Consideration audit committees: The PCAOB has some new duties for you

In a latest op-ed in The Wall Avenue Journal, “We Audit the Auditors, and We Discovered Hassle” (July 24, 2023), Public Firm Accounting Oversight Board Chair Erica Williams outlined just a few ideas relating to public firm audit committees. 

If audit committees undertake her directives, I’m afraid that the skilled relationships between the audit committee and the exterior auditor will probably be broken past restore.

In her editorial, Ms. Williams said, “We hope boards of administrators and audit committees will use PCAOB inspection experiences to carry audit companies accountable for high-quality outcomes and ask powerful questions on behalf of their traders.”

“Audit committees ought to know the deficiency charge of the audit agency they rent and the way it compares with different choices,” she continued. “They need to ask audit companies if the audits of their firm have been inspected and, in that case, for the outcomes. They need to discover out whether or not the particular auditors who’re assigned to work with their firm have had their audits for different shoppers inspected and what the outcomes have been.”

Her feedback as they relate to holding audit companies accountable are to be lauded. No audit agency that I do know of needs to be recognized for performing substandard audits. And an audit committee ought to certainly be asking powerful questions of their auditor. The auditor, on their behalf, additionally understands that they’re serving the general public curiosity and the corporate shareholders through the efficiency of their work.

However I’m involved when she asks the audit committee to evaluate an audit agency’s deficiency charge and “examine with different choices.” A deficiency charge ensuing from PCAOB audits will be fairly deceiving. For one, these charges are based mostly on very restricted samples. And the PCAOB tends to identification what they consider to be these reporting firms of the very best danger. This “measurement” by itself will probably be very misleading and might masks the prime quality of the various different audits {that a} agency could carry out. Additional, a deficiency charge by itself would are likely to masks the various variables — e.g., trade, administration expertise, enterprise pressures, stockholder/board activism — that might doubtlessly influence an audit and trigger a poor rating report. 

Her recommendation for the audit committee to “examine with different choices” is principally telling an audit committee that the PCAOB is encouraging a public firm to shortly change auditors when the regulator deems that the agency, as an entire, had carried out a substandard audit at different shoppers. Why does not the PCAOB merely state that that is their expectation relatively than put this in an op-ed? I additionally query the usage of a deficiency charge as a key determinant in making an auditor change. You possibly can’t make an apples-to-apples comparability based mostly on such a subjective measure. 

Her suggestion that the audit committee inquire as as to if their audit was topic to PCAOB evaluate leads me to consider that the PCAOB themselves failed to speak with the audit committee when reviewing an audit to find out the committee’s evaluation of their exterior auditor and the interplay between the auditor and the audit committee. This inquiry can present very precious enter when evaluating an audit and the failure to take action would trigger one to query the viability of the PCAOB’s work on the whole.

However my biggest concern arises from Ms. Williams’ feedback relating to encouraging an audit committee to make an inquiry as to the particular auditors who’re assigned to a consumer’s audit and their historical past with different shoppers and potential PCAOB opinions. I’m actually involved that this sort of inquiry will serve to dissuade proficient professionals from conducting audits of public firms. Having an audit committee embed themselves within the internal workings of their audit agency, their skilled observe actions, personnel evaluations, private improvement applications and different performance-related measures turns into too intrusive and can solely serve to construct antagonistic emotions between the agency and the consumer’s audit committee. 

Additionally, how far down the degrees of the audit group ought to the audit committee be involved with? If a employees accountant was concerned in an audit that was subsequently deemed poor (by means of no fault of their very own) will this skilled be damned for the remainder of their profession? Is it solely the companions that the audit committee needs to be involved with. I can solely see this intrusiveness as the start of a slippery slope. Moreover, if such an inquiry is made as to different PCAOB audit inspections, would that not serve to pierce any kind of confidentiality over which audits have been certainly reviewed by the PCAOB? Why ought to one audit committee be advised of different doubtlessly failed audit inspections?

I worry that what the PCAOB is proposing is easy — when you’ve got one deemed poor audit inspection, your profession as a public firm auditor is over, since no audit committee would comply with permit you to serve on their audit group. And the way does the audit committee know what precisely prompted the deemed deficiency? Was it a minor oversight that had nothing to do immediately with the standard of the audit?

Whereas I enthusiastically assist the general objective of the PCAOB to extend the standard of the impartial audit, I sincerely query the ways proposed by Ms. Williams on this regard. 

Whereas she could consider that the PCAOB deficiency charge is essentially the most legitimate device to evaluate an auditor’s efficiency, I’m of the opinion that different strategies would higher serve the audit committee, the shareholders and the capital markets as an entire. 

Additional, any inquiry by any audit committee of the historic expertise of their audit group in different PCAOB inspections goes too far and oversteps the boundaries of professionalism. If the audit committee believes that their audit agency doesn’t take their audit tasks significantly in managing their folks and in offering acceptable disciplinary and coaching actions, then by all means “examine with different choices.” However to conduct ongoing inquiries of their audit group capabilities and performances in different audits is a step too far.