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Financial Reporting and Regulatory Update

Fourth Quarter 2019

From the PCAOB

Strategic plan

On Nov. 19, 2019, the PCAOB approved its fiscal year 2020 budget and its fiveyear strategic plan for 2019 through 2023. The strategic plan guides the PCAOB’s programs, operations, and budget.

The plan includes the following strategic 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. 9-11, 2019, AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C, the PCAOB provided its perspectives at the conference in three separate sessions:

  • The five members of the board engaged in a panel discussion, which included remarks on the reaffirmation of the board’s five-year strategic plan, the importance of audit quality (a focus of the strategic plan), changes to the PCAOB’s inspection program aimed at improving effectiveness and efficiency, changes to inspection reports to improve readability and understandability, and the board’s focus on engagement with issuer audit committees.
  • Megan Zietsman, the PCAOB chief auditor, provided an update on PCAOB standard-setting activities including CAMs, an upcoming concept release on changes to quality control standards, consideration of audit firm use of technology or automated tools, and the final standards on auditing estimates and using the work of specialists.
  • George Botic, director of the Division of Registrations and Inspections, and Mark Adler, acting director of the Division of Enforcement and Investigations, each presented prepared remarks in a joint session. Among other topics, Botic discussed in more detail the effectiveness and efficiency changes planned for the inspection process and the outlook for 2020 inspections. Adler highlighted the PCAOB’s significant enforcement cases in 2019 against both global network firms and nonaffiliated firms and their associated individuals, and he shared thoughts on enforcement priorities in the next year.

On Oct. 3, 2019, PCAOB board member Kathleen M. Hamm spoke about cybersecurity, resiliency, and the role of financial regulators at the Program on International Financial Systems Technology and Capital Market Regulation Conference in Tokyo, Japan. In her speech, she addressed the nature of cyberthreats, how internet interconnectedness brings significant risks, how financial regulators can address cyberthreats, and the tools available to regulators to defend against cyberthreats. She said, “effective cybersecurity and resiliency includes three key elements: (1) identifying and implementing baseline protections and best practices, (2) engaging in information sharing, and (3) preparing an effective response and recovery plan.”

Critical audit matters publication

The PCAOB released, on Dec. 10, 2019, its first “Critical Audit Matters Spotlight” report presenting observations from the PCAOB’s review of CAMs on 12 large accelerated filers and including information about the PCAOB’s outreach and data analysis activities. According to the publication, the board believes “that sharing our initial observations from the experiences of the first adopters of CAM requirements could help auditors, companies, audit committees, and other stakeholders.”

Audit committee insights

On Dec. 18, 2019, the PCAOB posted “Conversations With Audit Committee Chairs: What We Heard & FAQs,” which provides insights gathered from conversations with almost 400 audit committee chairs into what those chairs wanted to discuss, perspectives on what is working well to enhance audit quality, an overview of the basics of the PCAOB inspection process, and answers to frequently asked questions that arose during the conversations. Specific topics discussed during those conversations included audit quality, quality of the audit engagement teams, relationship and communication with the auditor, new auditing and accounting standards, and technology-driven changes. FAQs that are answered in the document include:

  • Does the PCAOB have resources, educational training, or events for audit committee members?
  • Does the PCAOB do a cost-benefit analysis of standards?
  • What is the PCAOB’s view of audit quality indicators, and how does the PCAOB see them used?

Quality control standards concept release

To address the significant changes in the auditing environment, the PCAOB issued, on Dec. 17, 2019, a concept release detailing an approach to revising its quality control standards. The release seeks public comment to inform the PCAOB on the approach and also on what types of future changes could be proposed to strengthen the PCAOB’s requirements for audit firms’ quality control systems.

Based on information gathered through its oversight, outreach, and research activities, the PCAOB determined that changes to the quality control standards should be based on an integrated risk-based framework, such as the recently proposed International Auditing and Assurance Standards Board’s (IAASB) firm-level quality management standard. The potential approach described in the concept release is based on the IAASB’s proposed standard with specific changes suitable for firms subject to PCAOB standards and rules. 

To accompany the concept release, the PCAOB issued “Fact Sheet: Quality Control Concept Release,” which provides details on the concept release and on the IAASB’s proposed quality management standard.

Comments are due March 16, 2020.

Staffing updates

On Dec. 17, 2019, the PCAOB named Patrick Bryan as director of the Division of Enforcement and Investigations. As director, Bryan will lead investigations and litigation of violations of PCAOB rules and other securities regulations. Bryan most recently served as the assistant general counsel for enforcement at the Board of Governors of the Federal Reserve System (Fed). Prior to his position at the Fed, he served as a supervisory assistant chief litigation counsel in the SEC’s Division of Enforcement.

The PCAOB announced on Dec. 17, 2019, that Kenneth Lench was named general counsel of the PCAOB. In this position, Lench will be responsible for providing legal advice and counsel on all PCAOB operations and activities. Lench joins the PCAOB from Kirkland & Ellis LLP, where he was a partner focused on securities law.