Audit Watchdog Stiffens Rules on Lead Auditors’ Supervision of Outsiders

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The new standard for the Public Company Accounting Oversight Board will require lead auditors to obtain approval from outside auditors on the quality of their work.

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The regulator, which oversees audits of US-listed public companies, voted on Tuesday to approve the new standard, which aims to allow lead auditors to plan and supervise the work of others and reduce the risk of misstatements. better guidance for, for example, errors stemming from or fraud, or erroneous audits.

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The PCAOB said the new rule requires the chief auditor to obtain a written statement from the other auditors stating that they have adequate ethics and independence policies and have skilled workers who perform their part of the audit. Huh. The chief auditor must also secure a written statement of relationships with other auditors to avoid conflicts of interest.

The board continues to look into enforcement matters and oversight deficiencies that point to failures by some key auditors to oversee the work of others, Chair Erica Williams said Tuesday at the meeting.

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“These observations indicate that there is room for improvement and may benefit from increased involvement of principal auditors in evaluating the work of other auditors and investor protection,” she said.

The Center for Audit Quality, an accounting-industry group, said last November that the proposal was highly prescriptive, but did not provide a clear framework for leading auditors to determine how much documentation they should ask auditors to review. the wanted. On Tuesday, a CAQ spokesperson declined to comment, saying the organization is waiting to review the text of the rule, which has yet to be released.

Nearly 30% of public-company audits in 2020 used at least one external audit firm, according to a review by research firm Audit Analytics. The data shows that it was slightly higher than the 29% average for the last three years.

Audit firms that seek out other firms typically use at least three of them in their work on average, Audit Analytics said.

The PCAOB standard is the first to be approved under a new slate of board members, though the overseer was well into the rule-making process upon their arrival. First proposed in 2016, it was revised in 2017 and then approved by the board on Tuesday last September. The rules are set to take effect for audits of financial statements for the financial years ending on or after December 15, 2024, subject to the approval of the Securities and Exchange Commission.

Last November, the SEC, which oversees the PCAOB, appointed four new board members, including Ms Williams, after sacking former chairman William Dunke in June.

Ms Williams, who became PCAOB chair in January, is working with other new board members and staff to develop her strategy. In May, the PCAOB said it would prepare a proposal this year to consider possible illegal acts in audit quality control and audits by its clients. The watchdog said it wants to unveil a proposal in 2023 on the role of auditors in evaluating and reporting companies’ ability to continue operating, or remain “a concern”.

In recent weeks, PCAOB also launched two new advisory groups—one to address investor concerns, and another to address standards and emerging issues—both aimed at bringing in views from investors and other stakeholders. In the past, investors have complained that they have been cut off from the PCAOB rule-making process.

write to [email protected] . on Mark Maurer

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