Last month, in an effort to improve audit quality and provide transparency into the inspections process, the Public Company Accounting Oversight Board (PCAOB) released a report drawing on conversations with nearly 400 audit committee chairs. On Jan. 2, 2020, Protiviti published a Flash Report highlighting key points in the PCAOB’s report, along with commentary. Here are some top-level insights from our report:
Quality — Although it could be argued that audit quality relies heavily on the exercise of judgement – and therefore is inherently difficult to measure – best practices for the audit committee might include asking the external audit firm to share the firm’s annual audit quality or transparency report and understanding and discussing the processes that the auditor has in place to address the previous year’s PCAOB inspections report. For audit firms that use shared service centers, committee chairs suggest openly discussing procedures, controls and quality assurance protocols
Relationship — Committee chairs who were most satisfied with their external auditor relationship cited ongoing and frequent communication, beginning with pre-calls with the lead engagement partner; at least an annual assessment of the audit engagement; and possibly committee chair visits to various locations on multi-locational audits. Also helpful are deep dives on specific topics and having the auditor comment on relevant practices and trends they are experiencing on their other industry clients.
New Standards — Audit committee chairs expressed concern about the recent and extraordinary demands on external auditor resources created by the implementation of significant new accounting and auditing standards. Also top of mind are preparations for upcoming Critical Audit Matters (CAMs) disclosures, which recently began rolling out for accelerated filers in 2019. Leading practices here include early discussions with auditors (possibly at least a year in advance of the scheduled implementation deadline(s), and a timeline to ensure that appropriate processes are in place and key milestones are met. This is an area where third-party expertise and assistance has proven to be helpful.
Technology — While generally supportive of audit automation, some chairs note that return on investment in this area should be carefully considered. That said, most audit chairs are primarily concerned about technology as it pertains to cybersecurity, but they expressed a growing interest in the implementation of machine learning and data analytics for internal audit work with the potential of making external reviews more efficient. One promising application: The increased use of project management software to allow audit committees, auditors and management to track audit plan status.
The PCAOB report offers a look into what peers are doing to enhance audit quality and is a valuable resource that provides answers to common questions raised by audit committee chairs about the inspection process.
In addition to the most recent Flash Report, Protiviti has published other materials that may be of interest to audit committees in 2020:
- “Setting the 2020 Audit Committee Agenda” outlines several agenda items for audit committees to consider in the upcoming year based on input from our interactions with client audit committees as well as insights from roundtables and surveys we conducted during 2019 and discussions with directors in numerous forums. It includes discussions about CAMs and new accounting pronouncements.
- “Assessment Questions for Audit Committees to Consider” offers audit committees a tool they can use when they assess their composition, charter, agenda and focus in light of the company’s industry, circumstances, risks, financial reporting issues and the current challenges.