Early reaction to the PCAOB’s new standard-setting and research agendas has been positive.
“I just thought this was a good agenda,” said Daniel Goelzer, who was appointed as a founding member by the SEC when the PCAOB was established by the Sarbanes-Oxley Act of 2002 to prevent big accounting frauds. Goelzer later on served as acting chairman. The securities commission oversees the board.
“But I also thought there was a bit of an aspect—and it’s probably a good thing—of back to the future, stuff that had been worked on or discussed in the past. It seemed to be dead but is now coming back to life,” Goelzer said. “Confirmations is one thing I would put in that heading; interim standards is the other one.”
The agendas, which were unveiled in early May 2022, reflect the priorities of the new board members, especially Chair Erica Williams.
‘Oldies but Goodies’
Under her predecessor, William Duhnke, the rulemaking agenda was fairly limited, with fewer standard-setting activities.
Now, the board has 12 projects. Six are on the short-term standard-setting agenda: other auditors, quality control (QC), noncompliance with laws and regulations (NOCLAR), attestation standards update, going concern, and confirmations. Four are on the mid-term standard-setting agenda: substantive analytical procedures, fraud, interim ethics and independence standards, and interim standards. Two are on the research agenda: data and technology and audit evidence. And most of them were at one time or another on the agendas or were discussed during advisory group meetings.
For example, “confirmations was proposed 12 years ago,” Goelzer explained. “The review of all the interim standards, that’s something that was in one of the early board releases back in probably in 2003, 2004. They’re picking up some oldies but goodies.”
The board issued a proposal in 2010 in Release No. 2010-003, Confirmation, which was intended to modernize an old interim standard when electronic communications were far less advanced than they are today. But it got set aside after comment letters from auditors and companies criticized the proposal for relying too heavily on specific requirements. They preferred a standard that is more principles-based.
QC Project as Priority
In particular, Goelzer pointed to two that are important: QC and the projects on the research agenda.
The PCAOB in December 2019 during Duhnke’s tenure published a preliminary rulemaking document to solicit the public’s input about ways to improve the board’s QC standards for audit firms in Concept Release No. 2019-003, Potential Approach to Revisions to PCAOB Quality Control Standards. Now, the board is aiming to issue a proposal this year.
The regulatory board believes that strong QCs are important to audit quality, but the inspections staff has continued to find deficiencies.
Vanessa Teitelbaum, senior director for professional practice of the Center for Audit Quality (CAQ), said she was also happy to see the PCAOB prioritize the quality control project. The CAQ, an affiliate of the AICPA, represents the auditing profession.
“We the CAQ, the profession strongly support that project and believe it rightly should continue to be a high priority for the board,” she said.
The concept release proposed basing the PCAOB’s QC rules using standards developed by the International Auditing and Assurance Standards Board (IAASB) as a starting point, which the CAQ supports.
Teitelbaum noted that the international standard goes into effect in December this year, “so firms are implementing it as we speak.”
“In terms of audit quality, I think it’s very important for a firm… to be able to [more easily] comply with different standard-setters’ rules” she added. “It’s like a foundation of standards that should be ideally consistent, and then you can train staff on the differences and the nuances of PCAOB auditing and SEC rules. But you don’t want to have completely disparate auditing standards.”
Thus, “to the extent that the PCAOB concludes they need to have some additional or unique requirements because of perhaps unique elements of public companies in the U.S., that could be an approach” the board takes, she said.
Missing Project?
While the agendas covers a lot of ground, Goelzer said he was surprised not to see auditor’s responsibility for “other information” or information outside the financial statements. It had been on the board’s agenda for several years but was finally dropped in 2019. It had not resulted in any changes in part because of resistance by auditors who in part feared increased burden.
Investors had said they want some sort of assurance on other information because public companies are increasingly providing useful information, especially non-GAAP measures and sustainability reports.
Investors want to make sure that they can rely on them. And the current board has been emphasizing the PCAOB’s mission, which is to protect investors.
Because the extra information is not in the financial statements, it means that companies’ outside accountants do not perform rigorous audit procedures to make sure they are accurate and fairly presented. Moreover, often investors believe that such information is audited, creating confusion in the market.
SEC Taking the Lead
However, a heightened verification on sustainability issues might be required if the SEC adopts its proposal on climate change disclosures. In March, the commission issued the proposal that includes assurance of greenhouse gas (GHG) emissions data. And Chair Williams at a conference in early May said that the PCAOB is closely monitoring the SEC’s work to determine what the board should do in the future.
“I wonder if they see that as sort of potentially a separate project depending upon what the SEC does with its climate change proposals,” Goelzer said. “I was just very surprised that there wasn’t anything in that area on the agenda.”
But “I imagine they will hear about these things from their advisory committees,” he said, referring to the meetings that the reconstituted advisory groups—Investor Advisory Group and Standards and Emerging Issues Advisory Group—will have on June 8 and June 15.
In Teitelbaum’s view, attestation standards are typically the standards that would be used to evaluate ESG information that is outside the financial statements.
“So, when I look at the attestation standard project, to me that kind of shouts out ESG,” she said.
Still, there is a possibility that the PCAOB will take a look at it down the road, she added.
In the meantime, the SEC’s Investor Advisory Committee (IAC) will host a panel discussion on accounting of non-traditional financial information at its next meeting set for June 9.
And a guest speaker includes George Botic, director of PCAOB’s Division of Registration and Inspections.
This article originally appeared in the June 2, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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