New PCAOB Chair Erica Williams indicated that there will likely not be any major changes in terms of how the auditing profession is supervised.
Williams said she believes the PCAOB staff has been doing an “excellent job” in driving audit quality since the board’s inception about 20 years ago.
“And so, I don’t think that major changes are necessary in order to effectively oversee the audit profession,” she said. “But of course, we’re trying to continuously improve and grow and evolve as the capital market and the audit profession evolve and grow.”
She was responding to a question about whether major changes will be necessary to maintain high quality of audit during the 20th Annual Financial Reporting Conference hosted by Baruch College virtually on May 5, 2022. This was her first external speaking engagement since becoming the PCAOB chair in January.
In terms of standard-setting, however, there is likely to be more activity than was in the past few years. (See New PCAOB Leaders Set Ambitious Standard-Setting Priorities in the May 6, 2022, edition of Accounting & Compliance Alert.)
“I think it’s fair to say that this is one of the most ambitious standard-setting agendas in the history,” Williams said. “And one of the things that we are focused on … [is] trying to make sure that we are adapting and evolving to the changes in the profession. For example, one of the standards that’s on our agenda is directly related to the globalization. We’re looking to update the standard on the use of other auditors. And we want to make sure that we are addressing the challenges that are involved with supervising audits, including work done by other auditors around the globe.”
Most believe that the PCAOB played a significant role in improving the audit of public company financial statements, especially through its inspection programs. And Williams did not believe major changes would be needed to the board’s inspection approach either.
“But that doesn’t mean that there isn’t still more work to do,” she said, explaining that the board is continually trying to improve its inspections.
The board largely inspects higher risk areas. Moreover, its inspectors take the changing business environment into account. For example, during the COVID-19 pandemic, there was a greater focus on how it affected businesses, especially those in the transportation, retail, manufacturing, and commercial real estate sectors.
“And so while I don’t imagine any major shifts in inspections, every year we will be trying to focus on those areas where we think we need to have the most important focus and what we think are the emerging risks,” Williams said. “And we’re gonna adapt our inspection program each year to the risks that we’ve seen in the audit profession.”
In the meantime, she said that the board is trying to issue individual inspection reports more quickly. There is usually a long lag between when a firm’s audits are inspected and when the report is issued.
“We have been working to make those reports available in a more timely basis, and that is very much a priority for me,” she said. “As you know, over the last couple of years, we changed the format of the report. And we did so because we wanted to make them easier to read and more informative. And as a result of that change, we did slow the process a bit in getting those reports out. But we’re back to … a more typical schedule, and we hope to have the report issued more quickly in the future.”
All Stakeholders Important
In terms of the PCAOB’s relationship with audit firms, Williams emphasized that the firms are one of the board’s most important stakeholders.
“They are important just as the investor advocates, audit committee members, and financial statement preparers, members of Congress,” she said. “And we want to make sure that with all of our stakeholders, we are continuing to have an open line of communication.”
One way to do so, she said, is through the reconstituted advisory groups. ( See New PCAOB Leaders Unanimously Vote to Form Two Advisory Panels in the March 30, 2022, edition of ACA.)
In particular, she said transparency of the advisory groups will be important. The meetings will be public, and the materials will also be made public.
With respect to efforts to avoid any politicization of the advisory groups, she said the board will make sure to have a diverse group of members.
“And to try to make sure again that we’re not politicizing those groups, the board members are required to vote on the advisory group members, and we want to make sure that we are getting a wide range of perspectives, and that is definitely a focus of the board,” she said, adding that the board also approved the panels’ charters.
One of the most important work of the PCAOB will be to get Chinese authorities to agree to full inspection and investigation of audit firms in China whose clients trade on U.S. stock exchanges.
Following a congressional mandate, if audit firms do not allow the PCAOB to inspect for three years in a row because of position taken by local authorities, their clients’s stock will be prohibited from trading.
Williams emphasized that it is important that the board has the ability to do its job completely.
“At this time, we haven’t yet reached an agreement,” she said. (See U.S. Regulator: Speculation of Audit Inspection Agreement with China is ‘Premature’ in the March 25, 2022, edition of ACA.)
“If we do reach an agreement, we will also need to be able to test out that agreement and see if we are able to fully inspect and investigate Chinese firms,” she added.
PCAOB Spokesman Kent Bonham did not elaborate what that would mean vis-a-vis the congressional mandate, and whether an agreement reached would be voided.
However, he clarified errors in some news reports.
“Recent reports that PCAOB officials are currently in China, or that PCAOB officials were in China earlier this year to conduct face-to-face negotiations, are untrue. The PCAOB has not sent any personnel to China since 2017,” Bonham told Thomson Reuters on May 6. “We do not have any updates to share at this time. We continue to engage with PRC authorities, and speculation about a final agreement remains premature. As a result, we continue to plan for various scenarios and eventualities.”
This article originally appeared in the May 9, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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