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PCAOB to shake up inspections in 2021

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PCAOB to shake up inspections in 2021

The effects of the ongoing pandemic are going to be a focus for PCAOB inspections

Tuesday, December 8, 2020
By Daniel Hood for

In its 2021 inspections of audit firms, the Public Company Accounting Oversight Board will be paying particular attention to the impact of COVID-19, according to members of the board.

“Without a doubt, the effects of the ongoing pandemic are going to be a focus for us in our inspections in 2021,” said board member Megan Zietsman on a virtual panel discussion during the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments on Monday. “So, much like what we've done this year, we plan to tailor our inspection approach in 2021 as result of the pandemic. I expect we'll look closely at audits in industries that have experienced the most significant disruption to their operations as a result of COVID-19.”

As examples, she cited transportation, entertainment, hospitality, manufacturing and retail.

She also said that the board would be looking at how auditors are completing and documenting procedures in the face of pandemic-related constraints.

“We're also going to be taking into consideration changes in controls due to ongoing changes in the workforce environment,” she continued. “We'll look at how auditors have understood those changes, at their evaluation of how those changes affect the company's controls, and then the auditor's risk assessments. And then, in turn, we'll be looking at how they might've responded to changes to the nature, timing and extent of the procedures to address those risks.”

Besides responding to the pandemic, the board intends to inject a greater element of unpredictability into its inspections.

“We plan to select roughly the same number of audits to review as we have in recent years, but we plan to significantly increase the percentage of audits that we select randomly,” Zietsman explained. “So while we'll continue to focus our efforts on the largest issuers from a market cap perspective, we believe that increased unpredictability in how we make our selections can help raise the quality overall. With respect to increased random selections, we think that that will cause audit firms to focus consistently on performing quality audits across the practice, rather than on those perceived to have a greater chance of being selected for PCAOB inspection.”

The board is also planning to shake up the areas that it concentrates on within the audits it looks at.

“Along the same lines, we plan to select more nontraditional focus areas in an inspection, so when we do an inspection, we look at the whole audit,” she continued. “We target procedures in selected focus areas. And over time, I think we acknowledged that selection of those focus areas has kind of become a bit more predictable, such that firms can anticipate which areas we're going to home in on and then potentially place some more emphasis there, rather than on the other areas that are equally important. So, we thought some more unpredictability there would also be a good thing.”

“Of course, we will continue to target areas that we believe pose a higher risk of material misstatement, or that are the subject of recurring audit deficiencies,” she assured the audience.

Broader priorities and the value of CAMs

Looking beyond the specifics of inspections, PCAOB Chairman William Duhnke said in the same panel that, besides its ongoing focus on quality control, the board would be highlighting three priorities in 2021:

The timeliness of inspection reports;
Enhancing its internal and external engagement; and,
Continuing to support the implementation of its standards with resources and analysis.

“For example, we will continue to study whether and how investors use critical audit matters,” he said. “Our initial work demonstrated that investor awareness of CAMs was only beginning to develop.”

On the topic of CAMS, board member J. Robert Brown noted that he had seen some feedback from stakeholders that suggested that they offered little value to investors to statement users.

“I don’t agree with that, but if a CAM is seen as of little value, I would say that’s a reflection of the quality of the CAM,” he said. “I would encourage you to step back and ask yourself if the CAM is providing value.”

CAMs that are too generic or resemble standardized or boilerplate disclosures may well be seen as providing little value, but he encouraged auditors to go beyond those.

“This is an opportunity to share your expertise,” he said. “Take advantage of the opportunity to demonstrate the value you add.”

“There’s a tendency to talk about CAMs in the aggregate — there are a lot of them, and inevitably we hear about the most common ones — but as you drill down, you see some really interesting disclosures,” he continued. “Do investors think these have value? I think so. Will they be looking for them next year? I think so. Will they be asking audit committees about them? I think so.”

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