PCAOB Chair Sheds Light on Recent PCAOB Initiatives

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PCAOB Chair William Duhnke provided an update on a number of Public Company Accounting Oversight Board initiatives in his keynote speech at Baruch College’s 14th Annual Audit Conference on December 3.  Opening his remarks, Chair Duhnke stated that “the PCAOB is in the middle of significant change,” pointing to the adoption of a new five-year plan following the replacement of all five PCAOB Board members last year.  Chair Duhnke emphasized the PCAOB’s commitment to “stay the course” in transforming itself “into a trusted leader that promotes high quality auditing through forward-looking, responsive, and innovative oversight,” and he focused the discussion on the following selected areas of focus:

  • Driving Improvements in the Quality of Audit Services.  The PCAOB intends to drive continuous improvement in audit quality through its inspections, enforcement and standard-setting activities:
    • Inspections.  The PCAOB has undertaken a number of initiatives to improve the usefulness of its inspections reporting.  Notably, the reports on 2018 inspections for the largest audit firms, which will be released in 2020, will feature a more accessible format, which the PCAOB expects to refine in the coming years.  Similarly, over the past year, the PCAOB has started to communicate more comprehensively about its inspections observations, and Chair Duhnke indicated that the PCAOB plans to continue doing so and to highlight “good practices” that promote or enhance audit quality, not just the narrower focus of observed “failures.” 

      As for areas of inspection focus, the PCAOB is increasing its focus on systems of quality control.  Part of this initiative required internal retooling, and the PCAOB has “devoted substantial resources to understanding how the largest U.S. firms define their quality control objectives and manage the risks associated with achieving those objectives.”  For this and other objectives, the PCAOB has deployed a “target team” of inspectors, which is intended to offer a more consistent and expansive view into specific issues across the auditing profession.  The PCAOB has also formed an internal “Inspections Quality Group,” which touches the entire inspections lifecycle and has already confirmed the need for the PCAOB to “monitor the consistency, quality, and effectiveness of [its] inspections work on an ongoing basis.”

      From a stakeholder outreach perspective, the PCAOB has increased its interaction with audit committees during the inspection process and during 2019 requested to speak with every audit committee chair at companies whose audits were being inspected.  Such communications are intended to enhance the effectiveness of both the PCAOB and the audit committees.  Chair Duhnke reported that the PCAOB has engaged with nearly 400 audit committee chairs, a dramatic increase from prior years.

    • Enforcement.  From an enforcement perspective, Chair Duhnke emphasized that the PCAOB “has placed a renewed emphasis on investigating significant audit failures,” highlighting the violations related to the following as priority matters:  auditor independence, ICFR audits, quality control systems, engagement quality reviews, and other important areas of the audit.  He also noted a continued focus on instances where audit firms and their associated persons fail to cooperate with PCAOB inspections and enforcement activities, noting that a number of sanctions were issued in 2019 in this regard. 
  1. Standard-Setting.  In keeping with the focus on improving audit quality, among the top standard-setting priorities is an overhaul of the PCAOB’s quality control standards, which were originally developed and issued by the AICPA in 1997 and were adopted by the PCAOB in 2003.  Chair Duhnke indicated that the PCAOB views strong quality control within a firm as “crucial to promoting consistent, high-quality audits.”  Later this month, the PCAOB plans to issue a concept release on a potential approach to revising these standards, which the PCAOB aims to align with the standard recently proposed by the International Auditing and Assurance Standards Board (IAASB) – ISQM 1.

Touching on other recent standard-setting activities, Chair Duhnke commented on the implementation of the PCAOB’s critical audit matters (CAMs) disclosure requirement.  Consistent with prior statements, “inspection teams have examined a sample of CAMs from large accelerated filers and [the PCAOB] will publicly report [its] observations from [its] initial inspections and outreach as soon as possible.”  The review is primarily intended to identify significant costs or other unintended consequences of implementation and to develop an understanding of how auditors responded to the CAMs requirement.  Secondarily, the PCAOB expects to gain a preliminary understanding for how investors use CAMs.  Looking forward, the PCAOB plans to continue taking a proactive approach to all aspects of its oversight, similar to the CAMs guidance documents that were released this summer (see our prior post).

  • Anticipating and Responding to the Changing Environment.  As it relates to the current audit environment, Chair Duhnke commented on the rapid changes and risks and opportunities brought about by technological advancements.  Having heard that the PCAOB’s standards generally do not impede innovation in auditing, Chair Duhnke also noted that the standards do not expressly encourage the use of technology or illustrate how it may be used and the potential risks thereto.  In terms of audit technologies in the marketplace, Chair Duhnke emphasized that the PCAOB will “continue to monitor this area aggressively,” noting that it has observed a divergence in the level of adoption of new technology between the largest firms and mid-size and smaller audit firms, with the latter tending to rely more heavily on traditional audit techniques.  Looking introspectively, Chair Duhnke remarked that the PCAOB is “far behind” where it should be in the areas of data and technology strategy but noted that it has hired its first Chief Data Officer to spearhead efforts to define and implement the PCAOB’s efforts in these areas.
  • Enhancing Transparency and Accessibility through Proactive Stakeholder Engagement.  Expounding upon the theme of increased transparency and accessibility, Chair Duhnke commented on the PCAOB’s efforts to increase stakeholder outreach.  Some highlighted efforts include hiring Erin Dwyer as a direct point of contact for investors, audit committees and preparers; hosting a number of roundtable events for audit committees and investors; and increasing appearances at relevant events attended by investors and audit committee members.
  • Pursuing Operational Excellence and Developing, Empowering and Rewarding its People.  Looking internally, Chair Duhnke commented on the need to improve the PCAOB’s operational excellence, and cited a number of firsts, including the launch of an enterprise risk management program and human capital strategic plan.  The PCAOB also expanded its senior ranks with the hiring of a Chief Risk Officer, Chief Compliance Officer, Chief Information Security Officer, and several experts in project and portfolio management.  These measures are all intended to improve the efficiency and effectiveness of the PCAOB. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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