PCAOB considers changing focus of inspections

Enhancements in audit quality and audit firms’ quality-control procedures have the PCAOB considering changes in the focus of its inspection program, PCAOB member Jeanette Franzel said Thursday.

“In light of significant improvements that some firms are seeing in their inspection results and related progress in their remedial efforts, we need to ask whether and how the inspection approach could or should evolve to leverage and test those improvements,” Franzel said at the Baruch College Financial Reporting Conference in New York City.

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

• Selecting audits for inspection on a broader basis instead of using the current selection approach that focuses on areas of high risk. Random selection is one of the approaches under consideration. This could provide information about how firms’ quality-control systems are operating across a wider range of audits, Franzel said.
• Increasing the focus of inspections on the firm’s quality-control system while potentially decreasing the number of audits inspected. “Such an approach could be highly efficient and effective at catching quality-control weaknesses early, with a focus on preventing audit deficiencies,” Franzel said. “I would see this as a very positive evolution in audit quality and regulatory response.”
• 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.

Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), said the CAQ welcomes the comments. The CAQ is affiliated with the AICPA.

Fornelli said dialogue with the profession and public should continue as the PCAOB explores changes in the inspection process.

“Over the years firms have invested—and will continue to invest—heavily in quality control at the firm and engagement levels, which is demonstrated by higher levels of audit quality,” she said in a statement. “Just as the public company auditing inspection profession is built on a commitment to a continuous cycle of improvement, it is important for the inspection process to evolve and continue to benefit investors and the capital markets.”

For three of the Big Four firms, Franzel said, the percentage of inspected audits with deficiencies declined between the 2013 and 2014 inspection cycles. 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.

“This is an aspiration at this point,” she said, “albeit a worthy and achievable one.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.