PCAOB considers an update for audit inspections

Enhancements in audit quality and audit firms’ quality-control procedures have the PCAOB considering changes in the focus of its inspection program.

Potential changes that the PCAOB is exploring for the inspections process include:

• Selecting audits for inspection on a broader basis. The current selection approach focuses on areas of high risk. Random selection is one of the approaches under consideration.
• Increasing the focus of inspections on the firm’s quality-control system while potentially decreasing the number of audits inspected.
• New PCAOB reporting approaches and communications about inspection results that could provide individual firms, investors, audit committees, and the public with timely and meaningful information about inspection results.

For three of the Big Four firms, the percentage of inspected audits with deficiencies declined between the 2013 and 2014 inspection cycles, according to PCAOB member Jeanette Franzel. The PCAOB expects to see a further decrease in findings for the Big Four firms as a group in the 2015 inspection cycle. Franzel also expects to see progress and improvements in inspection results for other large firms that the PCAOB inspects annually.

Progress at smaller firms is more challenging to gauge because a different group of firms is inspected each year over a three-year cycle, and new firms join the group while others cease performing work that would require a PCAOB inspection.

Franzel is optimistic that a time could come when a large firm improves its quality-control system to the point that it prevents audit deficiencies. At that point, she said, having PCAOB inspections focus more deeply on the quality-control system could be more beneficial than the current approach.