The Public Company Accounting Oversight Board (PCAOB) on Sept. 28, 2023, voted unanimously to adopt a new standard that modernizes the auditor’s confirmation process. Confirmation is a technique that auditors use to obtain or verify information about a company by inquiring a source outside the company. It is intended to make sure that the information in the financial statements is accurate.
With a new confirmation standard, the PCAOB wants to better reflect today’s business environment and the increasing use of sophisticated technology that was not available when the existing standard was written three decades ago. The board is also strengthening confirmation procedures to better help prevent fraud.
In particular, the existing requirement for accounts receivable will carry forward with some differences. More importantly, the new standard requires auditors to confirm cash and cash equivalents held by third parties, which most auditors today already do anyway.
“It does not make sense that accounts receivable should require confirmation, but cash held by third parties would not – nor does it adequately protect investors,” PCAOB Chair Erica Williams said.
The new standard addresses situations when it is not feasible for the auditor to perform confirmation procedures or otherwise obtain reliable audit evidence by directly accessing information maintained by a knowledgeable external source.
In terms of direct access, for example, some financial institutions allow “read-only” access to transactions or balances.
Moreover, under the new standard, negative confirmations will not be sufficient.
“It no longer makes sense for auditors to drop a confirmation request in the mail and assume the information in question is accurate if they hear nothing back,” Williams said. “That’s why the standard before us focuses on positive confirmation, meaning an auditor must hear back from the third-party about the information they are trying to confirm. And if they are unable to obtain a response, they should perform alternative procedures to obtain relevant and reliable evidence for the information in question.”
Thus, the final standard emphasizes that the auditor must maintain control over the confirmation process. The auditor is responsible for selecting the items to be confirmed, sending confirmation requests and receiving responses, and address non-responses or incomplete responses to obtain audit evidence. The auditor should also identify situations in which alternative procedures should be performed.
The new standard is Auditing Standards (AS) No. 2310, The Auditor’s Use of Confirmation, and replaces interim AS 2310, The Confirmation Process, in its entirety.
Extant AS 2310 is an old AICPA standard that became effective in 1992 when electronic communications were far less advanced than are today. For example, existing AS 2310 references fax, which most businesses have stopped using more than a decade ago. The use of electronic communication has long been the norm instead of snail mail.
After the PCAOB was established two decades ago, the board on an interim basis adopted AICPA standards that auditors of public companies must use.
Over the years, the PCAOB revised some of the interim standards while others have remained unchanged, such as AS 2310.
Long History
This wraps up a long effort to change the standard.
The PCAOB under previous leaders first issued a concept release in 2009 and followed up with a proposal in 2010. But there was some pushback by audit firms at the time, saying the proposal was too prescriptive. And the project got set aside, and the PCAOB for a decade focused on other standards until the most recent board took over.
The move today comes as the PCAOB under the current leadership of Williams has set the most ambitious standard-setting agenda in the board’s history. Moreover, she has set an aggressive timeline to move on the standards much more quickly than ever.
“The new standard will help auditors detect fraud and better protect investors,” Williams said. “By replacing a confirmation standard that had not changed significantly since faxes were a regular form of communication, the board has taken an important step in modernizing our standards to effectively protect investors in today’s world.”
The new standard incorporate principles-based requirements to keep apace with changes in technology by applying to all methods of confirmation, including electronic and paper.
The PCAOB said that the final standard better integrates with its risk assessment standards to help prevent fraud.
The new standard must be approved by the Securities and Exchange Commission, which oversees the board.
If approved, the standard will take effect for audits of financial statements for fiscal years ending on or after June 15, 2025.
The final standard is based on a proposal issued in December 2022, and the board has made changes to address some issues identified in comment letters.
For example, some comment letters noted in certain cases, such as in the healthcare industry, it may not be effective to send out a confirmation for Medicare receivables because the auditor may never hear back. And in situations like that, the adopting release allows the auditor to perform alternate procedures instead of first waiting to hear back and then perform other procedures.
But the auditor first must determine that it is not feasible to obtain audit evidence by sending out a confirmation or get direct access to verify accounts. Then the auditor should obtain external information indirectly by performing other substantive procedures.
The release provides examples of what the PCAOB means by obtaining external information.
For instance, the auditor could look at bank statements to see the cash deposits or look at a third-party carrier documentation for goods that were shipped.
Thus, the final standard provides more specific illustrations of alternative procedures that can be performed for confirmation.
This article originally appeared in the September 29, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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