The Public Company Accounting Oversight Board (PCAOB) is continuing to work on the proposed standards for accounting estimates and the use of specialists, according to the most recent standard-setting agenda published on April 3, 2018.
The proposals were released in June 2017 in Release No. 2017-002, Proposed Auditing Standard—Auditing Accounting Estimates, Including Fair Value Measurements and Proposed Amendments to PCAOB Auditing Standards, and Release No. 2017-003, Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists. The comment periods ended last August, and the PCAOB staff is developing a recommendation for the board, the agenda said.
The staff is also determining the next steps for a proposal that would strengthen the requirements for a lead audit firm that supervises other accounting firms working on an audit in Release No. 2016-002, Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard — Dividing Responsibility for the Audit With Another Accounting Firm. In September 2017, the board issued Release No. 2017-005, Supplemental Request For Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit With Another Accounting Firm, to seek additional comments.
The last project on the PCAOB’s standard-setting agenda deals with the auditor’s evaluation of a company’s ability to continue as a going concern. The PCAOB staff is assessing implementation of the Financial Accounting Standards Board’s (FASB) 2014 Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate the company’s ability to stay afloat.
The audit regulatory board added a research project concerning auditor independence. The PCAOB puts emerging audit issues on its research agenda for further study. Not all research items will reach the standard-setting stage, the board said. While exploring an issue, the staff considers whether it needs to be put on its standard-setting agenda or if an issue can be resolved through interpretive guidance or other means.
The new research project deals with PCAOB Rule 3526, Communication With Audit Committees Concerning Independence.
“Inspection observations have identified situations that raise questions about how firms are executing against the provisions of PCAOB Rule 3526 in circumstances in which there has been a relationship that caused a firm not to be independent under PCAOB Rule 3520,” Auditor Independence, the PCAOB said in the agenda. “The staff is exploring, through outreach and other research activities, whether guidance should be issued or whether there is a need for amendments to Rule 3526.”
Rule 3526 requires accounting firms at least once a year to describe, in writing to a client’s audit committee, all relationships among the firm, its affiliates, and the client that could harm the firm’s independence. The audit firm must also discuss with the audit committee the relationships on the independence of the firm and document the substance of the discussion.
Moreover, the audit firm must state in writing to the audit committee that it is independent and complying with Rule 3520, which says an audit firm must be independent of its client “throughout the audit and professional engagement period.” A note to the rule says that auditors must satisfy the independence criteria in PCAOB rules, Securities and Exchange Commission (SEC) regulations, and other requirements that deal with independence.
The project comes amid an emphasis by SEC officials on the importance of auditor independence.
At the American Institute of Certified Public Accountants (AICPA) Conference on Current SEC and PCAOB Developments in December 2017, SEC Chief Accountant Wesley Bricker said auditors are required to be independent both in fact and in appearance to maintain investor confidence in their work.
“Audit firms should continue to invest in their policies, procedures and training, among other elements of a quality control system, that provide an audit firm with reasonable assurance that independence is maintained,” Bricker said during a presentation. “Independence is not only a legal requirement but also a professional and ethical duty.”
Other research projects address potential changes to the board’s quality control standards, including improvements to assignment and documentation of an accounting firm’s supervisory responsibilities. The PCAOB has also been studying how changes in the use of data and technology are affecting audit work. Another project deals with whether the auditor should be required to scrutinize information that is found in documents outside regulatory filings such as non-GAAP measures in earnings calls and press releases. Currently, there is no audit requirement for it.
The staff is also studying the auditor’s role when a client violates laws and regulations. The board is trying to determine whether Auditing Standard (AS) 2405, Illegal Acts by Clients, formerly AU Section 317, should be updated.
The latest version of the agenda reflects Chairman William Duhnke’s initial priorities for the PCAOB.
Duhnke, a former Senate Banking Committee staffer, was sworn in as chairman in January. Since then Kathleen Hamm, Robert Brown and James Kaiser have also been sworn in. Duane DesParte is expected to join the board soon.
For more information on this topic, or to learn how Baker Tilly SEC accounting specialists can help, contact our team.
We have partnered with Thomson Reuters to issue our monthly SEC accounting insights. Please feel free to contact Baker Tilly at email@example.com if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2018 Thomson Reuters/Tax & Accounting. All Rights Reserved.