Best in Class

June 2017

BDO employs an Audit Quality Framework based on five elements of internal focus (“pillars”) unique to BDO’s CLIMB strategy. Best in Class is one of the five elements discussed in our 2017 Approach to Audit Quality report

Being best in class means continuing to exceed aggressive performance goals for high-quality audits in order to support and bolster the integrity of capital markets. Achieving sustainable quality requires us to make decisions and investments and be proactive in how we deliver services.


Investing in Technical Knowledge 

We continue to invest in our National Assurance Department to keep pace with our growing client base and their expanded needs: 
  • Assurance professional staff overall has increased by 53% since 2013.
  • National Assurance Department has increased to over 80 professionals, including over 30 partners. The group is geographically distributed among our practice offices and provides real-time assistance to our practice professionals on an approximate one to 35 person basis.
  • Our Audit Quality Team now comprises six partners and nine professionals, with approximately half of this group having recent and extensive prior experience as PCAOB inspection staff.
  • The National Assurance Department is further supported by a network of approximately 30 professionals serving as either Assistant Regional Technical Directors (ARTDs) or Audit Quality Directors (AQDs). These individuals dedicate a minimum of 600 hours per year in support of audit quality initiatives, including accounting and audit methodology consultations.

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Growth and Engagement of Our Audit Quality Professional Staff

In 2016, we created the AQD network, which is composed of experienced senior managers, directors, and partners who contribute approximately 25% of their expected annual work hours (totaling approximately 12,000 hours) to various audit quality initiatives. This helps us drive audit quality throughout the firm. The AQDs are under the direct supervision of National Assurance and report to local Regional Technical Directors (RTDs). AQDs focus on specific audit-related subject matters when supporting our engagement teams; while RTDs with inclusion of AQDs, consult on more complex matters. The AQD network complements the Audit Quality Network (AQN) of local office senior associates through partners, who disseminate communications and guidance on technical topics more deeply throughout our offices and solicit feedback at the office level to share with our National Assurance practice. We intend to further expand the AQD network in the summer of 2017.

The RTDs help maintain the firm’s standards of technical competence and provide technical support to their assigned offices. RTDs take a proactive approach to risk management and work directly with engagement partners on client acceptance and continuance, identification of audit risks, and audit execution. 

BDO also offers two-year rotations for client-facing professionals (managers through directors) with the National Accounting, SEC, Audit, and Tax departments. The goals of this program include:
  • Develop future Assurance and Tax office practice leaders
  • Increase technical expertise and bolster audit quality in the local offices by having individuals work in the National departments and then return to their local offices
  • Increase the resources available in the National departments to provide improved support to the office practices

BDO offers a second shorter-term (three to four months) rotational option for professionals (experienced staff through directors): participating in projects that are focused on enhancing training and audit quality control activities. Over the past three years, we have had over 30 professionals participate in either a short- or long-term secondments. 


National Accounting & Assurance Department and Audit Quality Professionals 

Our National A&A department is structured to serve our engagement teams through traditional accounting and auditing functional support complemented by readily available technical resources across a variety of specialty practice areas:

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Client Acceptance and Continuance

Our policies and procedures provide the firm with reasonable assurance that we will undertake or continue only those engagements where the firm: (1) has the competencies to perform the engagement and has the capabilities, including time and resources, to do so; (2) can comply with legal and ethical requirements; and (3) has considered the risks associated with providing professional services in particular circumstances, including the integrity of the client. As such, we have revised our client acceptance process to take into account additional factors, including: (1) an evaluation of the workload and industry experience of the lead engagement manager and senior manager, in addition to partners who were previously being evaluated in this regard; and (2) the results of an additional layer of review and approval from our National Risk Management Partner in certain instances relating to partner and EQCR assignments.


Inspections

Both internal and external inspections are integral to our firm’s approach to audit quality. They help to identify areas for improvement, as well as underlying causal factors. Where necessary, we develop action plans to ensure our engagement teams receive and apply relevant audit knowledge and experience to execute a high-quality audit.


Internal Inspections 

A review team of partners, directors, senior managers and managers with the appropriate technical knowledge and industry experience conduct a formal inspection of the firm’s assurance practice under the direction of the National Director of Assurance Quality Control. A risk-based selection of partners is made each year for whom engagements are then chosen for review. A partner may be selected for inspection in any given year, and generally partners will be subject to review at least once every three years. These reviews are conducted to:
  • Determine the quality of work performed
  • Confirm that our work complies with professional standards and firm policies and procedures 
  • Monitor the effectiveness of remedial actions 

The team reviews, on a sample basis, the working papers and reports of each selected assurance engagement. The firm’s inspection program also includes a review of compliance with our quality control policies and procedures in other areas, including ethics, client acceptance and continuance, consultations, human resources, and other matters. These reviews involve focus group sessions with professional staff to ensure the firm’s quality control procedures are properly understood.

