Audit Insider | February/March 2024

AI. Chair Gensler recently warned public companies of risks associated with artificial intelligence (AI), including public companies over-hyping, or “AI-washing,” capabilities and over-reliance by public companies on only a handful of technology platforms. These risks and more, he warned, could introduce instability to the financial reporting system.

• How auditors and audit committees can prepare: Recently during an NACD and CAQ event, Cory Hrncirik, Microsoft Modern Finance Lead, outlined steps public companies can take to prepare for their AI journey. A follow-up blog by my colleague, Vanessa Teitelbaum, Senior Director, Professional Practice, outlines additional actions audit committees can take to mitigate risk.

PCAOB

Inspections. Before the end of February the PCAOB released 14 inspection reports. Included in this release were the 2022 inspection reports for the global network firms and some annually inspected firms. These reports contain the PCAOB’s findings from inspections they conducted in 2022 of 2021 audits. In my blog, Understanding the PCAOB’s Latest Inspection Results: Five Guiding Principles for Audit Committees, I share five principles I consider when reviewing the PCAOB’s inspection reports.

• Looking ahead: The PCAOB also outlined its inspection priorities for 2024, which includes key risks and considerations auditors should focus on, such as persistent inflation and geopolitical conflicts, along with questions for audit committees and more.

NOCLAR. In response to significant feedback to their proposal, NOCLAR, that would amend PCAOB auditing standards related to the auditor’s responsibility for considering a company’s NOCLAR, including fraud, the PCAOB is hosting a virtual roundtable on March 6. In light of the roundtable, they are also reopening the comment period through March 18.

• CAQ take: We’re pleased to see the PCAOB is taking action to solicit stakeholder feedback to the proposal – and we’re also pleased to have the opportunity to weigh-in during the roundtable. I’ll be joining as a panelist during the costs and benefits discussion. The virtual roundtable can be viewed via Webex and is scheduled to start at 9:30 ET – be sure to tune in! If you are not participating, you can still respond to the questions in the PCAOB’s briefing paper and/or provide views on what you hear in the roundtable while the comment period is still open.

2024 Advisory Group. This month, the PCAOB announced the 2024 members of its two advisory groups: the Investor Advisory Group (IAG) and the Standards and Emerging Issues Advisory Group (SEIAG). Advisory group members are appointed for two-year terms. Chair Williams said, “Input from our advisory groups is an important aspect of how the PCAOB engages with stakeholders and the public to become better informed and more effective in fulfilling our investor-protection mission. We thank all IAG and SEIAG members for their willingness to serve and for sharing their valuable time and perspectives with us.”

• CAQ take: We agree with Chair Williams that stakeholder engagement is necessary to effectively protect investors and meet the needs of our capital markets as the PCAOB makes progress on their standard-setting agenda.

Supervision of other auditors. On June 21, 2022, the PCAOB issued Release 2022-002, in which the Board adopted amendments to its auditing standards to strengthen requirements for planning and supervising audits involving accounting firms and individual accountants (“other auditors”) outside the accounting firm issuing the auditor’s report (the “lead auditor”). The CAQ has issued an alert that has been prepared to support auditors in planning audits of fiscal years ending on or after December 15, 2024.​​

IASSB

Fraud proposal. The IAASB recently proposed revisions to one of its standards for requiring auditors to look for signs of fraud in a client’s financial statements. Among other things, the revisions significantly strengthen auditors’ responsibilities related to fraud by defining the expectations in relation to fraud, delineating more robust procedures, and increasing transparency about the auditors’ responsibilities and fraud-related procedures in the auditor’s report. The IAASB is inviting feedback to the proposal by June 5, 2024.

• Our take: Regulators and standard-setters are taking a fresh look at their rules and standards related to fraud to make sure they hold up in the current environment. It takes every member of the financial reporting supply chain working in concert to detect and prevent fraud. Visit the Anti-Fraud Collaboration for resources for auditors, public company management, audit committee members and investors.  

Guidance for assurance practitioners when citing IFRS accounting standards. The IAASB in December issued guidance to help stakeholders understand how to reference IFRS Accounting Standards to follow recent updates to the IFRS Foundation® Trade Mark Guidelines. The new guidance clarifies how auditors should refer to the standards in their reports and describes certain changes that the IAASB plans to make to their handbook to address existing references to the IASs and IFRSs.

