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Financial Reporting and Regulatory Update

Fourth Quarter 2018

From the PCAOB

Strategic plan

On Nov. 15, 2018, the PCAOB approved its five-year strategic plan for 2018 through 2022, which emphasizes the PCAOB’s core values: integrity, excellence, effectiveness, collaboration, and accountability.

The plan includes the following strategic goals:

  • “Drive improvement in the quality of audit services through a combination of prevention, detection, deterrence, and remediation
  • “Anticipate and respond to the changing environment, including emerging technologies and related risks and opportunities
  • “Enhance transparency and accessibility through proactive stakeholder engagement
  • “Pursue operational excellence through efficient and effective use of our resources, information, and technology
  • “Develop, empower, and reward our people to achieve our shared goals”

Board speeches

Recently, board members including PCAOB Chairman William D. Duhnke have been speaking about the new board and its new strategic initiatives. The following speeches have been delivered recently:

  • Dec. 12, 2018, George Botic, director of the Division of Registration and Inspections – “Protecting Investors Through Change” at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C. He covered changes at the PCAOB under the new board that will affect the 2019 inspection cycle, including the PCAOB’s assessment of a firm's quality control system and control environment; engagement of U.S. company audit committee chairs to provide insight into the inspection process; and establishment of a program to share audit firm practices that promote or enhance audit quality. He also shared his expectation for changes to the inspection reports and the process for remediation. In the PCAOB’s information-gathering activities in 2019, the staff will consider which metrics may be predictive of audit quality (audit quality indicators), and Botic recommends that audit firms do the same. 

             Additional topics included:

  •    Frequent inspection findings for revenue, accounting estimates, and internal control over financial reporting
  •    Root cause analysis as a good audit firm practice
  •    Form AP
  •    Others areas of focus for 2019 inspections including technology risks and implementation of the new auditor’s reporting model including critical audit matters (CAMs)

New audit standard for estimates and using the work of others

The PCAOB adopted a new auditing standard, “Auditing Accounting Estimates, Including Fair Value Measurements,” on Dec. 20, 2018, to replace three existing PCAOB auditing standards on estimates. Changes to the auditing standard address the auditor’s professional skepticism, including potential management bias, and specific direction on auditing fair values of financial instruments that are based on information from third-party pricing sources. Concurrent with the new standard, the PCAOB adopted amendments related to using the work of a company’s employed or engaged specialists and the work of an auditor’s employed or engaged specialists. Subject to approval by the SEC, the new and amended standards are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020.

Staffing updates

The PCAOB named Megan Zietsman as chief auditor on Dec. 13, 2018. Zietsman is expected to assume her role in early 2019. She will join the PCAOB from Deloitte, where she has served as a partner in its professional practice network. She has served on the International Auditing and Assurance Standards Board since 2014, currently as the deputy chair. She also served on the AICPA’s Auditing Standards Board from 2007 to 2011.

On Nov. 12, 2018, the PCAOB announced that Torrie Miller Matous was named director of the newly formed Office of External Affairs. The new office combines certain existing offices and will include new liaison staff for the investor and business communities to assist the board in achieving the transparency and accessibility goals outlined in its draft strategic plan.

On Nov. 1, the PCAOB announced that George Botic was named the director of the Division of Registration and Inspections. Botic had been the acting director of the division since May and will lead the PCAOB’s efforts related to registration and inspection of domestic and foreign accounting firms that audit public companies or broker-dealers.

Also on Nov. 1, the board announced that Liza McAndrew Moberg was named director of the Office of International Affairs. She has been the acting director since May and “will lead the PCAOB’s efforts to advance cross-border engagement with others involved in investor protection efforts and to implement and maintain cooperative agreements that facilitate the PCAOB’s oversight activities outside of the U.S.”

On Oct. 9, 2018, the PCAOB announced the appointment of Ryan Sack as director of the Office of Internal Oversight and Performance Assurance, which provides examination of the PCAOB’s internal operations and programs. Sack has more than 20 years of experience in the internal audit and assurance field and was most recently at Orbital ATK as internal audit vice president.

Standing Advisory Group (SAG) meeting

The PCAOB’s SAG comprises various stakeholders – investors, auditors, audit committee members, public company executives, and others – and advises the PCAOB on audit and professional practice standards.

The PCAOB held a SAG meeting on Nov. 29, 2018, and the agenda included the following topics:

  • Governance and leadership in firm quality control systems
  • Communications about PCAOB standards

Auditor inspections outlook

The PCAOB posted the “Inspections Outlook for 2019” to its website on Dec. 6, 2018. The report includes key areas of focus for planned 2019 inspections of audits of issuers and brokers and dealers. It covers the following topics:

  • System of quality control
  • Independence
  • Recurring inspection deficiencies
  • External considerations
  • Cybersecurity risks
  • Software audit tools
  • Digital assets
  • Audit quality indicators
  • Changes in the auditor’s report
  • Implementation of new accounting standards

Sample auditor’s report for broker-dealer audits

On Dec. 17, 2018, the board posted a sample unqualified auditor’s report under Auditing Standard (AS) 3101 (which went into effect on Dec. 15, 2017) on the financial statements of a broker or dealer reporting under Rule 17a-5 of the Securities Exchange Act of 1934. The sample report includes marked changes that result from AS 3101.