In remarks at the Public Company Accounting Oversight Board’s recent Standing Advisory Group meeting, PCAOB Chairman Jim Doty indicated further evolution may be afoot next year as the PCAOB completes an introspective look at its own standards-setting process.
“Both the Board and staff organization-wide have devoted considerable effort to our review of our standards-setting program this year,” said Doty,
Standard-setting process
“While most of this work is behind the scenes,” Doty added, “I believe you will see the fruits of these efforts in our standards-setting program in 2016.”
There was some spirited discussion, led by SAG member Richard Murphy, about the extent to which the PCAOB sought to discern and document SAG members’ views, in particular any recommendations of the SAG or consensus positions, including a question from Murphy as to whether the chairmanship of the SAG should fall on one of its members rather than the PCAOB’s chief auditor. (Note: This suggestion can be viewed as a parallel to the FASB Private Company Council, which is chaired by a PCC member appointed by the Financial Accounting Foundation, who works in close coordination with a liaison from the FASB board.) PCAOB staff noted that there were not always consensus positions among the SAG, but the SAG was used as a sounding board of expert views of its various constituencies.
Together with its internal review of its standard-setting process, Doty told the SAG, “In 2016, we plan to make a thorough review to examine whether there are additional ideas or changes that should be pursued to make the most effective use of this body and of your time and advice.” He encouraged SAG members to actively provide feedback on the SAG process.
“Behind the scenes,” Doty said, “we have also been working closely as a board as well as with our colleagues at the SEC on advancing the many important initiatives in our standards-setting agenda.”
2016 rulemaking action expected
As detailed in a separate post in the CPA Success blog, the PCAOB expects to have its staff present a final rule to the board in December on disclosure of the name of the engagement partner.
At least four rule proposals or reproposals are expected to be considered in 2016, as outlined by Doty, who told the SAG that “next year, we should be in a position to issue” proposals on:
- The auditor’s reporting model.
- The use of other auditors.
- Fair value measurements.
- The use of specialists.
“These are all topics that have benefited from your counsel, as well as the counsel and support of the SEC staff,” Doty added.
Further detail can be found in the PCAOB’s standard-setting agenda (updated as of Sept. 30, 2015). As noted in that agenda, two staff consultation papers are also contemplated, with one on going concern planned for release by March, and another one on quality controls planned for a later date.
Post-implementation review of AS7, EQR
Separately, the PCAOB, through its Center for Economic Analysis, has kicked off the auditing standard-setters post-implementation review process, with the first standard undergoing review being Auditing Standard No. 7 on engagement quality reviews (EQR).
“We will soon publish a request for comment on how engagement quality reviews have worked and whether they have made a difference,” said Doty, adding that feedback from constituents will be considered along with work conducted by the CEA, which has been examining the existing literature and organizing data on these reviews gathered through the inspections process.”
Internal control over financial reporting
Although not on the PCAOB’s standard-setting agenda, questions were raised during the SAG meeting about the integrated audit of internal control over financial reporting conducted with the audit of the financial statements, and recent developments relating to PCAOB inspections and feedback between auditors, company management, the PCAOB and the SEC on this subject.
SAG member Doug Maine, limited partner and senior advisor with Brown Brothers Harriman & Co., called attention to PCAOB inspection results that appeared in a PCAOB Audit Committee dialogue posted in May, in which the PCAOB showed that the percent of deficiencies inspectors found in audits of internal control over financial reporting (i.e., deficient audit procedures, not that there was necessarily a deficiency in internal control) more than doubled, from a 15 percent deficiency rate in 2010 to 39 percent in 2013.
“This seems like a three-alarm fire to me,” Maine said.
Doty responded that “the inspection process has driven for and achieved consistency” in ICFR audit procedures carried out by auditors. “We’ve had a lot of talk with the firms,” he continued, and indicated that communication among all parties — including especially auditors, company management, and the audit committee — could be improved for a better understanding of what is expected with respect to ICFR.
Referring to the SEC’s chief accountant, Doty said, “Jim Schnurr and I have tried to make a special effort to meet with preparers. We have met with preparers, audit firms, groups of CFOs and others; that’s going to be an ongoing process.”
Doty then stressed several things regarding ICFR:
- “It’s clear that communication between audit firms and management of companies could improve. It could be better communication why an internal control audit needs to be changed from previous years. Those meetings and discussions will bear fruit at a panel at the AICPA meeting in December.” (This appears to be a reference to the upcoming AICPA National Conference on Current SEC and PCAOB Developments, taking place Dec. 9-11 in Washington, D.C.)
- “Also, not to suggest firms are doing worse in this area, it is a continuing instructional support for good auditing that we have an integrated audit of internal control and financial reporting. I think management is coming to believe that to recognize the importance that good internal control is well understood in the C-suite.”
- “If you don’t think your auditor is looking at internal controls and you can’t discuss what they are looking at, you need to get a new auditor.”
- “It’s clear we are getting better results (on inspection of ICFR audits) than in 2013. It’s not uniform; that’s why we say in our reports, no one should make conclusions about the quality of firms overall or industry.”
Chief auditor Marty Baumann added, “You’ve touched on a key item, getting a lot of dialogue among us, the SEC, preparers and auditors.”
SEC Deputy Chief Accountant Brian Croteau, an observer at the SAG meeting, said, “I share your concerns,” noting that ICFR is “an area that from the SEC staff perspective, we have been spending a significant amount of time on.”
“I don’t think what you are seeing in PCAOB inspection reports is (just) an audit issue. I refer you to Chief Accountant Jim Schnurr’s remarks a month ago, that lay out a start,” said Croteau. (See our summary of the chief accountant’s speech last month in an earlier post in the CPA Success blog, “SEC Chief Accountant Urges More Dialogue Between Audit Committees, Management and Auditors.”)
In another veiled but likely reference to the upcoming AICPA conference in December, Croteau closed, “We will continue working with the PCAOB soliciting feedback, and through public remarks, you will hear more.”