IESBA

IESBA issues exposure drafts on sustainability and experts. In January, the IESBA issued two exposure drafts aimed at improving independence sustainability reporting. The most recent draft, among other things, provide a clear framework of expected behaviors and ethics provisions for all auditors providing assurance over sustainability reporting. A separate exposure draft, issued in December, proposes independence standards for all sustainability assurance practitioners, including professional accountants, and specific ethics provisions relevant to sustainability reporting and assurance.

Audit Quality

Audit quality in the U.S. remains high, but in light of economic uncertainty, emerging developments, and demands on talent, audit practitioners should remain up to speed on the latest developments impacting audit quality. Read on for recent news, tools, and resources.

Guiding Principles to Understanding the PCAOB’s 2022 Inspections Results  

The PCAOB recently released its 2022 inspection reports for the U.S. global network firms. These reports contain the PCAOB’s findings from inspections they conducted in 2022 of 2021 audits.

Recently, I published a blog highlighting five key principles I consider when reviewing the PCAOB’s inspection reports. If you’re an audit committee member, consider using these principles as context when engaging in dialogue with your external auditors about the PCAOB’s inspection reports.

1. The PCAOB’s inspection process continues to drive improvement in audit quality. While being part of an audit team that has been selected for an inspection can be stressful (you can read more about my personal experience in my opinion for Bloomberg), auditors understand and embrace the inspection process as a valuable tool that improves performance and drives audit quality, along with investments in technology, processes, and people by the firms.
2. Inspection findings are not the sole measure of audit quality, nor are they a report card. The PCAOB’s inspections, largely risk-based, are designed to look at the most complex audits and audit areas – areas that typically require the auditor to exercise the most significant judgments regarding risks, design of procedures, and evaluation of audit evidence. For context, approximately 2% of all audits performed by annually inspected U.S. firms are selected for inspection. Of the audits where a deficiency is identified, the majority remediate with no change to the auditor’s conclusion (more on this later).
3. Inspection findings rarely lead to a restatement. From 2009-2021, only 0.8% of inspections resulted in a restatement. From 2017 to 2021, that number fell to 0.5%. In 2020 and 2021, there was not a single restatement as a result of inspections for annually inspected U.S. firms.
4. Inspection findings have narrowed. The PCAOB’s inspection staff have gained experience, which has allowed them to go deeper during inspections. As a result, firms have gotten better and the job of the inspector has gotten harder.
5. Audit quality depends on people. Auditing requires people. It requires people with experience, integrity, independence, and strong professional judgment, and application of those skills to the unique business and strategy of the company being audited.

I expand on these five principles in my blog, Understanding the PCAOB’s Latest Inspection Results: Five Guiding Principles for Audit Committees. I think audit quality will always be a journey, not a destination. There’s always more work to do and I know audit firms will use their learnings from this year’s reports to continuously raise the bar on audit quality.

CAQ Publishes Annual Transparency Barometer   

For ten years, the CAQ, in partnership with Ideagen Audit Analytics, has published a report that measures year-over-year comparison of disclosures for S&P 500, S&P MidCap, and S&P SmallCap companies in distinct key areas, including audit committee duties and composition, auditor evaluation and oversight, audit firm and lead partner selection, auditor compensation, cybersecurity and ESG. This report provides a “Barometer” on audit committee disclosure trends for investors, and the data gathered provides a macro-level view of public company transparency over the last decade, as well as disclosure trends in evolving areas such as cybersecurity and ESG.

Highlights from this report include:

• Disclosures of the fact that audit committees are responsible for cybersecurity risk oversight and ESG rose by as much as 50% in the last year.
• These new responsibilities also require expanded skill sets from audit committee members. Notably, we have seen changes in the audit committee’s composition, in terms of members and expertise, and responsibilities.
• Areas with room for improved disclosures include how the audit committee considers the tenure of the external auditor, how audit committees are involved in selecting the external audit engagement partner, and discussions of audit fees.

This year, the report also identifies several opportunities for audit committees to enhance disclosures regarding audit fees, particularly the audit committee’s responsibility for fee negotiations and, as well as how audit committees consider auditor tenure and engagement partner selection.

Improved audit committee disclosures serve an important role in promoting audit quality and auditor independence as well as meeting investor expectations. Read the full report for more audit committee insights: Audit Committee Transparency Barometer.

The Evolving Role of the Auditor

As investor demand evolves, so does the role of public company auditors. The CAQ is dedicated to providing resources to keep you up-to-date on trending topics in corporate reporting.

