The PCAOB Speaks – With Audit Committee Chairs
During its 2020 inspections, the Public Company Accounting Oversight Board offered the audit committee chairs of most of the U.S. public companies whose audits were reviewed the opportunity to speak with the inspection team. The PCAOB staff spoke with nearly 300 audit committee chairs, and, on February 1, the Board released 2020 Conversations with Audit Committee Chairs (Conversations Report), which summarizes these discussions. This is the second year the PCAOB has published the results of the inspection staff’s interactions with audit committee chairs. See What the PCAOB Heard: Report on Conversations with Audit Committee Chairs, January 2020 Update.
COVID-19 was an overarching theme of many of the 2020 conversations, and the PCAOB has previously reported on this aspect of the discussions. See Audit Committee Chairs Discuss the Impact of C0VID-19 with the PCAOB, September 2020 Update. The Conversations Report focuses on three other topics: the auditor and communications with the audit committee, new auditing and accounting standards, and emerging technologies.
The Auditor and Communications with the Audit Committee
Most audit committee chairs were satisfied with their communications with their auditor. Several referred to the value of dashboards that highlight data on audit progress. Audit committee chairs also said that their auditors performed well in areas such as “assigning resources with expertise on complex accounting issues, consulting their national offices as appropriate, offering practical approaches to problem-solving (as opposed to being highly theoretical), and providing continuity on audit teams.” In contrast, areas that were identified as needing improvement included:
Managing global audit operations.
Helping more junior audit team members learn the company’s business.
Guidance around auditing of certain controls for third-party vendors.
Over-auditing and/or over-documentation.
Increased visibility into and discussion around fee changes.
Views were mixed as to the quality of innovation and partner rotation, with some chairs satisfied and others seeing room for improvement.
The PCAOB asked audit committee chairs whether they reviewed the firm’s PCAOB inspection report with their auditor. Practice and perceptions in this area varied. There were complaints about the delay between when the inspection is performed and when the PCAOB issues the inspection report. Those audit committees that did review inspection reports and discuss them with their auditor “generally found the exercise to be useful.” Specific practices reported to work well included asking the auditor “to discuss any initiatives the firm has implemented to address deficiencies described in the inspection report” and “[r]eviewing year-over-year PCAOB inspection report trends within and between audit firms.”
New Auditing and Accounting Standards
Audit committee chairs complained that the implementation of the new accounting standards for revenue recognition, lease accounting, and current expected credit losses were challenging and time consuming. On the other hand, implementation of the PCAOB’s critical audit matter disclosure requirement “was generally viewed as smooth, with audit committee chairs noting that dry runs and other early preparation with their auditors led to few surprises.” Practices described as working well with respect to implementation of new standards included:
When reviewing the audit plan, asking the auditors if there will be any significant changes to their audit approach for the year in light of new or revised accounting or auditing standards.
Asking the auditors to provide the audit committee early notice and frequent updates when new standards are being implemented.
Setting aside time for educational sessions or deep dives where auditors can explain and answer questions about how new audit requirements may impact the audit.
Regarding the use of new technology in auditing, the chairs saw both opportunities and challenges. On the positive side, they thought that data analytics, workflow automation, cloud computing, and other new technology tools could “allow auditors to reduce manual work, obtain better evidence, and become more efficient.” However, some chairs were concerned about the gap between the technology capabilities of the company and those of the auditor, while others cited cybersecurity risks stemming from emerging technology. Another concern was the potential for over-reliance on technology to result in “less attention to or emphasis on preparer and auditor judgment, experience, or professional skepticism.” Other audit committee chairs referred to internal control implications – for both the company and the auditor – of increased reliance on technology.
Some of best practices regarding emerging technology that chairs discussed include:
Asking the auditors if/how the use of technology will change the way the team’s time and/or resources will be allocated.
As new technologies are implemented, discussing with management if/how the underlying controls will change and discussing with the auditors how they will evaluate and test any changes to the new controls.
Asking the auditor to provide best practices or benchmarks for the use of technology and/or information security within the issuer’s industry.
Discussing whether the company uses third-party software or data processing for financial reporting processes and, if so, how risks and controls are considered and addressed.
Comment: The Conversations Report provides insight into what is on the minds of public company audit committee chairs, although in some respects it only hints at the substance of the PCAOB’s discussions. It would, for example, be interesting to learn the details concerning the views expressed regarding such issues as over-auditing and over-documentation. For example, did audit committee chairs attribute these problems to their auditor or to the PCAOB’s oversight?
The lack of detail aside, the various “what works well” comments reported by the PCAOB are a useful source of ideas. Audit committees may want to consider whether they are already following these practices or, if not, whether any are worth emulating.
In 2021, the PCAOB will undoubtedly continue its practice of engaging in dialogue with the audit committee chairs. An audit committee chair who is contacted by the PCAOB inspection staff as part of an inspection of the company’s auditor may want to review the Conversations Report as a way of understanding what to expect during the interview.