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Financial Reporting and Regulatory Update

Fourth Quarter 2020

From the PCAOB

Strategic plan

On Nov. 19, 2020, the PCAOB approved its fiscal year 2021 budget and reaffirmed its five-year strategic plan through 2024. The strategic plan guides the PCAOB’s programs, operations, and budget.

The plan includes the following 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

At the Dec. 7-9, 2020, AICPA Conference on Current SEC and PCAOB Developments, the PCAOB provided its perspectives in three separate sessions:

  • The five members of the board engaged in a panel discussion. Topics included responses to COVID-19, improvements in audit quality, CAMs, proposed changes to auditor independence, quality control feedback, China inspections, tailoring of 2021 inspections, and the board’s top focus areas for 2021.
  • Barbara Vanich, the PCAOB acting chief auditor, provided an update on PCAOB standard-setting activities including quality control systems, supervision of audits involving other auditors, audit evidence, and data and technology. Vanich also discussed COVID-19 audit resources, implementation reminders related to CAMs, and the new standards and amendments on estimates and specialists.
  • George Botic, director of the Division of Registration and Inspections, and Patrick Bryan, director of the Division of Enforcement and Investigations, each presented prepared remarks in a joint session. Botic and Bryan shared information on the PCAOB’s recent inspection observations, registration issues, and enforcement actions. Topics included effects of COVID-19 on audits, trends observed, and PCAOB efforts to optimize program efficiency and effectiveness.

COVID-19 spotlight

The PCAOB, on Dec. 2, 2020, posted Staff Observations and Reminders During the COVID-19 Pandemic.” This report offers lessons learned from recent PCAOB inspections of reviews of interim financial information and audits, and it provides important reminders for auditors to consider as they plan for and perform audits in the current pandemic environment. Reminders and key takeaways include insights into concerns over internal control over financial reporting, significant judgments and accounting estimates, and the need for consideration of COVID-19 disclosures and risks.

Resource on new estimates and specialists requirements

On Nov. 12, 2020, the PCAOB released a new resource, “Audit Committee Resource: New PCAOB Requirements Regarding Auditing Estimates and Use of Specialists,” to help audit committees increase their understanding of the new requirements, which are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. This resource provides the basics of the new requirements, important takeaways for audit committees, and questions to consider asking auditors.

Critical audit matter requirements

The PCAOB, on Oct. 29, 2020, issued an interim analysis report and two accompanying white papers related to the initial impact of CAM requirements.

The interim analysis report provides insights and the perspectives of the PCAOB on the initial impact of CAM requirements on the primary audit process stakeholders. Findings highlighted in the report include:

  • Significant investments were made by audit firms to support initial implementation of CAM requirements.
  • Investor awareness of CAMs communicated in the auditor’s report continues to develop; however, some investors already find the CAMs information helpful.
  • No evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year has been identified.

The PCAOB staff white paper titled “Stakeholder Outreach on the Initial Implementation of CAM Requirements” presents results from surveys of engagement partners and audit firms, structured interviews with audit committee chairs and financial statement preparers, an investor survey, and a public request for comment.

The PCAOB staff white paper titled “Econometric Analysis on the Initial Implementation of CAM Requirements” is based on analysis of data gathered from a number of sources, including the PCAOB’s inspection program and third parties.

At the AICPA conference, the PCAOB recommended review of the publication “The PCAOB’s Use of Economic Analysis and Stakeholder Input in Standard Setting,” as it provides a useful discussion of stakeholder engagement in the adoption of CAM requirements.

Auditor independence

The PCAOB has proposed amendments to the PCAOB interim independence standards and PCAOB rules to align with the changes that the SEC recently has made to its auditor independence rules. The SEC published the proposed amendments for public comment, and comments were due Dec. 18, 2020.

Inspection insights and observations

Insights into 2021 inspections

At the AICPA conference, the PCAOB provided insights into the 2021 inspections, which will consider the impacts of the COVID-19 pandemic. The PCAOB plans to look closely at industries that have experienced the most significant disruption from the pandemic. Other areas that will be considered include:

  • Remote work environments
  • Time constraints
  • Changes in controls as a result of the changing work environment
  • Auditor risk assessments and procedures to consider COVID-19 impacts
  • Availability of information including digital information
  • Access to management
  • Nontraditional focus areas

2019 inspection observations

The PCAOB issued, on Oct. 8, 2020, a publication, “Spotlight: Staff Update and Preview of 2019 Inspection Observations,” that provides observations from the 2019 inspections of audits of issuers prior to issuance of the inspection reports, which audit committees might find useful when engaging with their auditors. The report highlights an update on PCAOB inspection transformation activities, observations on good practices, activities of the target team focusing on current audit risks and emerging topics, recurring audit deficiencies, the effect of technology, and audit committee communications. While recurring deficiencies are similar to those in prior years, one area identified for improvement is auditing accounting estimates, specifically related to allowance for loans losses.