PCAOB strengthens requirements for lead auditors

Dive Brief:

The Public Company Accounting Oversight Board (PCAOB) on Tuesday adopted amendments to its standards that will strengthen the oversight of audits involving multiple accounting firms or individual accountants with an aim toward improving audit quality and investor protections.
Under the new requirements the accounting firm deemed the lead auditor will have increased supervisory responsibilities including requirements to obtain written affirmations that the other auditors have the skills needed and necessary policies and procedures in place for the assigned tasks, according to a PCAOB release on the adoption.
While some audit firms have improved their supervising approach in recent years, PCAOB Chair Erica Y. Williams said in a statement Tuesday that “we…continue to see enforcement cases and inspection deficiencies that point to failures by certain lead auditors overseeing the work of other auditors. These observations indicate that there is room for improvement, and that investor protection could benefit from the lead auditor’s increased involvement in and evaluation of the work of other auditors.”

Dive Insight:

The new requirements come as many companies have expanded their operations globally, leading to an increase in audits executed by multiple firms, according to the PCAOB. The move is years in the making: it follows three comment solicitation periods starting with the first in 2016.

The amendments are designed to address challenges that stem from different auditors working on the same project which “can lead to misunderstanding about the nature, timing, and extent of their work and reduce audit quality,” the release states.

In the past the PCAOB has identified shortcomings related to both the lead auditor and the other auditors’ actions. For example, the inspections staff have seen instances of “significant” audit deficiencies in work performed by other auditors in critical areas such as revenue, accounts receivable, internal control over financial reporting and accounting estimates including fair value measurements.

There have also been instances of stumbles by the lead auditors. “These failures occurred at large and small firms, domestic and international. Among the most egregious findings, lead auditors failed to perform an audit or participated very little in an audit, and instead issued an audit report on the basis of procedures performed by other auditors,” the release states.

Some of the troubles stem from logistical complications related to multinational firms operating across multiple countries and cultures. For instance, a lead auditor was cited by the PCAOB as having failed to “adequately supervise the work of foreign audit staff in circumstances in which the engagement partner did not speak, read, or write the language used by the foreign staff.”

The risk-based supervisory approach of the new requirements “should result in more appropriate involvement by the lead auditor in audits involving other auditors,” the PCAOB release states. The amendments, which must be approved by the Securities and Exchange Commission (SEC), are slated to be effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2024.