2015

By Michael Cohn, Editor-In-Chief, AccountingToday.Com

The Public Company Accounting Oversight Board has issued a communication to audit committees known as an Audit Committee Dialogue, promising it will be the first in a series to provide insights from inspections of public company auditors that may be helpful to audit committee members in their oversight of auditors.

The Dialogue highlights key areas of recurring concern in PCAOB inspections of large audit firms as well as certain emerging risks to the audit. The Dialogue also provides targeted questions that committee members may ask their auditors on each topic.

“We are doing more in the way of outreach, especially to audit committees, with a view to help raise awareness of audit risks and challenges,” said PCAOB chairman James Doty, during a speech Thursday at a financial reporting conference at Baruch College in New York. “Audit committees play an important role in protecting investors’ interest in accurate financial reports and reliable audits.”

He noted that the PCAOB wants to better equip audit committees with information about the audit, PCAOB inspection reports, and the auditor’s strengths and weaknesses. “We have been meeting with audit committee members in groups and at conferences for a few years now,” he said. “Those meetings have given us the background to broaden our outreach, and take it to a new level. To that end, we have developed a communication tool to provide audit committees insights from our work.”

Doty stressed that the PCAOB's outreach to audit committee members is not a “regulatory push.”

“We don’t oversee the audit committee’s work and are cautious not to add to their burden,” he said. “Rather, we are responding to a demand pull. Audit committee members have asked for our insights, and the bulletin responds.”

The Dialogue outlines the audit areas in which significant deficiencies have been found in recent years at the member firms of the six largest global networks, and explains how audit committees may use this information. The areas include auditing internal control over financial reporting, assessing and responding to risks of material misstatement, and auditing accounting estimates, including fair value measurements. In cross-border audits, the PCAOB has also found deficiencies in “referred” work that is performed by outside audit firms and used by the signing audit firm.

The Dialogue also provides some indicators of potential emerging risks that are informing the PCAOB's inspection planning this year. Those include increases in mergers and acquisitions, falling oil prices, undistributed foreign earnings, and maintaining audit quality when growing other business lines.

Audit committee members and others can sign up to receive future PCAOB updates, and they can also contact the PCAOB directly.

Upcoming Standards
At the conference, Doty also provided an update on where the PCAOB stands with some of the standards on its agenda. He noted that the PCAOB has been working on a standard for engagement partner signoffs for several years, even predating his tenure as chairman, and acknowledged that auditors have expressed concerns about the unintended consequences that may come with personal signatures on audits by partners, including litigation risks. The comments the PCAOB has received helped the board consider and develop alternatives, Doty said, such as whether simple disclosure, without signing, could give the market valuable information without increasing the litigation risk.

The PCAOB staff has also developed several other proposals for doing a disclosure, as opposed to a signoff, along with proposing disclosure of the names of other firms that substantially contributed to the audit.

“I believe there is a middle ground, through disclosure in a filing instead of in the audit report,” said Doty. “I’d like to offer such an option, and seek comment on some technical points. But I hope to move toward a final standard soon.”

He would like to see auditors make the names of lead partners on specific engagements public in some way, for example, on their own Web sites, even without PCAOB action.

Doty also hopes to issue soon a PCAOB concept release on potential audit quality indicators as the next stage of enhancing transparency for audit committees and others.

Auditor’s Reporting Model
In addition, the PCAOB has been working on developing proposals for improving the auditor’s reporting model. Doty noted that the board has been keeping a close watch on efforts by the United Kingdom’s Financial Reporting Council, the European Union and the International Audit and Assurance Standards Board to enhance the auditor’s report. The IAASB’s new audit reporting standard is effective for audits of financial statements for periods ending on or after Dec. 15, 2016, he pointed out.

“This means that more than 100 markets across the globe will soon have expanded audit reports,” Doty added. “At least one market—the Netherlands—has early adopted.”

Revenue Recognition
Earlier in the conference, SEC chief accountant James Schnurr said that he would like to see the Public Company Accounting Oversight Board get more involved in the joint Transition Resource Group that the Financial Accounting Standards Board and the International Accounting Standards Board have set up to work on implementation of the new revenue recognition standard. Schnurr also suggested that FASB set up a Transition Resource Group of its own for the upcoming credit impairment standard that is part of the financial instruments project, which differs from the IASB’s final standard for credit losses.

However, Doty told Accounting Today after his speech he would prefer to have the PCAOB involved after the transition group finishes its work. “With us, I think we’re a bit of a follow-on with rev rec,” he said. “I think our job is to be sure that we know what the purpose of any accounting principle changes are here and what they intend to do. Then we can review that and take another look at our revenue recognition standard in that light. That’s why we did a revenue recognition audit practice alert last year. We’re not yet in a position in which we think there’s a basis for saying we should change the existing standards to create a special rev rec standard. But we’ll see what happens. That’s part of what we do. In the meantime, we’ll continue to see how well auditors understand how to audit for revenue recognition.”

He noted that the PCAOB does meet with FASB, as well as other groups such as the IAASB and the International Forum of Independent Audit Regulators. “We are involved in an array of working groups, coordinating and task force groups from time to time, as the SEC is,” said Doty. “We’ll continue to work closely with the SEC and FASB on this.”

Randomized Audits
After his speech, Doty also took audience questions, including one from Robert Kueppers, a senior partner at Deloitte. Doty mentioned that he would like to see the PCAOB do more “randomization” of audit inspections to make them harder for firms to second-guess. He explained to Accounting Today more about his plans.

“The randomization of what is chosen for inspection was raised by Bob Kueppers because he said you’ve raised the standards, but we haven’t done that,” said Doty. “We’ve gotten better at selecting audits. But one of the things we have learned is that if we give an audit a clean report, sometimes there is slacking off. One of the things you could argue is that we ought to have more randomization of selection. We should still select the riskiest audits that we can find. We ought to look at the risky areas. If the Caterpillar-type issues are risky areas, then we ought to look at those risky issues. On the other hand, we probably ought to just take some random audits because in some of the cases, the firms would say these are our best audits.”

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