In December, the PCAOB posted a report on the results of its 2019 conversations with almost 400 audit committee chairs, focused on audit committee perspectives on audit quality assessment and improvement, auditor communications, new auditing and accounting standards, and technology and innovation. Valuably, the report identifies practices—not necessarily endorsed by the PCAOB—that the committee chairs found to be most effective for improving audit quality across these categories. The report also includes a few PCAOB staff responses to FAQs raised during the conversations.
Audit Committee Chair Conversations with the PCAOB
The PCAOB found that, with regard to audit quality, most audit committee chairs focused on their own audit engagement teams, less so on firmwide metrics. They tended to view judgment as the most critical issue, but acknowledged that it is a difficult quality to measure. Few indicated concerns about the use of shared service centers, given that the engagement partner remained responsible. Most chairs were unfamiliar with the concept of audit quality indicators (AQIs), although many were familiar with the particular metrics, such as communication (direct, clear, thorough and timely), diversity, experience, industry expertise, knowledge of the issuer and issues, leadership ability of the lead engagement partner, professional skepticism and judgment, responsiveness, use of specialists and the national office and others.
Below are practices that the chairs identified as “working well” in connection with audit quality assessment and improvement:
- “Asking the auditor if the audit firm has an annual audit quality or transparency report (or other document that outlines how the firm measures audit quality).
- Understanding and discussing the processes that the auditor has in place to address the previous year’s PCAOB inspections report.
- Reviewing other audit firms’ inspections reports to see if there are any lessons learned or questions about potentially similar issues that could be discussed with your auditor. (All PCAOB inspections reports can be found here.)
- Selecting relevant AQIs to discuss with the engagement team and use as part of an annual evaluation.
- If the audit firm is using shared service centers, discussing at least annually the audit procedures performed at the shared service centers, what controls are in place, the impact on the quality of the work product, and whether the audit firm is considering additional shared service centers.”
Relationship and Communication with the Auditor
The PCAOB reports that most audit committee chairs were “satisfied with their relationship with their auditors, the service from the audit firm and engagement teams, the team’s skepticism and judgment,” as well as the information received regarding auditor independence. Communications were more frequent around scheduled quarterly meetings, and conversations during and prior to meetings helped to highlight key issues for committee focus.
Below are practices that the chairs identified as working well in connection with auditor relationships and communications:
- “Holding a pre-call or meeting with the audit committee chair and lead engagement partner prior to an audit committee meeting to review and refine the meeting agenda and materials.
- Conducting an assessment—on at least an annual basis—of the engagement team and audit, including discussions around what went well and what could be improved.
- If your issuer’s audit is selected for PCAOB inspection, asking the audit firm about any matters that arose during the inspection.
- Having the audit committee chair visit the component location(s) for multi-location audits.
- Dedicating some audit committee meetings to deep dives on specific topics (e.g., governance processes, cybersecurity, etc.) and having the auditor provide feedback on best practices or other trends they are seeing in those areas.”
New Auditing and Accounting Standards
The chairs spent “significant time” discussing new accounting and auditing standards with their auditors. While most believed that their auditors were proactive and timely with regard to implementation of new standards, there was some concern about demands on internal and outside auditor time and resources in light of multiple new standards with overlapping implementation timing. The chairs viewed CAM preparations to be “going smoothly.” Interestingly, they were particularly focused on comparing the number of CAMs disclosed by peer companies. While current CAM discussions emphasized language to be used, the chairs hoped that future discussions would emphasize “what CAMs mean and how that impacts the audit process.”
Below are practices that the chairs identified as working well in connection with new auditing and accounting standards:
- “Discussing new accounting and auditing standards with the auditor as early as possible, at least a year in advance of implementation deadlines.
- Creating a timeline to make sure the appropriate processes are in place and milestones are met for implementation of new standards, including the auditing of the implementation.
- Using outside consultants or experts to educate the audit committee on new or complex accounting standards.”
The PCAOB reported that the chairs had basic familiarity with auditing software tools and technologies. Although they supported automation in general, they cautioned that return on investment should be taken into account and that time will tell whether technology would really improve audit quality. Larger issuers were beginning to use “machine learning” for some “basic internal audit work.” In most cases, oversight of cybersecurity was a top responsibility of the audit committee. Many were “committing significant resources to cybersecurity detection and prevention, including by hiring third party consultants or dedicated internal resources or teams.”
Below are practices that the chairs identified as working well in connection with technology-driven changes:
- “Using project management software or a site where the audit committee, auditor, and management can all track the status of the audit plan.
- Discussing the technology and software tools the audit firm is using and how they are being used.
- Learning more about technology and scheduling time on the audit committee agenda to do deep dives on new and emerging technologies.”
PCAOB Responses to Audit Committee FAQs
Does the PCAOB offer training and resources for audit committees?
As part of its engagement with audit committees, the PCAOB is working to provide useful resources for audit committees, including a July 2019 publication on Critical Audit Matters, communications regarding independence, and the 2019 Staff Inspections Outlook for Audit Committees. (See this PubCo post and this PubCo post.)
Does the PCAOB do a cost-benefit analysis of standards?
Economic analysis, including costs and benefits, is performed throughout the process of developing new standards—in connection with the proposal, the public comment process and adoption. Post-adoption, the PCAOB Office of Economic and Risk Analysis conducts reviews of some rules and standards. One has been completed, and another is planned for the standard related to the new auditor’s report, including CAMs. For that review, the PCAOB will first conduct an interim analysis that will be reported this year. After full implementation of the new CAM requirements, a post-implementation review will be performed.
What is the PCAOB’s view of AQIs?
One goal of the PCAOB’s strategic plan is to develop a set of AQIs, based in part on the data collected through the inspection process, currently being analyzed by the Office of Economic and Risk Analysis.
Also included in the report, but not discussed here, is a Q&A about the PCAOB inspection process.