As part of BDO’s Quality Matters Process, National Assurance analyzes causes of negative quality events, including deficiencies identified for inspected engagements, and develops specific remedial actions to address the causes identified. Depending upon the nature of the causes identified, the remedial actions could be engagement specific or more systemic. Remedial actions are then monitored by National Assurance for effectiveness. 

During 2016, we internally inspected 114 audit engagements--25 issuer clients and 89 non-issuer clients--across 84% of our Assurance practice offices. This represents approximately 5% of the firm’s total assurance hours, inclusive of engagements from recent expansions.

Results of inspections, as well as results of focus group discussions, are used to improve communications, training, and tools for our audit professionals.


Quality Assurance Reviews

BDO USA, LLP is subject to periodic Quality Assurance Reviews (QARs) on behalf of BDO International. The objective of these QARs is to provide assurance that BDO member firms adhere to, and comply with, applicable professional standards, as well as BDO International’s standards. QARs are carried out by a team of dedicated reviewers who go through a special training process. QARs cover the major services supplied by the member firm, as well as the member firm’s overall quality and risk management framework. Member firms undergo these international reviews on a rotational basis. We passed our most recent review, which took place in May 2014. Our next scheduled QAR will take place in September 2017.


External Inspections 

PCAOB Inspections

As a firm that conducts more than 100 issuer audit engagements, we are subject to annual inspection by the PCAOB. The PCAOB’s reports on inspections of registered public accounting firms consist of two parts:
  • Part I–Public Portion: This section reports findings relating to specific audit engagements in which audit deficiencies may affect a firm’s ability to support its audit opinion. In addressing these findings, a firm takes appropriate remedial actions, including possible additional documentation or audit procedures, and/or in some cases, revising its report. Key findings in BDO’s 2014 and 2015 inspection reports align with findings across the profession and center primarily on testing of internal controls over financial reporting, management’s estimates, sampling, inventory, and journal entries.
  • Part II–Non-Public Portion: This portion includes the PCAOB’s observations relating to a firm’s audit performance and quality controls where improvements are recommended. In evaluating a firm’s quality controls, the PCAOB assesses the following areas as part of that inspection:
    • Management structure and processes, including tone at the top
    • Practices for partner management, including allocation of partner resources and partner evaluation, compensation, admission, and disciplinary actions
    • Policies and procedures for considering and addressing the risks involved in accepting and retaining clients
    • Processes related to the firm’s use of audit work that the firm’s foreign affiliates perform on the foreign operations of the firm’s U.S. issuer audit clients
    • The firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies in audit performance, independence policies and procedures, and processes for responding to weaknesses in quality control.

In November 2015, the PCAOB made public portions of Part II of our 2011 and 2012 PCAOB inspection.

We consider the PCAOB inspection process to be a valuable component of our firm’s overall approach to enhancing audit quality. We therefore take the inspection comments with the utmost seriousness, giving them prompt consideration. We have made, and continue to make, significant enhancements to our audit quality process, including investments in appropriate resources, tools, training, and communication, as well as in the design of specific action plans and monitoring of such plans. We are confident that these improvements are addressing matters raised in the inspection reports. We expect our increased diligence and attention to audit quality on our current year-end audits will lead to further improvement in 2017.

Peer Review

As a member of the AICPA, we are also subject to triennial external peer reviews of the portion of our auditing practice applicable to non-SEC issuers. Our peer review in 2015 concluded that the system of quality for the firm’s accounting and auditing practice applicable to non-SEC issuers was suitably designed, and the firm had complied with its own quality guidelines. The peer review also concluded the system provided the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Firms can receive a rating of pass, pass with deficiency(ies), or fail. Our firm received a rating of pass. Our next Peer Review will take place in 2018.

