The PCAOB: Clarifying Audit Standards

In school, teachers would sometimes telegraph or announce what would be on upcoming tests. Class members had a choice: take the hint, or not.

 The Public Company Accounting Oversight Board (PCAOB) has delivered its message on “objectives and potential focus areas for planned 2019 inspections of audits of issuers and brokers and dealers.”

 The board says auditors should “consider” this information as they perform audits and evaluate quality control systems. “Consider,” as in, “This will be on the test.”

The areas of PCAOB interest and main considerations in 2019:

  • System of quality control: quality control systems design and effectiveness.
  • Independence: the board is noting increasing examples of auditor independence deficiencies.
  • Recurring inspection deficiencies: internal controls over financial reporting, revenue recognition, allowance for loan losses, and other accounting estimates, including fair value measurements, and assessing and responding to material misstatement identified risks.
  • External considerations: the influence of outside factors, including economic conditions.
  • Cybersecurity risks: methods firms use to determine if risks and breaches pose a danger to material misstatements on financial statements.
  • Software audit tools: are firms applying due care in use of increasingly sophisticated tools.
  • Digital assets: how firms are dealing with, and maintaining independence, in the emerging and constantly-evolving digital platforms, cryptocurrencies among them.
  • Audit quality indicators: how firms are AQIs and data collection for future guidance.
  • Changes in the auditor’s report: evaluating how firms are responding to the accounting standard (AS 3101) adopted in 2017
  • Implementation of new auditing standards: monitoring firms process and procedures in light of accounting standards changes for revenue recognition, lease accounting, current expected credit losses, and financial instrument accounting, and how firms have audited implementation of the new accounting standards.

 Actions by the PCAOB indicate the seriousness with which it approaches these subjects, notwithstanding its staff limitations and the time it takes to conduct thorough investigations.

 One example: In Dec. 2017 the PCAOB settled a case with Grant Thornton – resulting in a $1.5 million fine for the firm – for quality control violations: “The quality control violations were in connection with the firm's assignment, support, and monitoring of two engagement partners on 2013 audits performed in the financial services practice based in Philadelphia.

“The Board also found that, in one of those audits, the 2013 audit of The Bancorp, Inc., Grant Thornton violated PCAOB auditing standards”.

Recurring deficiencies, another PCAOB 2019 focus, result from the fact that these things happen. For example, in May 2018 the board assessed a $500,000 fine on Deloitte: “The Public Company Accounting Oversight Board today announced a censure and $500,000 civil money penalty against Deloitte & Touche LLP to settle charges that it missed material accounting errors in three consecutive audits of Jack Henry & Associates, Inc., a Missouri-based provider of information processing solutions for banks and credit unions”.

The PCAOB has let everyone – auditors, brokers, dealers, businesses – know what’s on the test, and study hall is finished.

(For a full description of the PCAOB auditing standards focus, click here)

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Tagged PCAOB, Broker-Dealers, Cybersecurity, Assurance