PCAOB officials believe their recent focus on internal controls has brought about a necessary improvement in financial reporting and audit quality.
Jeanette Franzel, a member of the audit regulatory board, said during Baruch College’s Annual Financial Reporting Conference on May 4, 2017, in New York, that the extra scrutiny audit firms have felt in recent years can be traced to efforts by PCAOB inspectors to verify compliance with Auditing Standard (AS 5) No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With An Audit of Financial Statements, (AS 2201). After AS 5 was introduced in 2007 to set what was called more “risk-based” approach to internal control audits, inspectors were initially concerned with ensuring that auditors were clear on the shift in emphasis. But over time, inspectors begin evaluating audit firms for their compliance with the standard.
“With that new emphasis came a lot of audit deficiencies,” Franzel said. “Suddenly auditors were finding themselves in the uncomfortable position of having to tell clients, ‘gee, what we did last year was not sufficient.’ That’s a difficult conversation for auditors to have.”
Franzel said that as internal compliance officers started responding to the negative feedback from their external auditors, their frustration started filtering up to senior management and the directors on the audit committee. But in her view, the situation has largely evened out.
“There should be some tension in the system,” Franzel said. “But CFOs, audit committees, and auditors should be having honest discussions about what is necessary, and if different, or other work is needed. In some cases, the reason the auditor was struggling was because the client had a material weakness. That’s a really difficult conversation for an auditor to have. We have seen not an insignificant number of [internal controls over financial reporting] opinions get pulled.”
She added, “There will always be some tension between an audit and financial reporting.”
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