On November 1, the PCAOB announced that it had released updated versions of its standard-setting, research, and rulemaking projects agendas. These agendas suggest that 2024 will be a busy year for the PCAOB. Several initiatives it is pursuing could have an impact on audit committees.
From an audit committee perspective, the most significant change from the prior listings is that the PCAOB has added a project entitled “Communication of Critical Audit Matters” to the research projects agenda. According to the Board’s website, research projects “focus on whether there is a need for changes to PCAOB standards or other regulatory responses.” A research project may graduate to the standard-setting or may result in other actions, such as the issuance of guidance regarding the application of existing PCAOB standards. The research agenda describes the new CAMs project as follows:
“A critical audit matter (CAM) is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment. The project seeks to understand why there continues to be a decrease in the average number of critical audit matters reported in the auditor’s report over time and whether there is a need for guidance, changes to PCAOB standards, or other regulatory action to improve such reporting, including the information that is provided as part of the CAM reporting.”
In addition to the CAMs research project, at least three of the eight matters on the PCAOB’s short-term standard-setting agenda could have a significant impact on the relationship between audit committees and auditors. (Short-term standard-setting projects are those that are under active development and where a Board action, such as a proposal or final adoption of a standard, is anticipated in fewer than 12 months.) The three near-term standard-setting projects of interest to audit committees are:
Noncompliance with Laws and Regulations. This proposal, which the Board published in June 2023, would substantially expand the auditor’s consideration of possible audit client noncompliance with laws and regulations (NOCLAR). See PCAOB Proposes to Expand Auditor Responsibility for Financial Statement Fairness and for Legal Compliance, May-June 2023 Update. As discussed in Audit Committee Members Weigh in on NOCLAR Proposal, August-September 2023 Update, many audit committees filed comments with the PCAOB in opposition to this proposal. The Board anticipates adoption of a final NOCLAR standard in 2024.
General Responsibilities of the Auditor in Conducting an Audit (AS 1000). These amendments to the existing auditing standards, which the Board proposed in May 2023, are intended to “modernize and clarify principles and responsibilities fundamental to the conduct of an audit.” Among other things, the proposals would expand the auditor’s responsibilities by “clarifying” that the auditor’s determination of fairness “goes beyond” evaluation of whether the financial statements are presented in “mere technical compliance” with the applicable financial reporting framework. See PCAOB Proposes to Expand Auditor Responsibility for Financial Statement Fairness and for Legal Compliance, May-June 2023 Update. The Board anticipates final adoption of these changes to the current standards in 2024.
Firm and Engagement Performance Metrics. The objective of this project is to enhance information provided to investors at both the firm and engagement level by developing key indicators of audit quality and effectiveness. See PCAOB Adds Audit Quality Indicators to its Short-Term Agenda, May-June 2023 Update. The Board anticipates issuing a proposed performance metrics standard in 2024.