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US Securities and Exchange Commission

As Problems in Global Audit Persist, SEC Chief Accountant Reminds Lead Auditors of their Responsibilities

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Securities and Exchange Commission Chief Accountant Paul Munter urged lead auditors to do a better job when other accounting firms and accountants participate in the audit because the staff has continued to observe shortcomings.

In a March 17, 2023, statement, he pointed to the Public Company Accounting Oversight Board (PCAOB) disciplinary actions against auditors last year as well as SEC staff observations, which “highlight troubling instances where the lead auditor used audit work performed by another, affiliated audit firm that played a ‘substantial role’ in the audit, yet was not registered with the PCAOB.”

An accounting firm must register with the audit regulatory board when it plays a substantial role in the audit of a public company. This is regardless of the audit engagement structure used by the lead auditor. For example, lead auditors may assume the responsibility for the work of other auditors, or they may engage directly so that the other auditor is an extension of the lead auditor’s engagement team.

Moreover, he said that the SEC staff has observed violations of PCAOB Auditing Standard (AS) No. 1301, Communications with Audit Committees and problems in Form AP, Auditor Reporting of Certain Audit Participants.

There were instances when lead auditors did not provide accurate legal entity name of other auditors; thus, they failed to communicate correctly other auditor’s names, locations or planned responsibilities. Sometimes Form AP contained inaccurate audit hours performed by other accounting firms.

“Those communications and filing requirements underscore how critically important it is for lead auditors to prevent unregistered audit firms from playing a substantial role in the audits of issuers, and to correctly identify the role of certain other auditors,” Munter said. The SEC oversees the PCAOB.

Potential Risk for Audit Committee Confusion

Many accounting firms operate within a network, and erroneous or incomplete communication could confuse or mislead audit committees into thinking that the engagement involved a single accounting firm rather than a lead audit firm and other auditors in the same network.

“Because audit quality may not be the same in all accounting firms within a network, clear, accurate communication with the audit committee about which firms performed the work and the steps the lead auditor took to drive greater consistency in audit quality throughout the performance of the engagement is critical to the audit committee’s ability to oversee and evaluate the performance of the independent audit firm,” Munter said.

His remarks come as businesses operate in an integrated global environment, and there has correspondingly been an increased use of accounting firms and individual accountants other than the lead auditor on many public company audit engagements. Thus, in some cases, other auditors may work in countries with different languages and business cultures from those of the lead auditor.

In 2021, Munter said that 26 percent of all public company audit engagements and 57 percent of large accelerated filer audits involved the use of other auditors by the lead auditor. Large accelerated filers have a public float of more than $700 million.

“In light of the increased use of other auditors, it is noteworthy that recent academic research indicates an inconsistent quality of work performed by other auditors, which is potentially detrimental to investor confidence in the quality of financial information,” Munter said. “Such findings highlight the importance of the lead auditor’s role, and especially that of the lead engagement partner, to ensure investor protections by safeguarding against engagement performance failures due to inadequate planning, supervision, and oversight of other auditors.”

Former PCAOB acting chairman Daniel Goelzer welcomed Munter’s statement because some MNC audit committees may not fully understand which individual firms are participating in their audit.

“There is a tendency to assume that the company’s auditor is one worldwide organization when, in fact, the large global firms are networks with many members,” he said. “The statement contains a pointed warning as to why companies and their audit committees should pay attention to which firms are involved in their audit – if a firm that should be registered but isn’t works on the audit, company filings containing the audit report violate the SEC’s rules and the company may suffer the consequences.”

Audit committees are responsible for overseeing the companies’ external auditors.

“Maintaining uniform quality across the network is a big challenge, and audit committees would be wise to ask questions about how their engagement partner is supervising the work of all the players and making sure they are all following U.S. standards,” Goelzer added. “The statement is a good reminder to audit committees on that issue as well.”

In the meantime, the PCAOB revised its standards on audit supervision last year in Release No. 2022-002, Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit with Another Accounting Firm.

The rules become effective for audits for fiscal years ending on or after Dec. 15, 2024.

The board is also working to revise its quality control standards. And Munter discussed the importance of quality controls when using the work of other auditors.

Separately, Munter’s statement was also issued during a period when the PCAOB for the first time was able to inspect audit firms in China in the fall of 2022. The board will soon issue inspection reports of KPMG Huazhen LLP in mainland China and PricewaterhouseCoopers in Hong Kong. Board Chair Erica Williams last year indicated that the inspections staff found potential audit deficiencies.


This article originally appeared in the March 21, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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