The Great Resignation was frequently mentioned as a topic of concern by public company audit committee chairs, according to a summary of conversations that the PCAOB inspections staff had with 211 audit committee chairs in 2022.
While staff shortage affected all industries during the COVID-19 pandemic, it has been especially acute in the accounting profession. Moreover, there has been a decline in the number of students majoring in accounting.
“These audit committee chairs observed that turnover on the audit engagement teams and within the financial reporting roles at their respective public companies were areas of significant discussion as they both impacted efficiencies in conducting the audit,” according to Spotlight: 2022 Conversations With Audit Committee Chairs, published on Sept. 28, 2023. “For example, they were concerned about the number of CPAs at the issuer responsible for financial reporting, as well as the level of staffing and the experience of the engagement team.”
Each year, the staff from the PCAOB’s Division of Registration and Inspections invite audit committee chairs to have conversations in an information setting. Audit committees have oversight responsibilities of the companies’ external auditors. The discussions focused on topics related to the 2021 audit of their company’s financial statements.
Last year, 85 percent of 211 audit committee chairs who talked to PCAOB staff had not spoken with the PCAOB before.
Other Key Observations
Besides the staffing problem, the report highlights other key messages from the conversations: COVID-19 pandemic, communications, critical audit matters (CAMs) and information outside of the financial statements.
COVID-19: Remote Work
Last year, most audit committee chairs did not think the pandemic significantly affected audits of their companies.
“While many preferred that a larger portion of their audits would have been conducted in person, they were confident that in most instances auditors were able to perform high-quality audits in remote and hybrid environments,” the staff report stated.
Nevertheless, audit committee chairs had some concerns. They were aware of the elevated risks of remote and hybrid audit environments, especially controls and cybersecurity associated with the audit process.
“From the audit committee chairs’ perspectives, auditing remotely seemed more effective for lower-risk areas, such as vouching cash, as opposed to procedures such as inventory observation,” the report noted. “They also highlighted the need for heightened supervision and review when working remotely.”
Communications with Auditors
In conversations with PCAOB staff, audit committee chairs emphasized the importance of communication with their auditors. And many praised their auditors for proactive communication, easy-to-understand presentation of issues, and auditing and industry updates. Auditors also periodically provided audit committees with educational materials.
But several audit committee chairs said that inconsistent or last-minute conversation was problematic and wanted to see improvement.
“Audit committee chairs felt that early and ongoing communication with their auditors would help minimize the possibility of surprises throughout the audit,” the staff report stated.
Auditors are required to report CAMs in their reports. And the staff found that audit committee chairs “were generally pleased with their auditor’s level of preparation for CAMs-related discussions, and none cited significant disagreements over their auditor’s determinations as to what should be included as a CAM in the opinion.”
Common examples of CAMs were related to revenue recognition, intangible assets, goodwill and allowances.
A small percentage of audit committee chairs questioned whether CAMs disclosures have become too generic with boilerplate language.
Investor advocates tend to believe that CAMs are not useful enough. And the PCAOB’s Investor Advisory Group (IAG) has been discussing ways to prompt more useful auditor reporting. The advisory panel will present recommendations to the PCAOB when it meets virtually on Oct. 10. (See Audit Quality Indicators, Critical Audit Matters on PCAOB’s Investor Panel Meeting Agenda in the Oct. 5, 2023, edition of Accounting & Compliance Alert.)
Information Outside Financial Statements
The PCAOB staff asked audit committee chairs whether they have discussions with their auditors about information outside of the financial statements, such as non-GAAP measures which have been a frequent topic of SEC staff comment letters to companies in the past several years.
“While the key metrics continue to be those included in financial statements, there is increasing discussion about the inclusion of non-GAAP measures, such as earnings before interest and taxes,” the report noted.
The conversations revealed that almost all audit committee chairs said that they wanted to make sure that all information provided is accurate.
This article originally appeared in the October 6, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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