Statement on Supplemental Request for Comment: Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard — Dividing Responsibility for the Audit with Another Accounting Firm

Date
Sept. 26, 2017
Speaker
Lewis H. Ferguson, Board Member
Event
PCAOB Open Board Meeting
Location
Washington

I support the proposed changes to our standards concerning the supervision of audits involving other auditors and the division of responsibility between auditors, as well as today's request for supplemental comment. Although the changes identified in today's proposal are incremental in nature when compared to the draft proposal issued in April 2016, they provide important clarifications to that proposal. They further refine our original objective of fostering audit quality in audits in which more than one auditor participates.

In response to our April 2016 proposal, commenters generally supported our articulated objective of improving audit quality by strengthening the standards applicable to audits involving other auditors. A number of commenters specifically supported the Board's consideration of a scalable, risk-based approach to the supervision of other auditors' work. Some commenters, however, suggested potential revisions to modify or clarify aspects of the proposed standards. In particular, commenters requested modifications and/or clarifications related to:

  1. Planning, including the sufficiency of the lead auditor's participation in the planning process and a determination of whether the other auditors who will work on the audit have the necessary qualifications;
  2. Supervision, including communications between auditors and the supervision of multiple tiers of other auditors;
  3. Division of responsibility, including situations that involve differing financial reporting frameworks;
  4. Documentation, including of the lead auditor's review;
  5. Engagement quality reviews; and
  6. Certain definitions.

I believe the changes reflected in today's release address effectively the input received and further strengthen our original proposal.

When the Board approved issuance of the April 2016 proposal, I noted in particular my hope that we would receive input on our economic analysis and on the costs and benefits of the proposed standard. I am pleased that commenters generally agreed with our analysis and did not raise significant concerns with it. A few commenters asked whether the lead auditor could adjust the extent of proposed planning and supervisory procedures based on the facts and circumstances of the audit, apparently fearing the cost of implementing requirements that are not sufficiently scalable. I believe the standards we propose today more than adequately address any such concern. In particular, I note that they require the lead auditor to determine the extent of supervision of other auditors based on, among other things, the complexity of the work to be performed and the risk of material misstatement associated with the other auditors' work. The use of risk-based requirements in the proposed standard allows for scalability and, in my view, thereby promotes efficiency. Under the approach articulated in our proposed standard, any additional costs incurred in an effort to comply with the new standard are likely to arise in circumstances involving a corresponding, and potentially larger, risk-mitigation benefit to investors. We are not seeking to require additional work and costs for their own sake, but only in circumstances where they are warranted by the risks presented.

I extend my thanks to the Staff for their tireless efforts in addressing the comments we received and developing the supplemental request for comment. In particular, I'd like to thank Dima Andriyenko, Marty Baumann, Matt Goldin, Stephanie Hunter, Hunter Jones, John Powers, and Keith Wilson. As usual, we are also indebted to the staff of the Securities and Exchange Commission for their thoughtful review and comments.

Again, I support issuance of this proposed standard and the supplemental request for comments. I look forward to receiving additional comments and to concluding our standards-setting effort in this important area.