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New PCAOB Leaders Set Ambitious Standard-Setting Priorities

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Taking a sharp turn, the new PCAOB leadership has put back some projects on the standard-setting and research agendas that were previously given short shrift during former Chairman William Duhnke’s tenure.

On the short-term standard-setting projects, the PCAOB put back non-compliance with laws and regulations (NOCLAR), going concern, and confirmations on the agenda.

The board will also be making progress on supervision of other auditors and quality control (QC) standards, which were on the previous agenda.

As for other auditors, the board wants to adopt the rules this year. As for QC, a proposal is expected this year. (See PCAOB will Likely Not Need Third Request for Extra Comment on Proposed Rule Related to Lead Auditor’s Supervision of Other Auditors in the January 6, 2022, edition of Accounting & Compliance Alert and PCAOB’s Concept Release Solicits Comments on Potential Approach to Revising Audit Quality Control Standards in the December 18, 2019, edition of ACA.)

The PCAOB puts projects on the short-term agenda that it believes will make progress in the next 12 months.

The PCAOB’s Office of the Chief Auditor unveiled the priorities of the new board on May 4, 2022.

It appears that the board now-led by Erica Williams, SEC Gary Gensler’s choice to run the audit regulatory board, is prioritizing many of the issues that investor advocates have been asking the board to take up—some of them that fell on deaf ears when Duhnke headed up the board. The SEC oversees the board.

Gensler has put an emphasis on investor protection whereas his predecessor, Jay Clayton who named Duhnke as PCAOB chairman, had prioritized a more business-friendly approach to regulation.

“The agendas are the result of the new Board’s assessment of priorities that advance audit quality to protect the interest of investors,” the PCAOB said.

During Duhnke’s tenure, many investor advocates criticized that the board had pursued too few projects and barely had any public rulemaking meetings.

By contrast, Williams, during her first public speaking engagement as chair of the PCAOB, said that the new agenda is one of the most ambitious ones in the board’s history.

“If adopted, these standards are going to greatly improve audit quality,” Williams said at the 20th Annual Financial Reporting Conference hosted by Baruch College virtually on May 5.

The audit regulatory board also has mid-term standard-setting projects, which are items that will likely not advance within the next 12 months: substantive analytical procedures, fraud, interim ethics and independence standards.

As projects progress, they will move to the short-term agenda.

The board is also planning to be more active in updating interim auditing and attestation standards.

When the PCAOB was established, the board used AICPA standards in the interim. Over time, the board has developed its own standards, but some still remain as interim standards. The AICPA’s Auditing Standards Board writes audit standards for private companies.

As for research projects, the PCAOB is continuing to assess matters related to data and technology and audit evidence.

“Today, the PCAOB has taken another critical step in advancing our statutory standard-setting mandate by updating the standard-setting and research agendas,” said Chair Erica Williams in a statement. “The agendas represent the Board’s focus to modernize, simplify, and enhance our professional standards.”

Confirmations

Notable on the updated standard-setting agenda is an old project on confirmations.

“Consider changes to the confirmation process, including how AS 2310, The Confirmation Process, should be revised to reflect changes in technology, as well as to align more closely with the PCAOB’s risk assessment standards,” the agenda notes.

AS 2310 requires auditors to maintain control over confirmation requests and responses during the confirmation process. Moreover, the board’s quality control standard, QC Section 20, System of Quality Control for a CPA Firm’s Accounting and Auditing Practice, requires an audit firm to have a QC system so that its audit personnel comply with professional standards. This includes maintaining control over confirmation requests and responses.

The board said that auditors must determine that they can rely on the service provider’s processes and controls for direct communication between the auditor and the confirming third-party.

The board issued a proposal in 2010 in Release No. 2010-003Confirmation, which was intended to modernize an old interim standard when electronic communications were far less advanced than they are today. There was some pushback on the proposal at the time, and the board had put it on the back-burner. (See Revised Proposal for Audit Confirmations May Be Issued in the April 6, 2015, edition of ACA.)

The board, in a standard-setting agenda in 2015, said that the staff had been working toward a revised proposal. However, nothing materialized since then. And it was subsequently removed from the rulemaking agenda until today.

The board now wants to issue a reproposal in 2023.

NOCLAR

As for NOCLAR, previous board leaders dropped it from its research agenda in September 2020. It was a project that the board’s Investor Advisory Group (IAG) wanted it to take up.

The focus on the auditor’s responsibilities regarding its client’s illegal acts came amid a string of high-profile scandals in the past several years.

For example, Wells Fargo & Co. created more than 1.5 million unauthorized bank accounts and more than 560,000 credit card applications from 2011 to 2015, and investors asked where its auditor, KPMG LLP, was to prevent the fraud. KPMG said its audits were done appropriately.

AS 2405Illegal Acts by Clients, has remained largely unchanged since the original standard was issued in 1988. And the board’s staff had been doing research to consider whether the standard is sufficiently clear with respect to the auditor’s responsibility to detect, investigate, and report the illegal acts. The staff was also trying to determine whether the current scope of auditor’s responsibility is adequate to protect investors.

The PCAOB now expects to issue a proposal in 2022.

Going Concern

In September 2020, the board also dropped going concern—or a company’s ability to stay afloat—from the standard-setting agenda.

This is another project that the IAG had said the board should work on. Investors said the standards need to be improved because of the failure by many auditors to warn the markets about the severe problems banks were having prior to the 2008 financial crisis. Several large financial institutions collapsed, two of the nation’s Big Three carmakers had to be rescued by the federal government, and the pain was felt throughout the economy.

A proposal on going concern is expected next year.

More Transparency

The PCAOB on May 4 said that it will provide more transparency about its agendas by providing estimated timeline of the completion of each project.

“Going forward, the agendas will be dynamic and will change in response to developments from PCAOB oversight activities; engagement with investors and other stakeholders, including through PCAOB advisory groups; discussion with U.S. Securities and Exchange Commission staff; observations of the work of other standard-setting bodies; and other relevant inputs,” the board said.

The PCAOB will seek input on the agendas from its advisory groups.

The agendas will be updated as needed but at least twice a year.

 

This article originally appeared in the May 6, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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