MONTH-IN-BRIEF (Feb 2021)
PCAOB Reports on Audit Committee Conversations
By Thomas W. White, Retired Partner, WilmerHale
As part of its strategic objective to increase outreach to audit committees, the Public Company Accounting Oversight Board spoke to nearly 300 audit committee chairs during its 2020 inspections of registered public accounting firms. The PCAOB recently released a report on the feedback it received from audit committee chairs. The PCAOB’s conversations with auditors covered three general areas. Noteworthy comments include:
- The Auditor and Communications with the Audit Committee: Most audit committee chairs commended their auditors’ communications. They noted various areas in which auditors performed well and some areas for improvement. Some chairs praised their auditors for innovation and partner rotation, but others flagged these areas as needing improvement. Other areas for improvement included managing global audit operations; helping more junior audit team members learn the company’s business; independence communications; guidance around auditing of certain controls for third party vendors; “over-auditing” and/or “over-documentation;” and increased visibility into discussion around fee changes. Many chairs noted that they routinely assess the performance of their auditors, sometimes annually or in connection with ratification of the auditors or even quarterly or real time if the need for feedback arises.
- New Auditing and Accounting Standards. Implementation of new accounting standards, especially revenue recognition, leases and current expected credit losses (CECL), were particularly challenging and time consuming for many chairs. By contrast, implementation of the critical audit matter (CAM) requirement in auditors’ reports was generally viewed as smooth.
- Emerging Technology. Many chairs cited the potential benefits from the use of emerging technologies, notably to improve both the audit and overall financial reporting quality. These benefits including allowing auditors to reduce manual work, obtain better evidence and become more efficient. The benefits also included cutting down on opportunities to manipulate or falsify financial information and providing auditors with the ability to more easily identify anomalies. However, chairs also noted that the new technologies presented numerous challenges, risks and concerns. These included cybersecurity risks and concerns that an overreliance on technology “leading to less attention or emphasis on preparer and auditor judgment, experience or professional skepticism.”