Regulatory Developments: PCAOB Staff Previews 2020 Inspection Reports; SEC Chief Accountant Emphasizes Importance of Effective Audit Committee Oversight

October 27, 2021

Published: The CAQ

On October 18, 2021, the PCAOB issued a new Spotlight, Staff Update and Preview of 2020 Inspection Observations, providing thematic observations based on 2020 inspections. The Outlook is based on inspections of 153 audit firms with review of portions of 617 audits that generally had financial years ended during 2019 and the first half of 2020.

Which financial statements do these inspections relate to? These inspections occurred during 2020 and take place subsequent to the audit. Therefore, the inspection would have related to the audit report issued in 2020 of the financial period ended December 31, 2019 (if a calendar year-end company). This Outlook is a thematic preview of inspection reports not yet issued. For a calendar year-end company, the inspection would likely have taken place remotely during COVID but the audit being inspected would have been complete or nearly complete by mid-March 2020. Some companies with a fiscal year ended March 31 and June 30, 2020 were also reviewed by the PCAOB in 2020 according to the Outlook.

What are key takeaways for audit committees?

·             The PCAOB inspection process is an important part of the strong regulatory ecosystem in the US. PCAOB inspection findings are one of several data points used by audit firms to refine their audit methodology and training, which improves and maintains high audit quality.

·             The PCAOB Outlook observed the following good practices:

  • Real-time monitoring of in-process audit engagements
  • Increased supervision of the work performed by specialists
  • Increased training and emphasis on consultations

·             There is positive trend with fewer findings identified generally during 2020 inspections compared with 2019 inspections for annually inspected firms (those firms who audit more than 100 issuers).
While a deficiency in their inspection report does not necessarily mean that the public company’s financial statements are materially misstated or that undisclosed material weaknesses in ICFR exist, the findings are taken seriously by firms.

·             Common deficiencies include:

  • Revenue and related accounts
  • Accounting estimates
  • Inventory
  • Critical audit matters
  • Form AP
  • Independence
  • Engagement quality reviews

On October 26, 2021, SEC Chief Accountant Paul Munter emphasized the importance of high quality independent audits and effective audit committee oversight to high quality financial reporting to investors. Munter points out the need for continued attention to auditor independence, the foundation of audit quality. When an entity is active with mergers and acquisitions, it’s critical that timely information is shared with the entity’s auditor to enable appropriate analysis of the impact of such M&A activity on the auditor’s independence. Compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor. When there is significant M&A activity, audit committees should be aware of significant, multi-year non-audit service contracts or business relationship arrangements with non-audit clients that could impact the auditor’s ability to remain independent of its existing audit client in certain future circumstances.

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