GAAP Flash – PCAOB Inspections and News from the PCAOB – 05.20.16
gaap-flash-pcaob-inspections-and-news-from-the-pcaob-05-20-16

GAAP Flash – PCAOB Inspections and News from the PCAOB – 05.20.16

This week’s GAAP Flash includes articles about preliminary results from the 2015 PCAOB inspections of broker and dealer auditors, as well as other news from PCAOB.

PCAOB Releases Staff Inspection Brief Offering a Preview of Observations from 2015 Inspections of Auditors of Broker-Dealers (April 19, 2016) – PCAOB (@PCAOB_News)

The staff of the Public Company Accounting Oversight Board (PCAOB) published an inspection brief that previews the results of 2015 inspections of broker and dealer auditors. The 2015 inspection cycle was the first in which all audits of broker-dealers were required to be conducted in accordance with PCAOB standards. You can access the staff inspection brief here.

How It’s Relevant: We discussed some of the challenges of auditing broker-dealers in accordance with PCAOB auditing standards in this post. Turns out we were spot-on because the 2015 inspections focused on and found deficiencies in the following areas:

  • Auditor independence;
  • Financial statement audit areas for which audit deficiencies were identified in past inspections, including revenue recognition and use of information produced by broker or dealers or service organizations;
  • Audit procedures on the supplemental schedules to the financial statements;
  • The examination of compliance reports and the review of exemption reports under newly applicable PCAOB standards; and
  • The engagement quality review.

Auditing broker-dealers in accordance with PCAOB standards is serious business and we’ve helped regional accounting firms navigate the rules and reduce audit deficiencies.

PCAOB Mulls Changes in Inspections and Enforcement (May 5, 2016) – Accounting Today (@AccountingToday)

Speaking at a financial reporting conference, PCAOB board member, Jeanette Franzel, said the PCAOB is seeing some “slivers of hope” in audit quality improvement. “Generally, audit firms have made significant improvements, and PCAOB inspections have helped drive those improvements,” she said. She noted that some firms are starting to experiment with ways to improve audit quality, particularly larger firms. “The larger firms are at different points on this journey, and unfortunately, we still find a number of smaller firms each year that just don’t get it, “ she said.

How It’s Relevant: We discussed how larger firms fare better during PCAOB inspections than smaller firms in this post. Ms. Franzel believes the PCAOB may need to look more closely at the area of quality control. “In my optimistic view, we could see a time when a large firm improves its quality control system so that it prevents audit deficiencies,” she said. She went on to discuss how in this scenario, the PCAOB could change its inspection process to focus on the quality control systems and “catching quality control weaknesses early.” Sounds like an internal controls over financial report (ICFR) audit under Auditing Standard No. 5 (AS 5)!

PCAOB Rules to Improve Transparency by Disclosing Engagement Partner Name and Information about Other Audit Firms are Approved by SEC (May 10, 2016) – PCAOB (@PCAOB_News)

The PCAOB announced that its rules to improve the transparency of the audit by disclosing the names of audit engagement partners, as well as information about other firms that participate in the audits, were approved by the Securities and Exchange Commission (SEC). For public company audits issued on or after January 1, 2017, audit firms are required to file Form AP disclosing the name of the engagement partner with the PCAOB. “Auditing is a profession built on reputation, and one important way investors can assess the quality of the audit is to know who conducted that audit,” said PCAOB Chairman James R. Doty. “Form AP will provide that important information to investors.”

How It’s Relevant: We have our doubts that this new rule will improve audit quality. Disclosing the name of the audit engagement partner is already common practice in Europe. Are European audits better than American audits? As former auditors with a Big 4 firm in both Europe and the U.S., we believe the answer to this question is “No.”

PCAOB Launches Post-Implementation Review Program (April 7, 2016) – AccountingWEB (@accountingweb)

Auditing Standard No. 7 Engagement Quality Review (AS 7), AS 1220 under the PCAOB’s recent reorganization of its standards, will be the focus of the audit regulator’s first post-implementation review. The goal of this review program includes:

  • Evaluating whether the standard is accomplishing its intended purpose.
  • Identifying, wherever possible, costs and benefits.
  • Identifying unanticipated consequences – either positive or negative.

How It’s Relevant: AS 7 requires an engagement quality reviewer to evaluate significant judgments made by the engagement team. When the standard was adopted, the PCAOB indicated that a “well-performed engagement quality review can serve as an important safeguard against erroneous or insufficiently supported audit opinions and, accordingly, can contribute to audit quality.” It makes sense that AS 7 would be the first standard subject to this newly implemented post-implementation review program given the PCAOB’s focus on quality control at the firms, wanting these controls to catch significant engagement deficiencies before it issues an audit report.

As Audit Competition Increases, So Does Corporate Opinion Shopping New Research Finds (May 2016) – American Accounting Association (@aaahq)

A study in the American Accounting Association journal The Accounting Review finds that competition for audit clients fosters opinion-shopping with respect to internal controls. The new research, which, the authors say, is “the first to document the existence of opinion-shopping in any form in the post-SOX era,” concludes that shopping for favorable audit opinions on internal controls “is most pervasive when [auditor] competition is relatively high…suggesting that increased competition in audit markets may actually impact audit quality negatively.”

How It’s Relevant: The study also found that auditor dismissals late in the company’s fiscal year are a sign of company trouble. In the words of the study, “auditor dismissals that occur relatively late in the reporting period are much more likely to be associated with opinion-shopping,” especially when companies switch from one of the Big Four auditors to a mid-tier or smaller tier firm. Interesting! What did we say about the audit deficiency rates of non-Big Four firms?

 
PCAOB Inspection

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