PCAOB Rulemaking Could Lead to More Timely Issuance of Audit Inspection Reports
March 30, 2023
The Public Company Accounting Oversight Board on March 28, 2023, voted unanimously to issue a proposal that could in part slightly reduce the amount of time that investors and others have to wait in order to read inspection results of accounting firms that audit publicly-traded companies.
Under the proposal, auditors must put together the final set of audit documentation within 14 calendar days, rather than the current 45 days, after the auditor’s report is released. Thus, this work must be wrapped up in two weeks, rather than the roughly six weeks that auditors have today.
In explaining the proposed change, the PCAOB said that audit documentation is done electronically today. The 45-day documentation rule was adopted in 2004 when audit tools and software were not as advanced as they are today.
Often there is a long lag time when the inspections are carried out and the reports are released publicly. And investors have been complaining for years about not only the usefulness of the inspection reports but also the rather slow process of issuance for public consumption. Part of the lag time is necessary, but other parts of the process could be improved, observers say. While the lag time between inspections and the publication of reports may not be reduced, if the proposed provision is adopted, PCAOB inspectors can start inspecting sooner. This could lead to an overall reduction of wait times for the public.
This is part of a larger effort to update Auditing Standards (AS) 1000 series that were adopted on an interim basis when the board was established following passage of the Sarbanes-Oxley Act two decades ago. And the PCAOB is proposing to adopt AS 1000, General Responsibilities of the Auditor in Conducting an Audit.
New AS 1000 would reorganize and consolidate foundational standards that describe the main principles and responsibilities of the auditor, such as reasonable assurance, competence, independence, professional judgment, due professional care and skepticism.
“Merging these foundational standards into one standard, would reaffirm the general principles and responsibilities of the auditor and solidify the foundation of every audit; leading to investor protection and informative, accurate, and independent audit reports,” PCAOB Chair Erica Williams said.
Proposal in Detail
The proposal is in Release No. 2023-001, Proposed auditing Standard—General Responsibilities of the Auditor in Conducting an Audit and Proposed Amendments to PCAOB Standards.
Comments are due by May 30, 2023.
Current auditing standards that would be reorganized in AS 1000 series are:
AS 1001, Responsibilities and Functions of the Independent Auditor
AS 1005, Independence
AS 1010, Training and Proficiency of the Independent Auditor
AS 1015, Due Professional Care in the Performance of Work
In addition to modernizing the core set of principles and responsibilities of the auditor, PCAOB Chief Auditor Barbara Vanich said the proposal “would remind auditors of their fundamental obligation to the public by serving as the protector of the public interest in the integrity of financial statements.”
“The Supreme Court described this responsibility as a public watchdog function that demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust,” she explained. “We believe it is important to explicitly remind auditors of their obligation to protect investors.”
In particular, PCAOB staff member Akiko Upchurch, who provided a summary of key proposed provisions, said that Release No. 2023-001 emphasizes the auditor’s obligation to be independent by referring to the PCAOB and Securities and Exchange Commission independence rules. The SEC, as the capital market regulator, oversees the board.
“This includes incremental independence obligations that were added after adoption of the foundational standards but not explicitly addressed in those standards,” Upchurch said.
The proposal also provides more specificity around the requirements to maintain competence and prepare audit documentation.
“For example, the proposed standard state that auditors are required to develop and maintain competence through an appropriate combination of academic education, professional experience in accounting and auditing with proper supervision and training including accounting, auditing, independence, ethics and other relevant continuing professional education,” she said.
The proposed standard describes responsibilities related to professional judgment and provides additional clarification with respect to the engagement partner’s responsibility for exercising due professional care, Upchurch said. “This includes more directly aligning the partners’ existing responsibilities for supervision and review with the exercise of due professional care.”
In addition, she said the proposal retains and clarifies the auditor’s fundamental responsibilities for conducting an audit.
Dominika Taraszkiewicz, an associate chief auditor of the PCAOB, provided an overview of proposed changes to other standards that address responsibilities fundamental to performing an audit. The PCAOB’s proposal touches upon the engagement partner’s existing responsibilities for supervision and review.
“Proper supervision by the engagement partner includes evaluating that the work of engagement team members was performed and documented,” she said. “The proposed amendments clarify the extent of the planning, supervisory, review and documentation activities to be performed by the engagement partner as part of exercising due professional care.”
The engagement partner can “seek assistance” from others. But the proposal would amend AS 1201, Supervision of the Audit Engagement and AS 2101, Audit Planning to “clarify that even when the engagement partner seeks assistance from other engagement team members, the engagement partner retains the primary responsibility for the engagement and its performance,” according to Release No. 2023-001.
The proposal also specifies that the engagement partner must review sufficient documentation to determine that the engagement was performed as planned, significant judgments were appropriate and significant findings and issues were appropriately addressed, the conclusions in the auditor’s report are appropriate and supported by evidence and appropriate matters are communicated. This is to strengthen due professional care.
“The proposed amendments also emphasize that the engagement partner and other engagement team members performing supervisory activities are required to complete their review of audit documentation prior to the report release date,” Taraszkiewicz said. “We believe that the engagement Partner’s review of audit documentation is an important part of supervision.”
In partly explaining the rational for the proposed changes, Dylan Rassier, an economist at the PCAOB, noted that “available evidence, including observations from our regulatory activities, indicates that audit engagement partners may be … falling short in certain aspects of their supervision of the audit.”
“The changes could improve efficient use of the standards, promote consistency across audits and reduce the window of opportunity for improper alteration of audit documentation,” he added.