The PCAOB has released Spotlight: 2024 Conversations With Audit Committee Chairs (2024 Conversations Report), its annual summary of discussions between audit committee chairs and the Board’s inspection staff. As part of the annual audit firm inspection program, the PCAOB staff interviews many of the audit committee chairs of the public companies and broker-dealers whose audits are under review.  During the 2024 inspection cycle, the staff interviewed 272 audit committee chairs.  Seventy-eight percent of those interviewed chaired the audit committee of a company audited by one of the six global network firms—BDO, Deloitte, EY, Grant Thornton, KPMG, and PwC.  More than three-quarters of the interviewees had not previously spoken to the PCAOB’s inspection staff.

The 2024 Conversations Report “present[s] high-level observations and takeaways from interviews with audit committee chairs in 2024.”   For last year’s summary of these discussions, see In 2023 PCAOB Conversations with Audit Committee Chairs, the Economic and Audit Environments Were Top of Mind, July 2024 Update.

Topics of Significant Discussions Between Audit Committees and Their Audit Firms

The inspection staff asked the audit committee chairs what topics they spent most of their time discussing with their auditor. The 2024 Conversations Report describes five topics that audit committee chairs frequently identified.

1.     Factors Affecting Relationships with the Audit Firm

Chairs identified three factors that contribute to a good working relationship with their audit firm:

• Communication: Transparent, two-way communication is essential to informing the audit committee about audit risks and areas of focus. Open dialogue, frequent meetings, easy communication channels, and the ability to contact the audit partner directly contribute to successful communication. ​ Insufficient communication can be a reason for auditor dismissal. ​

• Coordination: Effective coordination between the auditor, management, and the audit committee is critical for an efficient and effective audit process. ​

• Technical Expertise: Technical expertise in the company’s industry and the audit firm’s ability to retain personnel with relevant industry experience are key areas of interest. ​

2.     Firm Inspection Reports

Most audit committee chairs review the audit firm’s inspection report as part of determining whether to reappoint the auditor.  Audit committee discussions with their auditor regarding its inspection report centered around key findings and measures taken by the firm to address the findings.  When considering changing audit firms, findings in inspection reports are particularly important.

3.     Economic Environment Affecting the Audit

Many audit committee chairs discussed the audit implications of economic and geopolitical developments, such as elevated interest rates, increased risks including fraud and technology, supply chain disruptions, and inflation, with their auditor.

4.     Auditing and Accounting

Approximately 63 percent of the audit committee chairs interviewed had discussions beyond the required communications with their auditor related to the application of auditing or accounting standards. The most frequently discussed topics included revenue recognition, lease accounting, current expected credit losses, cybersecurity disclosures, and the SEC’s climate-related disclosure requirements.

Critical audit matters (CAMs) described in the auditor’s report were also a subject of discussion. Over 60 percent of the chairs thought that CAMs inform stakeholders about topics that were a focus for the auditor, although several criticized the length, readability, or boilerplate nature of CAMs.  The 2024 Conversations Report suggests the following questions to assist audit committees in discussing CAMs with their auditor:

• Is the CAM presented and summarized in a way that investors will find informative?

• Is there an indication as to why a matter requires challenging, subjective, or complex auditor judgment?

• Does the information reflect the specific circumstances?

• Does the description avoid the use of boilerplate language and overly technical accounting and auditing terms?

• Is the description specific enough that it cannot be applied to an audit of any company within that industry?

• Were there any items that were “close calls,” but the audit firm decided not to include them as a CAM? If so, what was the audit firm’s rationale for not including?

5.     The Use of Emerging Technologies in the Audit

Audit committees and their auditor discussed technology, including artificial intelligence (AI).  Many chairs were interested in how automation and analytics could improve audit effectiveness and reduce fees. However, chairs were also concerned that over-reliance on technology could lead to auditor complacency and failure to exercise professional judgment and skepticism. Another concern was how new auditors will develop the right skillset to challenge the validity of AI responses.

The 2024 Conversations Report suggests that audit committees consider asking their auditor the following questions to understand how emerging technology may be shaping the audit process:

• What is the audit firm’s use of technology? What was applied during the audit?

• How is the use of technology in the audit helping the auditors perform a more effective audit?

• Are there any risks associated with the technology used in the audit, and how are those risks mitigated?

• Can you demonstrate how technology improves efficiency without compromising professional judgment and skepticism?

• Are there any complexities (e.g., multiple systems) or concerns (e.g., data security) at the company preventing the use of technology by the auditor?

• Are there any areas of the audit where the company can facilitate (or further facilitate) the audit team’s use of technology to not just streamline testing, but also, more importantly, to improve the efficacy of the testing?

Frequently Asked Questions from Audit Committees

The 2024 Conversations Report also includes five questions that audit committee chairs frequently asked the staff during interviews and the staff’s responses.

• How Are Audits Selected for Review?  The Board selects audits using risk-based and random methods, focusing on factors like economic trends, industry developments, market capitalization changes, audit firm and partner, and inspection history.  In 2025, the PCAOB inspections will prioritize industries with specialized accounting, higher deficiencies, or going concern uncertainty.

• What Does an Inspection Entail?  Inspections assess compliance with the Sarbanes-Oxley Act, PCAOB and SEC rules, and professional standards. ​ They focus on risk assessment, financial reporting, audit areas affected by economic trends, recurring deficiencies, and new accounting standards. ​ Inspections also review audit firm quality control areas like firm management, client acceptance, and independence policies.

• Can the PCAOB Share Inspection Results During Calls with Audit Committee Chairs?  The inspection staff cannot share inspection results during audit committee calls due to statutory confidentiality requirements. ​ Audit committees can review public inspection reports and discuss findings directly with their auditor.

• How Do Comment Forms Increase Audit Quality?  If, after reviewing the work papers and discussion with the audit firm, the inspection team believes that an audit deficiency may exist, it will issue a written comment concerning the matter. Comment forms provide a structured opportunity for the firm to respond to staff concerns.  Comment forms also prompt firms to improve their practices before receiving the final inspection report. 

• Does the PCAOB Have Educational Training or Events for Audit Committee Members?  The PCAOB hosts webinars and roundtable discussions to which audit committee members are invited.

Audit Committee Takeaways

1.     The 2024 Conversations Report provides insight into the current views and concerns of audit committee chairs. Committees may want to use it as an indicator of the issues that their peers are raising with their auditor.   In this regard, the report notes that audit committee chairs of companies audited by firms that are not part of one of the six global networks spent more time discussing significant transactions, fraud risks and the related procedures to address the risk of fraud, and matters related to internal controls. In contrast, the chairs of companies audited by one of the global network firms spent more time on independence and accounting issues.  This is puzzling since all of these issues seem to be of considerable significance to audit committees, regardless of the audit firm’s size.

2.     The role and implications of emerging technology are one of the top areas of audit committee focus.  Committees may want to consider the inspection staff’s suggested questions on this topic, especially those that focus on risks associated with the auditor’s use of technology and on whether technology improves audit efficiency without compromising professional judgment and skepticism.

3.     An audit committee chair contacted by the PCAOB staff as part of an inspection may want to review the 2024 Conversations Report and prior reports on these dialogues to prepare for the interview.