Date: April 12, 2016
Speaker: James R. Doty, Chairman
Event: PCAOB Open Board Meeting
The Board meets today to consider a proposal to amend the auditing standards governing an audit firm's use of other audit firms. This comes up regularly in multi-national audits by firms of all sizes.
Last December, the Board adopted a rule that will provide public transparency on the significant extent to which such audits involve the work of other auditors beyond just the lead auditor who signs the audit opinion. Under that rule, registered firms will disclose information that will allow investors to see, for any particular audit, how much of the work was performed by other auditors.
The proposal before us today comes at the matter of other auditors from a different perspective – not one of ensuring transparency but one of ensuring appropriate involvement in that work by the lead auditor.
PCAOB-registered firms around the globe contribute audit work to each other's audits, and our existing auditing standards prescribe responsibilities for the lead auditor with respect to the work of other auditors.
Investors depend on the lead auditor to provide assurance that there are no material misstatements in audited financial statements or material weaknesses in internal control, no matter where those misstatements or weaknesses may reside.
In our inspections, we review audits in which the inspected firm served as the lead auditor and used other auditors. We often also review the inspected firm's work in audits in which it was not the lead auditor but played a role. That role can range from a full scope audit of a significant subsidiary, to certain selected procedures that the lead auditor specifies relating to a less significant component.
Our inspections have found that many engagement partners do a good job of overseeing and coordinating the work of the affiliate and other audit firms that participate in the audit. But our inspections also encounter engagements that are not well managed, as well as work performed by the other auditor that does not meet the objectives of that auditor's role in the audit.
Today's proposal is intended to require conduct by lead auditors that should result in a consistent level of quality assurance regarding other auditors' participation in in the audit. The proposal would direct the lead auditor's supervisory responsibilities to the areas of greatest risk, consistent with our risk assessment standards.
It would also require procedures that would cause the lead auditor to be more involved in the work of other auditors, through more communication, access to the other auditor's work papers, as well as more robust evaluation of the other auditor's qualifications and work.
I look forward to public comment on the proposal, including comment on the economic analysis that underpins the proposal.