Big Four firms have been touting improvements in audit quality for a couple of years, mostly to stem the tide of criticism about their evident failures to spot fraud and foresee the imminent financial collapse of some large companies.
But have audits really improved? The Public Accounting Oversight Board went straight to the customers — audit committee chairs of public companies — to find out.
What’s going right with audits? In conversations with the PCAOB, most audit committee chairs (the PCAOB spoke to 300 of them) praised their auditor’s efforts at communications with the client, sharing that they were “thorough, timely, and at the right level of detail,” according to a PCAOB summary published on Monday. Several chairs also liked the dashboards their auditors provided for tracking the real-time progress of their audit.
Other areas of strong performance by auditors, in the eyes of audit committee chairs, were the assignment of resources with expertise on complex accounting issues, consultation with national offices as appropriate, their practical approaches to problem-solving, and their maintenance of continuity on audit teams.
Areas needing improvement included helping more junior audit team members learn the client’s business, communications about auditor independence, guidance around auditing of certain controls for third-party vendors, “over-auditing” and “over-documentation,” and lack of visibility into and discussion around fee changes. Some chairs flagged audit partner rotation as also needing attention.
Since technology is so much a focus of change at auditors, the PCAOB also asked audit committee chairs about the emerging technologies being deployed by audit firms.
Emerging technologies presented some challenges, audit committee chairs admitted. For example, the they said the technological capabilities of the client and the audit firm need to be at a similar level for technology benefits to be fully realized. Cybersecurity was another concern, especially with the pandemic’s shift to remote work. Audit firm implementations of internal controls over their technology was also a worry.
Audit chairs cautioned against auditors becoming overly reliant on new technologies, which could lead to “less attention to or emphasis on preparer and auditor judgment, experience, or professional skepticism,” the PCAOB said.
Recently adopted technologies also gave rise to the fear of unknowns. Audit chairs noted that “while the benefits of emerging technologies are often immediately clear, the risks involved can take longer to become apparent or understood.”
Generally, audit chairs were pleased with how auditors navigated compliance with the flurry of new accounting standards, such as revenue recognition and lease accounting, in 2020.
The new required disclosure of critical audit matters (CAMs) — matters material to the financial statements and involving “especially challenging, subjective, or complex auditor judgment” — was supposed to cause headaches for clients and auditors. Still, audit chairs said the implementation was smooth. They attributed that to dry runs and other early preparations.
In 2020, PCAOB inspectors reviewed 219 audit firms, 11 of which were U.S. firms with more than 100 issuer clients and 103 that were U.S. firms with 100 or fewer issuer clients. They also reviewed 39 non-U.S. firms.