The Public Company Accounting Oversight Board (PCAOB) is getting serious about its core principles.
“During times of economic uncertainty, the risk of fraud is heightened, and auditors have to be more vigilant than ever,” PCAOB Chair Erica Williams said in a statement.
The regulator, which is overseen by the Securities and Exchange Commission (SEC), is set to update more than 30 standards that have remained largely unchanged since first introduced — on an interim basis — nearly two decades ago, at the start of the 21st century.
Much has happened since then. A global banking crisis, a pandemic, another banking crisis, vast advances in technology — the list goes on.
“I have enormous respect for the people who work for the U.S. government, but we simply don’t invest enough in making it more effective,” wrote J.P. Morgan Chase CEO Jamie Dimon in his annual letter to shareholders Tuesday (April 4), referencing what, in his view, is a worrying prevalence of antiquated systems and processes across government agencies.
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“Our capital markets never stop evolving, and PCAOB standards must keep up to keep investors protected,” said Williams in a press release announcing the proposed updates. “This proposal would modernize standards that are foundational to audit quality, ensuring they are fit to meet today’s challenges.”
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If adopted, the amendments listed in AS 1000, the proposed new standard, would reorganize and consolidate a group of standards that address the core principles and responsibilities of the auditor, bringing them into the 21st century and modernizing the role.
Among its many proposed changes, which the industry has until May 30, to respond to or comment on, the updates to “General Responsibilities of the Auditor in Conducting an Audit” released March 28 include reinforcements and clarifications around the engagement partner’s responsibility to “exercise due professional care related to supervision and review,” and would separately shorten the maximum period for auditors to assemble a complete and final set of audit documentation from 45 days to just two weeks.
The common thread running through the proposed accounting standards updates is the far-reaching impact of digital technology and sweeping advances in software-driven business capabilities — both for auditors and the organizations they are responsible for working with.
Most of the documentation in the audit process now occurs electronically.
“Auditors have largely moved away from a paper-based approach to audit documentation in favor of using software that houses electronic workpapers and audit programs,” PCAOB said in the AS 1000. “Use of electronic workpapers facilitates more efficient performance and review of audit procedures and enables auditors to assemble a complete and final set of audit documentation in less time than in a paper-based environment.”
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The PCAOB had a banner year in 2022, instituting 42 public enforcement actions — double the number from 2021 and representing the agency’s most actions taken since 2017.
The past year also saw the PCAOB impose the highest monetary penalties in its history, charging auditors over $11 million in civil penalties tied to enforcement actions.
Additionally, the PCAOB is increasingly facing calls to be the regulator that brings effective supervision to bear on auditors of cryptocurrency companies.
It also facing criticism.
Sens. Elizabeth Warren of Massachusetts and Ron Wyden of Oregon together sent a letter to PCAOB Chair Williams Jan. 25, alleging that the regulatory watchdog ignored questionable practices by crypto auditors.
“When PCAOB-registered auditors perform sham audits — even for firms that may lay outside of the PCAOB’s jurisdiction — they tarnish the credibility of the PCAOB and undermine confidence in the PCAOB-registered auditors that investors and the public rely on when making investment decisions,” the senators wrote.
Warren and Wyden also accused auditing firms of “cashing in on the crypto industry’s at best confusing and at worst deceptive attempts to convince investors of their safety and legitimacy.”
Still, while critics note that KPMG gave Silicon Valley Bank (SVB) a clean audit opinion in February, just weeks before its collapse set off a banking crisis, the PCAOB has so far refused to publicly address the recent turmoil in the banking sector.
“I understand recent bank failures may be top of mind for many of you,” Williams said at a meeting of the Standards and Emerging Issues Advisory Group March 30. “But today’s meeting is not the forum for providing those answers, and it’s important we avoid speculation.”
