PCAOB Proposes Changes in Audit Supervision

The proposal is intended to make it easier for lead auditors to spot deficiencies in the work of outside auditors.
Matthew HellerApril 14, 2016

The Public Company Accounting Oversight Board has proposed new guidance for lead auditors’ supervision of other auditors, citing inspections that have found deficiencies in other auditors’ work.

The board said its oversight activities have shown that the supervision of other auditors is an issue at some firms, in some cases because the other auditors have different business practices, cultural norms, languages, and quality-control systems from the lead auditor.

The proposed amendments to its auditing standards that the PCAOB announced Wednesday are intended to ensure lead auditors are appropriately involved in other auditors’ work.

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“Investors depend on the lead auditor to provide assurance that there are no material misstatements in audited financial statements or material weaknesses in internal control, no matter where those misstatements or weaknesses may reside,” PCAOB Chairman James R. Doty said in a news release. “Today’s proposal is intended to improve the consistency in the quality of engagement partner oversight of other firms engaged to assist in the audit.”

The changes include directing the lead auditor’s supervisory responsibilities to the areas of greatest risk, consistent with PCAOB risk-assessment standards and making clear that, to act as lead auditor, an audit firm must itself audit a meaningful portion of the financial statements.

The board also proposed requiring more explicit procedures to prompt the lead auditor to bolster its involvement in the work of other auditors through enhanced communication and more robust evaluation of other auditors’ qualifications and work.

According to the PCAOB, other auditors are involved in about 55% of audits performed by U.S. global network firms and about 30% of audits performed by non-U.S. global network firms. About 80% of audits of Fortune 500 companies performed by U.S. global network firms involve other auditors.

“The need for stronger standards in this area has become evident over the past few years,” PCAOB member Jeanette Franzel said. “In my view, the proposed requirements will help enhance audit quality in this area of increasing audit risk and significance to capital markets.”