Survey of Investors Shows Desire for More Information on Noncompliance, Fraud 

A recent CAQ survey of institutional investors designed to understand their perspectives on noncompliance and fraud found that investors have some concern about the current fraud landscape. Overall, the findings demonstrate that while many investors take fraud into consideration when making investment decisions, they don’t always feel they have all the information they need. Highlights include:

• Nearly all investors take non-compliance and fraud risks into account in their investment decisions.
• Three-fourths of investors believe the U.S. corporate reporting system is effective, with a plurality (45%) saying it is effective but could use some updating.
• Nearly six in ten believe non-compliance and even fraud goes undetected frequently. Of these, most say federal regulators or company management could do a better job of detecting non-compliance.
• Seven in ten say information available on non-compliance, and even fraud, does not meet all their needs. Public company auditors, company management, and federal regulators are cited as groups they want to have more information from.

Regulators including the PCAOB, and standard-setters like the IAASB, are taking action to address fraud by re-evaluating the efficacy of existing rules and standards. In the meantime, the profession is also doing its part to deter and detect fraud by working with leaders of the financial reporting supply chain to develop anti-fraud resources and provide educational thought leadership via the Anti-Fraud Collaboration (AFC). Recently, the Association of Certified Fraud Examiners took a step to strengthen the global fraud risk management community by joining the AFC. This milestone and strategic partnership will strengthen shared goals of both organizations and provide resources that support efficient and effective financial fraud risk management programs across all industries.

Survey of Audit Partners Finds Less Pessimism on US Economic Outlook  

Late last year, the CAQ published the results of its Audit Partner Pulse Survey, which tracks audit partner perspectives on the current business environment in the US. Topics covered include U.S. economic health, challenges and risks facing businesses, and how leaders are adjusting their strategies in the current environment.

The survey also gained insight into audit partner perspectives on emerging opportunities and risks, including the accounting talent shortage, cybersecurity, and artificial intelligence (A.I.). The good news? Audit partners are significantly less pessimistic on the US economy compared to a year ago. The renewed optimism is likely being driven by an increasingly less likely threat of a recession and strong market performance. However, audit partners also see challenges ahead for businesses, including persistent inflation, new regulations that affect compliance costs, and cybersecurity threats.

Some of the highlights of the report include:

• Pessimism in the economy has dropped by 30 percentage points since the Fall of 2022.
• Nearly 1 in 3 public companies are using A.I. in their financial reporting. Auditors are also seeing public companies facing challenges in deploying generative A.I. technology in financial reporting, with data quality (47%), lack of mature technology (45%), data security risks (42%), and gaps in talent to implement and manage AI (40%) topping the list of concerns. Business operations (62%) is the primary area where auditors see public companies deploying A.I. technology.
• A clear majority of public companies (59%) are using technology – including A.I. and machine learning – to manage risk, fraud, and cybersecurity threats.
• 3 in 4 audit partners believe regulations are having a negative impact on businesses, primarily because of increased regulatory and legal risks and compliance costs.
• Auditors see nearly two-thirds of companies preparing for new global and U.S. climate reporting requirements. Auditors see nearly half of all companies (45%) voluntarily disclosing environmental and climate information.
• The number of companies seeing cybersecurity as a large economic risk jumped 20 percentage points since the Fall of 2022.

Download the full report: 2023 Audit Partner Pulse Survey.

Talent Spotlight

CAQ Honors Black History Month  

In recognition of Black History Month, the CAQ spotlighted two individuals who have made significant contributions to the profession. Hear from them on important topics, including the history of diversity in accounting and how they champion diversity within accounting:

• Professor Kecia Williams Smith, Ph.D., CPA, North Carolina Agricultural and Technical State University, spotlights interesting facts and milestones about diversity in the accounting profession, including information on the first HBCUs, NABA and various efforts to improve diversity within accounting in this blog.
• In this blog, Yousdad Celne, Associate at PwC US, recounts how her parents, Haitian immigrants, taught her the value of education. This led her to ultimately pursue a career in accounting and inspired her to champion diversity within the profession. Read her story here.

CAQ Announces Partnership with Pittsburgh Steelers to Introduce Students to Accounting  

I might be an Eagles fan, but I have to admit I am pretty excited about this one.

Last year, the CAQ and the Steelers penned a multi-year partnership for their ‘Steelers Showcase’ program. This program aims to expose students from across Western Pennsylvania to the field of accounting, with the committed goal of increasing the diversity of the accounting profession’s talent pipeline. At Steelers Showcase events, students will have the opportunity to network with members of the Steelers’ Finance Department and local industry executives.

Hear from General Manager Omar Khan on what the partnership means to him: