Highlights - PCAOB Standing Advisory Group Meeting Nov 30-Dec 1, 2016

DECEMBER 2, 2016    RECENT DEVELOPMENTS

The Public Company Accounting Oversight Board’s (PCAOB) Standing Advisory Group (SAG) met on November 30 and December 1 to discuss various topics.  Highlights are below:

PCAOB Standard-Setting Agenda (Active Items)

·       Auditor’s Reporting Model proposal (final standard expected in Dec 2016)

·       Auditing Accounting Estimates (proposal under development; coordinating project with Specialist project below)

·       Auditor’s Use of the Work of Specialists (developing proposal)

·       Supervision of Audits involving Other Auditors (also discussed comments received, which were generally supportive)

·       Going Concern (staff considering additional guidance or change in standards, etc.)

PCAOB Research Agenda (Active outreach, research, and economic analysis)

·       Quality Control standards

·       Changes in the use of data and technology in audits

·       Other (non-GAAP) information and performance measures

·       Auditor’s consideration of noncompliance with laws and regulations  

SAG members expressed concern that the firms’ use of big data / analytics and other new technology is moving rapidly and running ahead of the profession’s standards. A member also raised a concern about using cost/benefit analysis to inform needed standard-setting, noting that it is challenging to measure the impact (benefit) that reliable financial reporting provides to the public.

Independence

The PCAOB monitors the impact of the implementation of significant standards on audits, including for example, the new revenue recognition standard. PCAOB Chief Accountant Marty Baumann noted that while auditors should be discussing the new standard with their clients, including related internal control issues, they should be careful to not violate the independence standards by assuming a management role or auditing their own work. He also said under AS 16 firms should be talking to their audit committees about significant impacts from any adopted but not yet effective financial reporting standards.

Inspection Trends

Helen Munter, Director, PCAOB Division of Registration and Inspections provided an overview of recent trends in inspection findings. She noted some improvement in inspection results between 2015 and 2016, and that it has been helpful for staff from the SEC Office of the Chief Accountant’s office to participate in inspections (last 2 years). Some areas of improvement noted were: teams’ understanding of issuer’s processes, controls, transactions, etc.; the coaching and support in teams and between the firms’ national offices and the teams; and monitoring occurring at the engagement and firm levels.  Areas of concern include: ICFR (same as last year); testing of IT controls; teams’ responses to their risk assessments; auditing estimates (continuing concern); related party transactions; performance of engagement quality reviews; and independence (continuing concern).

Independence concerns included:

·       the impact of the firms’ growing consulting practices,

·       the intersection of member firm activities (i.e., nonaudit work) within the firm’s network, e.g., one member firm performs nonaudit work that may impair another member firm’s audit of the company, and

·       audit committee communications , i.e. –

o   audit committee does not approve services,

o   nonaudit services do not match services performed, or

o   the nature of the nonaudit work changes and the team does not obtain approval for the new services.  

Effective Auditor/Audit Committee Interactions

PCAOB member Jay Hansen moderated a discussion by five SAG members with various backgrounds (large/small audit firms, audit committee/corporate management) who shared their perspectives about the current environment, issues, trends, and best practices for communications between auditors and audit committees.   (See the first agenda item on December 1 and a briefing paper the staff prepared).  Comments coming out of the discussion included:

·       the audit committee’s use of annual self-assessments to improve performance is a good practice

·       importance of the parties to work as one team and develop a trusting and transparent relationship

·       great value of PCAOB inspection results to audit committee (would like to receive quicker)

·       important that audit team know about other expertise / capabilities of their firm

·       value of the audit team having good rapport with persons outside the accounting area, e.g. CEO, Risk Management, IT

·       positive attitude by auditor about PCAOB inspections

·       open discussion with audit committee about PCAOB inspection results, any firm-planned improvements and impact on the audit

·       auditor insights about significant judgments are invaluable to the audit committee and should be shared (“straight talk” appreciated)

·       audit committee appreciates receiving AQIs (audit quality indicators) from the firm, if available

·       audit committee member competence is key and if member is retired, they must educate themselves to stay current

·       helpful to hear sector information from the audit partner and whether the company is an outlier, e.g., conservative or aggressive

·       the audit committee should meet periodically with the auditor without company executives

·       auditors should let the audit committee know about “yellow flags”

Overall, members believed that audit committee competence and independence, among other things, have improved since the adoption of Sarbanes/Oxley and creation of the PCAOB.

For more information see https://pcaobus.org/News/Events/Pages/SAG-meeting-November-2016.aspx.