- Flaws persist in the auditing of U.S. companies, especially in internal control over financial reporting, reporting on revenue, accounting estimates, inventory tracking and auditor independence, according to the Public Company Accounting Oversight Board (PCAOB).
- “We observed frequent deficiencies related to the design and performance of audit procedures to identify and address assessed risks of material misstatement related to revenue,” the U.S. audit watchdog said in a report on an inspection of 510 audits conducted by 114 U.S. audit firms and 107 audits by 39 audit firms outside the U.S.
- Some auditors did not confirm that companies provided services to a customer before they recognized the revenue for the services, the PCAOB said in describing its 2020 inspections. Also, some auditors when “performing tests of details or substantive analytical procedures did not test, or did not identify and test any controls over, the accuracy and completeness of data or reports produced by the public company."
The PCAOB oversees the accounting firms that audit public companies and was established after the Enron accounting scandal under the Sarbanes-Oxley Act of 2002.
Securities and Exchange Commission Chair Gary Gensler in June ousted William Duhnke as chair of the PCAOB, underscoring his aim to put the board “on a path to better protect investors by ensuring that public company audits are informative, accurate and independent.”
“I don’t think that the PCAOB was living up to its potential or mission,” Gensler said in a Wall Street Journal interview after removing Duhnke, adding he supports “taking a new direction and reinvigorating” the board. He said the PCAOB has fallen short in enforcement against accounting firms, setting audit standards and its contacts with investors.
Gensler appointed Duane DesParte, a PCAOB board member, as acting chair. Since then the SEC has indicated it is seeking applicants for the board’s four other seats.
A new board should consider making five improvements, according to Daniel Goelzer, a founding member of the PCAOB.
“The PCAOB needs to be more transparent about what its policy goals and standard setting objectives are,” Goelzer said during a webinar Wednesday sponsored by the U.S. Chamber of Commerce and the Center for Audit Quality. “There's been a lot written about the fact that it disbanded two advisory groups that have operated for a number of years, and I think the public has just been left a bit more in the dark about what the board's priorities and objectives are.”
Second, the board should “revitalize its standard-setting program,” Goelzer said.
“In the last few years the board really hasn’t done a lot of standard setting in core auditing,” he said, noting especially a need to update standards in line with “the technology revolution in auditing.”
The PCAOB should also modernize its quality-control standards and allow for more transparency in regards to its inspection reports, Goelzer said.
Finally, the board should ask Congress to make the board’s enforcement process more transparent, he said.
“Today, the PCAOB’s enforcement cases are non-public until they’re resolved,” Goelzer said. “This hampers the PCAOB’s enforcement efforts.”