Since its inception with the Sarbanes-Oxley Act the PCAOB has faced many challenges in fulfilling its responsibilities to establish GAAS for public company audits, inspect audit firms and enforce when auditors do not fulfill their responsibilities. As the PCAOB has evolved one important lesson we have all learned is that their activities and agenda do not affect just auditors. All public company reporting participants have a stake in what they do. For example, the recent audit standard about related party issues was important not just for auditors, but companies needed to assure they would have the information the new standard required auditors to obtain. Some companies even modified their D and O questionnaires in this process.
To help us be aware of where the PCAOB’s activities could impact us all, here are a few items of note going on at the PCAOB right now.
- Auditor’s Involvement in non-GAAP Measures
If you use non-GAAP measures in an earnings release, MD&A or other communication vehicles you will want to follow the events of the May 18-19, 2016 meeting of the PCAOB’s Standing Advisory Group. A significant part of the first day’s agenda is a discussion of “Company Performance Measures and the Role of the Auditor”. The meeting will include breakout discussion sessions and a report of the breakout discussions on day two of the meeting. You can find the agenda and how to access a webcast at:
- Anticipating and Avoiding Accounting and Auditing Problems
The PCAOB inspections staff has published a “Staff Inspections Brief” which provides a preview of their observations from 2015 inspections. Interestingly the number of audit deficiencies identified for annually inspected firms, those with over 100 public clients, has decreased. For firms with less than 100 public clients, who are inspected every three years, the inspection staff found “an overall high number of audit deficiencies”. Areas with frequent deficiencies were:
Auditing internal control over financial reporting
Assessing and responding to the risk of material misstatement
Auditing accounting estimates, including fair value
Audit areas affected by economic risks, including factors such as oil prices
The report also discussed several financial reporting issues including business combination accounting, the statement of cash flows, revenue recognition and income taxes.
Auditor independence continued to be a problem area, particularly for triennially inspected firms.
You can read the whole Staff Inspection Brief at:
- A Board Member’s Perspective on Inspections, Enforcement and Standard Setting
This speech, delivered by Board Member Jeanette Franzel, is a wide ranging summary of “progress in audit oversite” and has some interesting perspectives on changes that could be in store for the inspection process. She comments that inspections of large firms are showing fewer audit deficiencies but that at smaller firms there are still some that “just don’t get it”. She also provides summaries of the enforcement program and standard setting at the PCAOB.
You can read the speech at:
- A “Darker” Staff Practice Alert
The PCAOB inspectors continue to see enough instances of auditors making changes after audit workpapers are supposed to be “locked down” that they have issued a Staff Practice Alert to remind, or perhaps warn, auditors not to make changes inappropriately in advance of an inspection. You can read the Alert at:
Interestingly, the last section of the new release has a link to the PCAOB’s tip line……
- Re-proposed Changes to the Auditor’s Report?
The Board met on May 11, 2016 to consider re-proposing changes to the standard auditor’s report. The current pass/fail model would be retained, but the original proposal and the potentially revised proposal hope to provide additional information to make the report more relevant and informative. Stay tuned for updates on the results of the meeting; in the meantime you can read about the meeting, the revised proposal and related original proposal at:
- Naming the Audit Partner is a Done Deal and the PCAOB’s Standard Setting Agenda
Last, as you may have heard, the SEC has approved the PCAOB’s new Auditing Standard requiring disclosure of the names of audit partners and information about other firms involved in an audit beyond the principal auditor. To learn about that change and to see what else is on the horizon, here is a link to the PCAOB’s current rulemaking agenda:
Clearly, the PCAOB is busy!
As always, your thoughts and comments are welcome!