Many audit firms have invested heavily in audit quality in recent years, with encouraging results.
But after a few years of declines in the number of Part I audit deficiencies found in PCAOB inspections of the largest firms, the PCAOB is noticing a “plateau” in the number of deficiencies.
As a result, PCAOB member Jeanette Franzel is calling for audit firms to dedicate additional resources to ensure high-quality audits.
“Firms need to strengthen their focus on both systemic and engagement-specific elements, such as project management and monitoring, staff supervision, and tone throughout the organization including at the audit team level,” Franzel said Tuesday in her prepared remarks for the AICPA Conference on Current SEC and PCAOB Developments in Washington.
Audit deficiencies are most frequently identified in:
- Assessing and responding to risks of material misstatement.
- Auditing internal control over financial reporting.
- Auditing accounting estimates, including fair value measurements.
Franzel acknowledged that audit firms generally have dedicated significant resources toward responding to PCAOB findings by remediating deficiencies and improving their quality-control systems. She said that to varying degrees across the large firms, the PCAOB has observed improvements in tone at the top; coaching and support to audit teams; training; and monitoring of quality.
Nonetheless, she said, more needs to be done.
“In addition to remediating known deficiencies and related quality-control issues, firms need to focus on the preventive aspects of their quality-control systems — building quality into the audit process in addition to using detective monitoring techniques,” she said.
Helen Munter, director of the PCAOB’s Division of Registration and Inspections, suggested Wednesday that audit firms:
Choose clients carefully. “A bad decision in this area can have horrible consequences down the road,” she said.
Manage personnel effectively. Firm policies can ensure that people get assigned to the right jobs for their qualifications, that the necessary training is provided, and that personnel with the right qualifications get advanced. It’s also important to consider the workload of audit team members and whether enough time has been allocated to perform the audit, Munter said.
Develop a consultative culture. Policies and procedures can encourage personnel to refer to authoritative literature and consult the right experts in a timely way when appropriate. Consulting may be even more important while auditing companies are adopting significant new accounting standards.
Review and supervise thoroughly. Many of the PCAOB’s findings have occurred in areas of significant judgment that were reviewed by the engagement partner and the engagement quality reviewer. Reasons for this may include a lack of time, relying too much on discussions with the engagement team, or review of summaries that don’t contain enough detail. “Obviously, there was something wrong with those reviews,” Munter said.
Take the next step in monitoring. “Firms may need to be more innovative in their root-cause analysis, and remedial actions may need to be more focused on the long-term fixes to elements within the system of quality control as compared to individual engagement issues,” Munter said.
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.