On December 6th, the Public Company Accounting Oversight Board (PCAOB or the Board) released Inspections Outlook for 2019 (the Report), which provides insights into the Board’s transformation and key areas of focus for 2019. This blog will discuss two key areas of focus and tie statements in the Report to comments made by PCAOB board member Kathleen M. Hamm in a recent speech, “Quality Control: The Next Frontier” (University of Tennessee’s The Neel Corporate Governance Distinguished Speaker Series, November 30, 2018) and the Board’s recently released Strategic Plan 2018-2022.
The new slate of PCAOB directors has embarked on a series of interrelated projects to reevaluate (among other things) how the Board plans, conducts and reports on inspections. Projects, which include the procedures they perform, selection process (both engagements and areas of focus), how they report results, and how to more effectively consider evolving risks and other factors, are to some degree long-term, but will impact the 2019 inspection cycle. The Board has promised to communicate updates as its approach evolves.
Key Areas of Focus
Key areas of focus are always of interest to firms, for obvious reasons. The first two in the list are:
• Quality control systems
Quality control systems. The Board plans to increase focus on the design and operating effectiveness of firms’ systems of quality control. This ties directly to the Board’s recently adopted Strategic Plan to improve audit quality via prevention, detection, deterrence and remediation. The PCAOB wants to identify and help firms correct deficiencies before they impact an engagement. Their intent, according to Ms. Hamm’s recent speech is to “tailor our inspection procedures based on the size, complexity, and risk profile of firms, including their past inspection results, identified weaknesses and known changes in controls”. Inspectors will consider which controls the firm has designed to self-identify compliance issues and in selecting files for review, assess how the firm’s system prevents risky audit behaviors.
Independence. The PCAOB, over the years, has identified recurring deficiencies related to independence, including monitoring procedures that fail to identify independence violations. The Report attributes this failure to either lack of understanding of the rules or lack of appropriate controls to prevent violations. Thus, independence will remain a key area of focus in next year’s inspections, including:
• Maintaining independence in fact and appearance
• Education on independence requirements
• Monitoring compliance with independence requirements
• Impact of non-audit services on independence
Other Mentions of Independence
Two of the other key areas of focus -- digital assets and implementation of new accounting standards -- will prompt inspectors to look closely at compliance with independence requirements.
Digital assets - Among other things, inspectors will evaluate auditors' responses to risks related to digital assets. To the extent firms are offering services in this area, Inspectors will consider whether firms are maintaining their independence.
Implementation of new accounting standards - Given the spectrum of significant accounting standards changes in recent years, inspectors have been monitoring firms' processes and procedures, focusing on areas requiring management judgment and how auditors have addressed the design and operating effectiveness of internal controls post-implementation. Inspectors also plan to evaluate firms' processes related to their maintenance of independence when providing their clients assistance implementing new accounting standards.
Other Key Areas of Focus
• Recurring inspection deficiencies
• External considerations
• Cybersecurity risks
• Software audit tools
• Audit quality indicators
• Changes in the auditor’s report