The Public Company Accounting Oversight Board has issued a preview of its inspection report for 2020. The preview report made three key observations: The PCAOB continues to identify a number of deficiencies that recur from year to year; for most annually inspected audit firms, the PCAOB identified fewer findings in 2020 compared to its 2019 inspections (for triennially inspected audit firms, some improvements were noted, although deficiencies continue to remain high); and there was evidence of good practices that could be effective in enhancing audit quality.
The preview reported that the PCAOB inspected 153 audit firms, reviewing portions of 617 audits that generally had financial years ended during 2019 and the first half of 2020. Those inspections included 114 U.S. audit firms, for a total of 510 audits, as well as 39 non-U.S audit firms, for a total of 107 audits.
The report found that common deficiencies occurred in six areas: internal control over financial reporting, revenue and related accounts, accounting estimates, inventory, critical audit matters, and independence.
On the other hand, the report identified six good practices that the PCAOB has observed during inspections. They are:
- Incremental steps in response to the COVID-19 pandemic, including increased training and assistance, emphasis on consultations, and modified client acceptance and continuance procedures.
- Real-time monitoring of in-process audit engagements.
- Increasing supervision of the work performed by specialists.
- Use of practice aids to assist engagement teams in identifying risks for each factor relevant to management’s estimation processes.
- Monitoring workload and expertise of engagement quality reviewers and hiring qualified and experienced third-party engagement quality reviewers, when necessary.
- Providing focused industry training and tailoring work programs dealing with industry-specific risks and issues
The report addressed changes that the PCAOB was forced to implement in light of the challenges presented by the COVID-19 pandemic.
“Some of our responses to the COVID-19 pandemic included conducting all inspections remotely, adjusting our inspection approach to consider the impact of COVID-19 on the audits of public companies, refining our planned QC procedures, and providing insights to inform stakeholders on the PCAOB’s oversight activities related to the COVID-19 pandemic,” said the report. “As we executed our 2020 inspection plan, we tailored or enhanced certain aspects of our inspection procedures. For example, we took discrete steps to understand audit firms’ considerations of, and responses to, the effect of the pandemic on audits of financial statements and internal control over financial reporting (ICFR) and reviews of interim financial information. Our procedures included reviewing audit firms’ publications and internal guidance that specifically addressed aspects of the audit most likely to be affected by the pandemic.”
According to Accounting Today, auditing firms, along with as PCAOB inspectors were forced to perform many of their audits and inspections remotely during the pandemic. That may be one reason why the number of findings was relatively low last year. Accounting Today also observed that the PCAOB has loosened its inspection policy in recent years, and that SEC Chair Gary Gensler wants to reinvigorate those standards. In furtherance of the changes he wants to implement, Gensler, in June, removed William D. Duhnke III as PCAOB chair and appointed Duane M. DesParte as acting chair.