As a result of both the internal and external inspection processes, we have significantly increased and formalized protocols around audit quality. We have placed significant emphasis on improving activities from how, who, and when we conduct our internal inspections to how findings are remediated, monitored, and used to inform our evaluation of policies, procedures, and tools. In 2016, we bifurcated our internal inspection teams and implemented differing inspection methodologies for our private company and issuer clients. For private companies, we applied a holistic approach where we inspected engagement file compliance. For issuer clients, we applied a focused area approach, where a deep dive was taken into audit methodology, documentation, and compliance with current regulatory views. With respect to our issuer clients we utilized Audit Quality Team members, specifically those who were former PCAOB inspection staff, to review and to track progress, including completion and review of remedial actions. This process helped to inform our overall causal analysis of identified deficiencies, implementing corrective actions, as well as searching for undetected quality issues which benefit our entire organization. Such actions aligned with the evaluation and remediation actions undertaken by our firm with respect to external inspection findings noted by the PCAOB. In addition, we specifically assigned individuals to the inspection teams, based on experience and other factors, to further distinguish between issuers and private companies and provided focused training for our inspectors. 


Coaching

In 2014, we began to formalize and build upon our focused coaching program, which promotes learning and on-the-job training and, where applicable, ensures effective implementation of engagement-specific remedial actions of Assurance partners and staff through all key phases of the audit. In addition, the observations from a coach’s review of work papers and direct interactions with engagement teams provides us with valuable information on best practices and potential new remedial actions, as well as timely feedback regarding necessary revisions to existing guidance, practice aids, and templates. This program has been further enhanced with additional Risk Assessment Coaching performed by members of the Audit Quality Team, AQDs, and RTDs. This aspect of the coaching program is designed to:
  • Achieve earlier performance of effective risk assessment procedures 
  • Improve the design of audit responses to identified risks, including assessing the sufficiency of the issuer’s controls in such areas 
  • Improve the design of targeted substantive audit procedures on audits that are likely more complex and have more stringent requirements than those performed for non-accelerated filers and non-issuer clients  


Monitoring

In 2015, we first introduced our Audit Milestone Program to provide benchmarks for:
  • Timing of issuer audit procedures
  • Distribution of audit hours over the course of the audit cycle
  • Engagement partner and Engagement Quality Control Review (EQCR) partner hours 

This program is designed to promote timelier and more effective planning and risk assessment procedures by improving the sequencing of audit work and coordinating with management in areas identified as having significant risks. 

Behavior of our professionals, including maintaining the appropriate level of skepticism and embracing accountability, is critical to fostering a high quality audit environment. In 2016, we implemented a transparent Partner Performance Management process that links the balance of a partner’s positive and negative quality events to his or her annual performance evaluation. If appropriate, positive or negative adjustments to partner compensation will be made. 
This builds upon our Quality Matters Process, introduced in 2015, as corrective action and monitoring program at the engagement level to address audit issues identified during various inspections. The firm has also implemented an annual partner workload assessment process to evaluate the workload of all engagement partners, EQCR partners, and directors serving in the partner role on non-issuer engagements. 


Communications and Consulting

In 2016, we strengthened communications regarding our audits and internal policies. Our Chief Executive Officer, Chief Operating Officer, and our Managing Partner of Audit Quality and Professional Practice distributed a series of messages to partners and professionals focused on the firm’s audit quality, risk management, and accountability improvement initiatives. These communications emphasized that audit quality is our top priority. We expect these messages to continue and cascade to regional and local leadership.

We have restructured our mandatory engagement team planning discussions to require timelier and more specified audit procedures and responses to identified significant risks. In addition, our consultation process now includes a consultation log (electronic database) in which all consultations with our National office are tracked, reviewed, and approved. This will give us better control over the consistency and effectiveness of our consultation process. 

For issuer engagements, we have implemented mandatory pre-issuance engagement team discussions. Such discussions ensure that the engagement team has properly re-evaluated the nature, timing, and extent of tests of controls and substantive procedures in areas containing significant risks 
of material misstatements, significant estimates, or areas of significant judgment. This process allows our engagement teams to sufficiently support audit opinions on the financial statements and internal controls over financial reporting, if applicable. 

Finally, to accompany the launch of our 2016 Audit Quality Report, we built an audit quality website. The site has since been transformed into an interactive vehicle that clients and contacts, as well as our professionals, can use to explore the ways in which our firm is enhancing audit quality.
 

"Elevating the role of oversight within our auditing practice is helping shape the future of BDO. Through our Audit Quality Framework and our revised governance structure, we are leading our Assurance practice to new heights. We have created a multi-faceted approach to audit quality that includes our Audit Quality professionals, procurement of experienced talent, focused coaching, our leadership platform, and countless other integrated initiatives. These will help us prevent negative quality events from occurring and lay the groundwork for our teams to deliver the highest quality service."

Christopher-headshot.jpgChristopher D. Tower
Managing Partner of Audit Quality and Professional Practice, BDO USA, LLP


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