November 13, 2018
The Public Company Accounting Oversight Board is planning extensive changes in how it inspects firms and interacts with financial statement preparers.
The PCAOB has a new slate of board members this year along with a new chairman. Two of the new board members, James Kaiser and Duane DesParte, spoke alongside Cindy Fornelli, executive director of the Center for Audit Quality, at Financial Executives International’s Current Financial Reporting Issues conference in New York on Monday. The PCAOB has drafted a five-year strategic plan and, after receiving input from stakeholders, plans to vote on the plan at a meeting Thursday.
“If you take a look at our strategic plan, I believe you’ll see that we are taking a fresh look at all that we do,” said DesParte during a press conference Monday in response to a question from Accounting Today about how the new board will differ from the old one. “You’re going to see that we’ve identified five areas of focus, five strategic objectives. That’s where we’ll focus. I haven’t gone back to cross-reference what the old board was doing versus what we’re doing, but we’ll certainly try to be as responsive to our stakeholders’ input as possible.”
The five areas of focus in the draft plan include: “drive improvement in the quality of audit services through a combination of prevention, detection, deterrence, and remediation; anticipate and respond to the changing environment, including emerging technologies and related risks and opportunities; enhance transparency and accessibility through proactive stakeholder engagement; pursuing operational excellence through efficient and effective use of our resources, information, and technology; and develop, empower, and reward our people to achieve our shared goals.”
Kaiser foresees changes with the inspection process. “We want to improve the timeliness of the inspection reports, for one,” he said. “Two, we want them to be balanced, and then more plain English is the other aspect or change you might see.”
The PCAOB also plans to shine more of a spotlight on best practices of audit firms.
Fornelli said she already sees changes in the amount of outreach that’s being done with groups like FEI and the CAQ. “I think the outreach they’ve engaged in so far is a change,” she said. “I think hearing the conversation today about perhaps highlighting best practices or areas where things went right, not just where they went wrong, those are shifts in focus from prior boards. I for one welcome that. I think that’s a great development.”
Another change will involve more oversight of the use of technology such as data analytics and artificial intelligence, which more audit firms are already leveraging.
“We developed a Data and Technology Task Force earlier this year,” Kaiser told conference attendees during the panel discussion. “It’s met twice. It has 11 members, four from our Standing Advisory Group, two from academia, and five from representative firms. They’ve agreed that data analytics and artificial intelligence are the two priorities and focuses of the task force initially and they’re focusing on what are the next steps that we need to do from a standard-setting process, whether that’s guidance or whatever. So stay tuned. The group’s just getting started, but I think it’s important that we have a focus there.”
In addition, the PCAOB plans to use technology in a more sophisticated way. “Internally we talked about the new strategy, and internally I would say our goals are really to tech enable our workforce, improve their user experience and really go mobile,” said Kaiser. “If you think about those concepts, what does that mean? We have so much data that we’ve accumulated over the past 15 years, but we’re still receiving that data in an unstructured manner, and our [approach to] inspections is virtually where it has been for a number of years. What we really need to do is bring that up to date, invest in technology, just like you are and the firms are, for our own part that runs the engine on inspections, so we no longer get Excel spreadsheets from the firms, that we get data in a structured manner, so our staff can use that, whether it’s inspections or our academic research, more effectively, and also that will be integrated with the whole inspections transformation process we’re going through. Stay tuned on that.”
DesPartes, a former senior vice president and corporate controller at the energy company Exelon, wants the PCAOB to do more outreach to financial statement preparers. “One of our objectives is to improve how we engage with all of our stakeholders, but with preparers in particular,” he said. “I know as a controller, I had a whole team that was focused on new accounting standards and the EITF and SEC and FASB developments and participating actively when it was appropriate. The PCAOB for me was, ‘Well, that’s the auditor’s thing. I’ll kind of follow that, and the auditors will tell me when changes are going to impact me.’ In hindsight, I was taken by surprise by a number of things over the years: related party testing, different materiality thresholds for de minis reporting, internal controls. That is something I think we need to increase our engagement with preparers as the regulator to make sure that we are appreciating how our activities and our standards might be impacting them, to take that fully into account. How we do that, we’re still thinking about, but that’s something I’m interested in. I know the other board members are interested in it, and I think CCR [Financial Executives International’s Committee on Corporate Reporting] could be that portal to FEI in terms of that kind of engagement.”
The PCAOB might also have to confront some of the changes going on in Europe and the United Kingdom, where the Big Four firms have come under pressure to separate their audit and consulting practices. But Fornelli doesn’t believe that will have as much impact in the U.S. “Because auditor independence in the United States is supported by strict regulatory prohibitions, robust firm policies and procedures, and the oversight of strong, independent audit committees, I do not see the ideas being discussed in the U.K. being relevant here in the U.S.,” she said in an email to Accounting Today.