On the third Thursday of the last month of each quarter, 18th SVA Founding Principal Gabe Zubizarreta and Candela Solutions Managing Partner Ron Kral share news and insights from the PCAOB. To register for the next PCAOB Quarterly Update on December 17th at 1:00 PM Eastern click here.
In our most recent webinar, on September 18, 2015 Gabe and Ron reviewed recently the first three inspection reports released by the PCAOB in 2015 and compared them to the 2014 reports for the same firms. Some of the key issues that Gabe and Ron identified:
- The PCAOB has revamped their report format. The new format contains additional charts and graphs and make the reports easier to digest.
- Of the three 2015 inspection reports released so far, all have shown significant improvement in the number of issuers with issues and the number of issues as shown in this chart.
- The numbers are still high, but there is improvement. Expect pressure from the PCAOB for firms to continue to lower the number of deficiencies.
- Auditing Standard #5 “An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements” was the most frequently cited issue, affecting 30% of issues in both 2014 and 2015.
- While all audit documentation should be in the audit file, the PCAOB will allow firms to use other contemporaneously produced documentation to prove work.
- Companies own their controls. They must document what they do (are the controls present?) and then do what they document (are the procedures being followed? Are they effective?)
Both Ron and Gabe encouraged companies to read the PCAOB inspection reports, especially for the firm that is doing their audits. Ron further encouraged companies to request the non-public portion of the report for the firm doing their audits
It is important that companies have good process, and good, well designed controls, AND that auditors adequately document the controls. In fact, Gabe made the assertion that good process is more important for effective compliance than controls.
In the second part of the webinar, Ron and Gabe discussed the highlights of a recent speech given by PCAOB board member Jeanette Franzel. Some of the key points from that speech include:
- Increased scrutiny by the PCAOB, the adoption of COSO 2013 framework, and changes to accounting standards, such as the new revenue recognition guidance combine for a perfect storm. This perfect storm presents an opportu
- Overall, we are weathering the storm well, but issues and challenges remain
- She emphasized that management is responsible for establishing controls and assessing their effectiveness . Auditors assess management’s work, and the PCAOB assesses the compliance of auditors with applicable standards and requirements
- ICFR continues to be the largest area of concern.
- An analysis of material weaknesses and restatements indicates that many ICFR related material weaknesses are not being caught by auditors. Ron and Gabe believe that this finding will increase pressure on the accounting firms and issuing companies. Where there is pressure there will be more cost.
- The final highlight of Ms. Franzel’s speech was that “Data does not indicate any systemic impact on audit fees that could be attributable to recent changes in ICFR auditing or inspections. However, there are variations in audit teams’ and firms’ effectiveness in implementing changes to their ICFR audit procedures…may be impacting the amount of audit work for some issuers….sometimes audit fees are impacted by the simple fact that issuers have inadequate controls.”
Ron and Gabe note that audit fees continue to go up. They recommend strongly that companies need to be proactive and improve their processes, documentation, to keep their audit costs under control.