In April 2023, the PCAOB published Spotlight: Staff Priorities for 2023 Inspections. This Spotlight highlights certain priorities that the Division of Registration and Inspections has planned during 2023 inspections and is published for the benefit of audit firms, audit committees, investors, and other stakeholders. If you audit public companies, I highly recommend that you read the document in its entirety to help prepare you for the 2023 inspection season. After reading the document, here are my top 5 takeaways:

They are enhancing their inspection program (Translation: They’re ramping up!).

According to the Spotlight document, the PCAOB’s strategic plan “includes a goal to enhance its inspection program.” When I read this, I said, in my best Scobby Doo voice, “Ruh Roh!” In fact, the PCAOB stated that one “enhancement” is to expand the number of public company audits they select for review (and they are ramping up their budget for inspections to fund it).

The PCAOB did give a “heads up” for what types of engagements might be selected for review. The Spotlight document noted that the PCAOB’s approach for selection emphasizes audits of:

• Public companies in industries and sectors potentially impacted by uncertainties and volatility in the economic and geopolitical environment.
• Fortune 100 companies.
• Public companies with sizable or volatile market capitalization.
• Public companies or broker-dealers with material or significant digital asset activities.
• Public companies engaging in M&A activities, including de-SPAC transactions.
• Broker-dealers that conduct business with customers including those that file compliance reports (many of whom typically hold customer funds and maintain control over the custody of customer securities) and others that provide customers with various investment opportunities, such as introducing brokers.

The current market conditions increase audit risk.

It seems the world can’t catch a break! Just as we were emerging from the global pandemic that shut the world down for several years, rampant inflation and the related response from monetary authorities in the form of raising interest rates has thrown us another curve ball. Add to this an unprovoked war by Russia in Ukraine and some unforced errors by bad actors in the cryptocurrency space, and you have the recipe for increased financial reporting and audit risk.

The PCAOB noted that “these conditions have heightened the need for auditors to exercise professional skepticism in identifying and assessing risks of material misstatement and to plan and perform audit procedures in response to their assessments of the risks of material misstatement and fraud in the financial statements.”

Want to improve audit quality? Set your sights on risk assessment and internal controls!

Based on our review of the 2021 inspection reports of annually inspected filers, a whopping 37% of the audit deficiencies noted were related to AS 2201 An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, which ranks it first among all PCAOB auditing standards for deficiencies. AS 2301 The Auditor’s Response to the Risks of Material Misstatement came in third, contributing to 13% of all deficiencies noted. Together, half of all deficiencies were related to these two auditing standards. Engagement teams would do well to ensure that their audit test work and documentation in these areas are tight because the PCAOB is watching!

During its 2023 inspections, the PCAOB will evaluate the auditor’s procedures to:

1. Design and implement overall responses that address risks of material misstatement,
2. Understand, identify, and test relevant controls, and
3. Modify the audit approach based on identified deficiencies.

Audit firms face many challenges (and the PCAOB is watching!). 

After COVID, many people reevaluated their priorities and looked in the mirror and said, “Life’s too short!” Then they promptly quit their jobs…in droves! The Great Resignation affected a lot of companies, especially audit firms. To address their staff shortages, many audit firms resorted to early promotions, hiring “experienced” staff, and using the work of others, including so-called “shared service centers,” which has its own unique set of challenges (and rules). Furthermore, the PCAOB noted that many of these new hires “received their onboarding, training, and professional development exclusively or primarily in a remote work environment.” Expect the PCAOB to focus on the firm’s policies and procedure surrounding identifying, hiring, and training new hires, as well their supervision and review of their work.

Areas of special focus: Digital assets and M&A activities

Digital assets

Between the arrests of crypto bros SBF and Do Kwon and the SEC’s crackdown on staking-as-a-service offered by many crypto exchanges, it has been a rough year for crypto. This time last year, one of the largest crypto exchanges, Coinbase, had a stock price of $135.15. Today its $54.75, a decrease of nearly 60%. And don’t get me started about the wild fluctuations in the coins themselves. According to the PCAOB, digital asset activity “presents unique risks, including potential fraud risk due to volatility and lack of regulation, which requires an appropriate risk assessment and audit response.” Expect the PCAOB to focus their 2023 inspections on audits of entities with material digital assets.

Note that in late March 2023, the FASB proposed a new ASU related to the accounting and disclosure of crypto assets. Check out this post for more information.

M&A activities, including de-SPAC transactions

During our review of the 2021 PCAOB inspection reports, it was noted that two annually inspected firms had unusually high audit deficiencies rates. We’re talking 76% and 60%. Yikes! It was noted that these high deficiency rates were primarily attributable to their testing of SPACs. And, if you’ve followed us over the past couple of years, you know that we wrote and spoke about the large number of Big “R” restatements related to SPAC transactions. Expect the PCAOB to focus on M&A transactions, especially de-SPAC transactions, during their 2023 inspections.

Hopefully, this post helps you understand where the PCAOB will focus its efforts during its 2023 inspections. Want to learn more about PCAOB inspections? Check out the 5th Edition of our eBook Learn from PCAOB Inspections – Your Prescription for Better Audits due for release in early May 2023!

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