In early 2018, the leadership of the Public Company Accounting Oversight Board (PCAOB) changed hands. The new board members have taken a fresh look at the previous standard-setting agenda. In June, Chairman William Duhnke told the PCAOB’s Standard Advisory Group (SAG) that he would like to complete several existing projects in the coming months. Here’s a closer look at three top PCAOB priorities today.
- Accounting estimates
In June 2017, the PCAOB proposed changes to the audit standards on the use of accounting estimates. Release No. 2017-002, Proposed Auditing Standard — Auditing Accounting Estimates, Including Fair Value Measurements, would establish a single standard that sets forth a uniform, risk-based approach to auditing estimates. Currently, there are three PCAOB auditing standards that primarily relate to accounting estimates. These standards were originally adopted between 1988 and 2003.
Examples of accounting estimates include allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets. These estimates involve some level of measurement uncertainty. Some may be easily determinable, but many are inherently subjective or complex. As a result, they may be susceptible to misstatement and require more auditor focus.
In particular, fair value accounting, a type of accounting estimate, has become more widely applied over the past decade. This led the Financial Accounting Standards Board (FASB) to issue updated guidance on fair value measurement (Accounting Standards Codification Topic 820). Auditors sometimes mishandle their examinations of clients’ application of fair value, according to a FASB Staff Consultation Paper, Auditing Accounting Estimates and Fair Value Measurements, which was published in August 2014.
- Using specialists
Release No. 2017-003, Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, was also released in 2017. It would amend two existing audit standards and replace a third existing standard with an updated standard. The changes would apply a consistent, risk-based supervisory approach to both auditor-employed and auditor-engaged specialists.
Increasingly, auditors and company management call on specialists to help them make subjective estimates under U.S. Generally Accepted Accounting Principles (GAAP). For example, an actuary may be hired to determine employee benefit obligations, an engineer might be used to determine obligations regarding environmental remediation, or an appraiser might be retained to determine the value of intangible assets or real estate.
Observations from PCAOB research show that there’s substantial diversity in practice regarding the use of the work of specialists. Moreover, the research has uncovered deficiencies related to auditors’ use of specialists’ work, such as failures to evaluate the assumptions of company specialists in fair value measurements and failures to consider contradictory evidence raised by an auditor’s specialist.
When supervising these specialists, more-specific direction might help minimize the risk of misstatement, especially when specialists aren’t subject to the audit firm’s training, resources and quality control systems.
- Supervising other firms
In April 2016, the PCAOB issued a proposal — Release No. 2016-002, Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard — Dividing Responsibility for the Audit with Another Accounting Firm — that addresses the lead auditor’s responsibilities with respect to other auditors that participate in the audit.
Why would more than one audit firm participate in a company’s audit? It’s most common among companies with significant international operations. Here, the lead auditor issues the audit report and other independent audit firms (or sole practitioners) perform other important audit work. Less common is the situation in which the lead auditor divides responsibility for the audit with another accounting firm and refers to the audit report of the other firm in the lead auditor’s audit report.
In an audit conducted in accordance with PCAOB standards, the auditor plans and supervises the audit so that the work of all participants is properly directed and coordinated, and the results of the work are properly evaluated. When other auditors participate in an audit, the lead auditor must assure that the audit is performed in accordance with PCAOB standards and that sufficient appropriate evidence is obtained through the work of the lead auditor and other auditors to support the lead auditor’s opinion in the audit report.
Working with other auditors can differ significantly from working with individuals in the same firm. For example, the lead auditor and other auditors may work in countries with different business practices, languages, cultural norms and market conditions. In addition, different firms have different quality control systems and professional training. These factors can pose challenges in the coordination and communication between the lead auditor and other auditors.
In September 2017, the PCAOB followed up with Release No. 2017-005, Supplemental Request for Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard ― Dividing Responsibility for the Audit with Another Accounting Firm, to seek additional comments. The PCAOB is seeking input on ways to increase the lead auditor’s involvement in and evaluation of the work of other auditors, enhance the ability of the lead auditor to prevent or detect deficiencies in the work of other auditors, and facilitate improvements in the quality of the work of other auditors.
Eye on technology
The PCAOB also plans to continue its research on ways that technology can be used to make audits more efficient and effective at catching errors, omissions and deviations from U.S. GAAP. Chairman Duhnke told the SAG that the PCAOB is “taking a fresh look at technology and the role it plays, not only today in the audit but the role it will play in the future, and how we need to reflect that with the standards and any guidance that should be provided.”
He continued, “There was a lot of very deliberate, careful work that was done by the [previous board]. I think we are getting comfortable with that work. We are also making sure that those standards that are close to completion or in the pipeline — to the extent possible — [are] fashioned so that they are evergreen, and they can evolve and still remain applicable given emerging technology…. We are deeply committed to getting those appropriately evaluated and resolved so we can set our future standard-setting agenda.”
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