PCAOB Announces an Ambitious Standard-Setting Agenda
On May 4, the Public Company Accounting Oversight Board released an updated standard-setting and research project agenda. The agenda provides insight into the priorities of the new Board, appointed by the SEC last Fall. See SEC Unveils its PCAOB Make-Over, November-December 2021 Update. Among other things, the Board plans to address, in the short or medium term, such challenging and controversial issues as the auditor’s responsibility to detect client noncompliance with laws and regulations (NOCLAR) and financial statement fraud. The PCAOB is also considering updates to the auditing standards governing the use of confirmations and the auditor’s assessment of whether the audit report requires a going concern qualification.
The standard-setting agenda lists six projects on which the PCAOB’s staff anticipates Board action (i.e., a proposal or adoption of a standard) within the next 12 months:
Other Auditors. In 2021, the Board published proposed amendments to its standards regarding the lead auditor’s planning and supervision of audits involving other audit firms.
Quality Control. This project involves the standards for audit firm quality controls (QC) to provide reasonable assurance that the firm's personnel comply with applicable professional standards. In 2019, the Board issued a concept release discussing possible revisions to its QC standards.
Noncompliance with Laws and Regulations. The Board is considering changes to the standards governing an auditor’s response to information obtained during an audit suggesting client non-compliance with laws and regulations. The Board’s objective is “a scalable, risk-based approach that takes into account recent developments in corporate governance and internal control practices.”
Attestation Standards Update. The agenda does not describe the substance of this project. It does, however, cross-reference the Board’s interim standards project (see mid-term projects below). The interim standards project includes review of “Attestation standards, including those related to general attest engagements, agreed-upon procedures, and compliance attestation.”
Going Concern. This project focuses on revisions to the standards related to the auditor’s evaluation and reporting of a company’s ability to continue as a going concern.
Confirmations. In 2010, the Board published proposed changes to the standards on the confirmation process. This project would revive that long-dormant proposal with the objective of reflecting changes in technology and aligning the confirmation process more closely with the risk assessment standards.
Mid-term standard-setting projects (i.e., those on which Board action is not anticipated in the next 12 months) are:
Substantive Analytical Procedures. This project considers changes to the PCAOB standard on substantive analytical procedures “to better align with the auditor’s risk assessment and to address the increasing use of technology tools in performing these procedures.” (Analytical procedures involve determining and evaluating ratios or other relationships between particular types of financial or nonfinancial information, such as the ratio between accounts receivable and sales. When the results of such procedures are used as evidence to support of audit findings, their use is substantive.)
Fraud. This project considers revisions to the standard on the auditor’s consideration of financial statement fraud to “better align an auditor’s responsibilities for addressing intentional acts that result in material misstatements in financial statements with the auditor’s risk assessment, including addressing matters that may arise from developments in the use of technology.”
Interim Ethics And Independence Standards. As part of its review of the interim standards (see next item below), the PCAOB staff will consider whether the ethics and independence requirements should be “enhanced and updated to better promote compliance through improved ethical behavior and independence.”
Interim Standards. When the PCAOB commenced operations in 2003, it adopted as interim standards certain then-existing audit standards of the American Institute of Certified Public Accountants. Many of these standards have subsequently been revised. The interim standards project will evaluate whether the remaining interim standards should be amended, replaced, or eliminated. “The Board will evaluate which standards are necessary to retain, * * * which should be retained with minimal updates, and which require more significant changes.”
The PCAOB’s research agenda includes two projects aimed at determining whether there is a need for standard-setting or other action. The research areas are:
Data and Technology. This project involves research to assess whether there is a need for guidance, changes to PCAOB standards, or other regulatory actions in light of the increased use of technology-based tools by auditors and preparers.
Audit Evidence. This project will research whether there is a need for guidance or changes to the standard on audit evidence due to the use of technology-based audit tools and the increasing availability and use of information from sources external to the company.
The PCAOB notes that its standard-setting and research agendas are informed by a range of activities, including engagement with its advisory groups – the Standards and Emerging Issues Advisory Group (SEIAG) and the Investor Advisory Group (IAG). While the PCAOB’s original advisory groups were disbanded several years ago, on May 9 the Board announced the appointment of new members to reconstituted groups and scheduled inaugural meetings of the IAG and SEIAG for June 8 and 15, respectively. See PCAOB Announces Members of New Advisory Groups, Sets Dates for First Meetings.
Comment: The PCAOB’s standard-setting agenda is ambitious. Following a period of several years during which standard-setting was limited, the current Board clearly intends to take a more activist approach. However, one omission from the agenda is surprising. There is no mention of guidance or standard-setting arising from the auditor’s potential new responsibilities under the SEC’s climate change proposals. See SEC Unveils its Climate Disclosure Proposals, March 2022 Update. It seems likely that, if the Commission’s proposals are adopted in their current form, the PCAOB will be pressed to issue guidance on auditing the expanded financial statement disclosures relating to climate impact and the attestation requirements related to greenhouse gas emissions.
From the limited description of some of the projects, it is difficult to assess their potential impact. For example, depending on the parameters of specific proposals, broadening the auditor’s obligation to discover fraud or to uncover and report illegal company conduct, regardless of financial statement impact, could have far-reaching implications. Similarly, major changes in the ethics and independence rules –such as requiring audit firm rotation – could be controversial. (Audit firm rotation was explored, but not adopted, by a prior Board. See Mandatory Audit Firm Rotation is Dead in the U.S. (For Now), March 2014 Update). However, there is no indication in the agenda of what specifically the Board is considering in these areas.
Audit committees should follow the PCAOB’s standard-setting activities and ask their auditor to keep them informed of the potential impact of new standards on the company’s audit and on the committee’s relationship with the auditor.