PCAOB Spotlight: Staff Overview for Planned 2022 Inspections
Is your audit committee remaining abreast of drivers of audit quality? The Public Company Accounting Oversight Board (PCAOB) recently issued Spotlight: Staff Overview for Planned 2022 Inspections. This annual publication provides guidance on what audit committees, management and auditors can expect with regard to the 2022 audit inspection cycle and the principal changes responsive to reporting and risk posed by the evolving economic environment. The PCOAB endeavors to collaborate in its efforts to uphold high audit quality standards which aim to benefit individual companies and the capital markets as a whole.
Overview
On June 30, 2022, the PCAOB issued Spotlight: Staff Overview for Planned 2022 Inspections highlighting the planned areas of inspection focus during the 2022 inspections based on financial reporting and audit risks driven by the recent economic environment, including:
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Increased initial public offerings (IPOs) and merger and acquisition (M&A) activities, including transactions with special purpose acquisition companies (SPACs).
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Widespread disruptions in supply chains.
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Continued effects of COVID-19, especially within high-risk industries.
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Fluctuations in interest rates and inflationary trends leading to increased volatility in financial and commodity markets.
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Audit firm-wide risks, such as from increased staff turnover and risks arising from auditing in a remote audit environment.
2022 inspection focus areas highlighted in the publication include:
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Fraud and other risks.
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IPOs and M&A activity.
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Audit firms’ execution challenges.
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Broker-dealer-specific considerations.
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Independence.
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Use of service providers in the confirmation process.
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Critical audit matters.
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Technology.
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Audit areas with continued deficiencies including:
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Revenue recognition and related risk assessment.
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Allowance for loan losses and other accounting estimates.
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Internal control over financial reporting, particularly controls with a review element.
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Firms’ quality control systems.
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Collaboration between the audit committee and external auditor is an important component of a high-quality audit. Time and thoughtful discussion should be appropriately allocated throughout the audit process and encompass areas highlighted in this publication. The PCAOB also remains committed to collaboration and intends to, as in prior years, seek views and feedback from audit committees on how to further drive improvements in audit quality and will continue activities to obtain such views and feedback. For example, the PCAOB intends to continue to engage with the audit committee chairs of the U.S. public companies whose audits they inspect.
BDO Insight
At a time when audit committees have increasing responsibilities and an everchanging risk environment, the PCOAB reviews a large number of filings in their inspection process and the spotlight captures key areas of financial statement reporting risk that companies and their auditors should be paying attention to.
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Audit committees are responsible for the oversight of financial reporting: The audit committee needs to recognize their oversight responsibilities and understand how risks are being captured in financial reporting. With the responsibility for the oversight of the financial reporting process, audit committees should maintain healthy skepticism regarding the nature of management’s role in financial reporting, which includes the potential for accounting and reporting risks that may impact the quality of the audit such as:
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Unreasonable assumptions affecting the timing and amount of revenue recognition.
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Unreasonable assumptions used in projections.
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Earnings manipulation.
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Complexities regarding existence and valuation of inventory.
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Financial, economic, and business uncertainty that impacts the required. assessment to evaluate threats and uncertainties.
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Internal control over financial reporting.
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The audit committee should remain aware of increased environmental, societal and governance risks impacting the organization. The committee should further ensure that it understands how management estimates are being developed and whether it is in a position to challenge management’s assumptions. This may include more frequent inquiries of management including discussions around emerging operational challenges in supply chain and human capital and their effects on financial reporting. It should further understand potential management pressures and opportunity for manipulation within the internal control structure.
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Audit committees set expectations for the audit and audit quality drivers: The audit committee appoints and oversees the external auditor which includes the oversight of the auditor’s performance, independence and qualifications. In this role, the committee should remain aware of PCAOB rules, expectations, processes and evaluative criteria and apply those standards to their own evaluation. The audit committee should further recognize why the PCOAB is focused on certain areas and synthesize such information to inform inquiries with the auditors regarding the company to ensure changes in circumstances and environment that may affect certain aspects of their financial reporting have been identified and addressed.
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As a reminder, risk identification and assessment, both by the audit committee and the auditor, are an iterative and dynamic process. It is not a discrete activity that starts and ends annually. It is a perpetual process driven by both internal and external factors and should be discussed as changes warrant.
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While the pursuit of audit quality should be the standard, a reminder that enforcing compliance with professional standards and other related laws and rules governing audits of public companies is a key part of the PCAOB’s oversight and may directly impact both companies and auditors. The establishment and agendas of the newly formed PCAOB Advisory Groups, together with recent SEC enforcement actions, indicate a renewed focus on enforcement in the name of investor protection.
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Audit committees are expected to engage in continual constructive communications with auditors: Auditor communications with the audit committee are required under PCAOB standards and provide the opportunity to enhance audit quality. The PCOAB periodically shares expectations and evolving trends to inform stakeholders, who may then leverage this information to further inform constructive communication. Timely, candid and open communication between the engagement team, management and the audit committee is critical to the process of identifying and responding to information relevant to the audit.
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The audit committee can contribute to this collaborative process to drive audit quality by:
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Discussing risks identified and the associated assessment of such risks and continually revisiting the discussion for changes in market conditions, events specific to the company or other observations.
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Understanding audit plans and procedures, while recognizing necessary changes in those plans or procedures.
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Inquiring as to audit challenges and how the audit committee may support the auditor in the audit execution.
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Discussing audit quality with the audit firm, which includes independence matters along with the firm’s system of quality control.
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Demonstrate a firm tone from the top that audit quality is imperative to the financial reporting process.
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Next Steps for All
We encourage audit committees, other board of directors, and management to review the PCAOB’s guidance and engage one another as well as the auditor in dialogue about the specific facts and circumstances relevant to the client’s business that may impact the execution of the audit and overall audit quality.
We invite you to explore additional resources of interest and educational programming via BDO’s Center for Corporate Governance and Financial Reporting, and BDO’s Center for Accounting and SEC Matters.
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