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PCAOB to Expand Inspection Procedures in 2024

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

As part of the Public Company Accounting Oversight Board’s (PCAOB) efforts to enhance its audit inspections program under the leadership of Erica Williams, the Division of Registration and Inspections (DRI) will expand inspection procedures, which the division began in 2023 and will continue to do so in 2024, to assess how well firms are complying with standards related to independence, fraud, audit findings, audit committee communications, Form APs, the auditor’s report, engagement quality reviews, and audit documentation.

“These additional procedures enhance the robustness of inspections that assess audit firms’ compliance with applicable laws, rules, and standards,” according to Spotlight: Staff Priorities for 2024 Inspections and Interactions With Audit Committees, published on December 20, 2023.

The DRI’s 2024 inspection program will consider overall business risks, including:

  • high interest rates, tightening of credit availability, and inflationary challenges.
  • disruptions in the supply chain and rising costs.
  • business models that are significantly impacted by rapidly changing technology.
  • geopolitical conflicts.
  • financial statements that include areas with a higher inherent risk of fraud, estimates involving complex models or processes, and presentation and disclosures that may be impacted by complexities in the company’s activities.

“Our inspection priorities Spotlight provides firms with important insights to help them plan and perform high-quality audits investors deserve,” said PCAOB Chair Williams in a statement. “We encourage firms and audit committees to make use of this important tool to help improve audit quality.”

The report states that next year, the board will also continue to scrutinize audits of companies that have acquired other businesses, among areas of focus.

Focus on 3 Sectors: Financial Industry, IT, and Other

In 2024, the inspection selection process will prioritize on the following three sectors: financial industry, information technology, and other.

In terms of financial institutions, the PCAOB noted the disruptions among regional banks earlier in the year following high-profile bank failures. For example, it was found that Silicon Valley Bank had poor risk management practices and suffered a massive run on deposits when the Federal Reserve increased interest rates several times during a short period of time.

“The failure of an auditor to properly understand the business and management’s strategy degrades the ability to appropriately and diligently exercise professional skepticism and professional judgment,” the report notes. “Our risk selection factors will be calibrated to intentionally select more audits of regional bank public companies and mutual funds with Level 3 investments, or other specific audit challenges.” Level 3 assets are the hardest to value because they are not traded frequently.

Inspections will focus on IT companies because their financial statement accounts, disclosures, and related internal controls tend to be complex.

“The risk of fraud due to management override, although not unique to this sector, is often heightened given earnings pressures,” the inspection staff explained.

As for other sector, the PCAOB inspections will continue to emphasize on selecting audits of companies that apply industry-specific or sector-specific accounting.

Increase Number of Engagements for Inspection for Larger Firms

The DRI will also increase the number of engagements it reviews at annually-inspected firms “in response to heightened risks in certain industry sectors,” among inspection enhancements for 2024.

Firms that are inspected every year have more than 100 public company audit clients. For 2022 inspections, 14 firms met the criterion: the Big Four, BDO USA, LLP, Grant Thornton LLP, RSM US LLP, Baker Tilly Virchow Krause, LLP, B F Borgers CPA PC, Cohen & Company, Ltd., Crowe LLP, Marcum LLP, Moss Adams LLP, and WithumSmith+Brown, PC.

The board does not have the resources to inspect all audits and thus selects audits to review largely based on risk-based assessment. The PCAOB also picks some audits for review randomly. It is intended to introduce an element of unpredictability and is intended to gauge a more correct level of deficiency rate.

In terms of the number of audits that DRI inspects each year, several factors are taken into account, the PCAOB said, and the factors include previous inspection results and emerging risks in a particular firm or industry, the staff report states.

Target Team: Large Firm Culture

For 2024, the PCAOB will create a targeted team that will assess culture across the US global network firms. These are Big Four firms, BDO, and Grant Thornton.

The small team will interview firm personnel and evaluate other documentation as part of the inspections’ quality control procedures. The PCAOB said that this information will inform its understanding of audit firms’ cultures and the effect on audit quality.

Faster Publication of Inspection Reports

In the past several years, the PCAOB has been trying to publish inspection results in a more timely manner, and the board will take “additional steps to streamline our internal processes” to do so.

There is often a long lag between when a firm’s audits are inspected and when the results are issued for public consumption.

During a meeting of the SEC, which oversees the PCAOB on December 13, Chair Williams said that the board will strive to issue inspection reports six months after inspections.

 

This article originally appeared in the December 27, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.

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