Work to continue on key standard-setting priorities

The PCAOB in 2018 plans to make progress on existing projects intended to improve audit quality, according to the most recent standard-setting agenda released by the audit regulator on Dec. 29, 2017.

The staff is developing its recommendations for the next move by the regulatory board on the standards projects for accounting estimates and the use of specialists, according to the quarterly update.

The PCAOB in June 2017 issued 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 two related proposals are intended to strengthen the requirements when auditors scrutinize assets and liabilities that are hard to estimate, such as fair value measurements, oil company reserves, and actuarial forecasts.

The board’s work comes as the use of estimates in financial reporting has become more widespread. At the same time, the reliance upon valuation specialists has also grown. But the board’s inspectors have found problems with both auditing estimates and using the work of specialists.

Release No. 2017-002 would replace three existing standards with a single standard and align the audit requirements for accounting estimates with the PCAOB’s risk assessment standards. The proposal is based upon the August 2014 Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements.

Release No. 2017-003 would strengthen the requirements for auditors when they use the work of an appraiser, engineer, lawyer, or other nonaccountant specialist. The proposal builds upon the May 2015 Staff Consultation Paper No. 2015-01, The Auditor’s Use of the Work of Specialists.

According to the agenda, the staff is also “analyzing comments and determining next steps” on a third proposal that would strengthen the requirements for a lead audit firm that supervises other accounting firms working on an audit.

The PCAOB issued the proposal 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 April 2016. 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 on the April 2016 proposal after accounting firms asked for more guidance and clarification about some of the proposed requirements.

A lead audit firm is hired by the client and prepares the audit report in a client’s regulatory filing. The lead firm often draws upon work performed by other accounting firms. Sometimes, the other auditors may be involved with issues that have a high risk of misstatement. PCAOB inspectors often find problems in the work of other auditors in critical audit areas, and at times, the lead auditors do not draw attention to or resolve the problem areas.

PCAOB Chief Auditor Martin Baumann said at the AICPA Conference on Current SEC and PCAOB Developments in Washington on December 5 he expected the estimates, specialists, and supervisory standards to be adopted in 2018.

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 board has yet to decide its next steps, and the board’s staff plans to continue its outreach on the project and assessing the implementation of the FASB’s 2014 accounting standard for going concern statements by management.

The staff has been analyzing the matter after some investor advocates told the board that the audit standard on going concern needs to be improved. Investors were troubled that there was no advance warning in the regulatory filings of the large banks that failed during the 2008 financial crisis. Instead, their auditors approved the financial statements without alerting investors to the growing risks facing the banks and the financial markets. The FASB’s 2014 decision to issue 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, has given the PCAOB an extra reason to address the going concern question.

Before the FASB issued ASU No. 2014-15, management did not have to make the going concern evaluations. Now, management must disclose if it has “substantial doubt” about the company’s survival. The FASB defines substantial doubt using a threshold of “probable” that a company will not be able to pay debts as they come due during the next 12 months.

Section 10A of the Securities Exchange Act of 1934 and PCAOB Auditing Standard (AS) 2415, Consideration of an Entity's Ability to Continue as a Going Concern, formerly AU Section 341, require auditors to assess a public company’s prospects for staying in business. The evaluations are based on whether there is “substantial doubt” about a company’s ability to continue business operations. If there is, the auditor needs to report it in the auditor’s opinion that is part of a public company’s regulatory filing. But the “substantial doubt” threshold under auditing standards is broader and more qualitative than that of the accounting standards.

The updated agenda also says the audit regulatory board is researching some long-range projects, including revisions to the board’s quality control standards, which typically encompass the guidelines for accounting firm management policies and employee supervision. The PCAOB staff is also studying how technology is changing the manner in which audits are conducted and an auditor’s responsibilities when a client breaks the law. Another research effort involves an examination of an auditor’s responsibility for evaluating the information produced by the client that is not addressed by a standard from U.S. GAAP.

The latest agenda is expected to be the last the board produces under its chairman for the past seven years, James Doty, and his colleagues on the board, Steven Harris, Lewis Ferguson and Jeanette Franzel. On Dec. 12, 2017, the SEC appointed former Senate Banking Committee staffer William Duhnke to succeed Doty. The transition to the new board is expected to start in January 2018, with Duhnke setting his priorities for the PCAOB’s standard-setting agenda. The SEC appointed Robert Brown, Kathleen Hamm, James Kaiser and Duane DesParte to fill the other board seats.

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