Trends in Audit Oversight and Audit Quality I Q N U T - - PowerPoint PPT Presentation

PCAOB: P Protecting the he Pub ublic I Int nteres est thr hrough A Aud udit Ov Over ersight

I N T E G R I T Y Q U A L I T Y

Trends in Audit Oversight and Audit Quality University of Kansas Auditing Symposium

Jeanette M. Franzel, Board Member Public Company Accounting Oversight Board May 20, 2016

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 The

he views I I express t today are re mi mine ne a alo lone ne, , and nd do do not n t necessarily r refl flect the the v views of

• f the

the Boa Board, o

• the

ther Boa Board Members, or

• r PCAOB sta

staff.

Disclaimer

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PCAOB at a Glance

 Statutory mission areas

• Registration, inspection, enforcement, standards

 Staff: 876 (budgeted for 2016)  2016 Budget: $257.7 million  Registered Firms: 2,100 (1,200 U.S., 900 foreign)

• 950 report no activity subject to PCAOB oversight

 2016 Inspections (estimated):

• 10 annual, 140 triennial US, 62 triennial foreign
• 75 broker and dealer auditors

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Asia a Pacific $23.1 T T US US $25.1 T T Americas as, exclu luding US $2. $2.9 T T Global E Equity M Market C Cap $ $62.8 T Glo lobal l Equity M Marke ket Cap p for U. U.S. T Trad aded C Compan anies: $ : $32.6 T Trilli llion

• n

Europe pe, A Africa, Middle E East t $11. 11.7 T T

Data Source: World Federation of Exchanges, as of December 31, 2015

Equity Markets Around The World

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Caribbean – Bermuda and Jamaica South America – Argentina, Brazil, Chile, Colombia Peru and Venezuela European Union – Austria, Cyprus, Czech Republic, Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal, Spain, Sweden and United Kingdom

* The countries labeled in red are jurisdictions where the PCAOB is currently prevented from conducting inspections and that have firms subject to PCAOB

inspection as of 12/31/2015. The numbers in red are the aggregate market cap of issuers, as of 12/31/2015, audited by firms in these blocked jurisdictions. Data Sources: Firm data is from Audit Analytics and Market cap is from Standard and Poor’s and is as of December 31, 2015.

Central America – Mexico and Panama

Europe (except EU) $648 B Oceania $139 B Canada $925 B South America $413 B

($0)

Asia $2,615 B

($1,339 B)

European Union $3,134 B

($435 B)

Africa & Middle East $162 B Caribbean $33 B Central America $161 B

Europe (except EU) – Norway, Russian Federation, Switzerland, & Turkey Africa & Middle East – Israel and South Africa Asia – China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Republic of Korea, Singapore, Taiwan, and Thailand Oceania – Australia and New Zealand

$8.2 Trillion market cap audited by non-US firms $1.8 Trillion (22%) market cap audited by firms in blocked jurisdictions

Market Cap for Issuers Audited by non-U.S Firms

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Firms Registered with the PCAOB

** Based on firms that issued opinions for issuers in the specified year. Data is from Audit Analytics. *** Firms that indicated in their Form 2 for the specified year they audited broker-dealers, but did not issue opinions for issuers in the specified year. Data is from Audit Analytics.

2,3 ,397 2,3 ,388 2,3 ,363 2,3 ,319 2,2 ,201 2,1 ,107

692 687 658 631 606 584 516 499 507 480 435 368 1189 1202 1198 1208 1160 1155 500 1000 1500 2000 2500 2010 2011 2012 2013 2014 2015

Other Firms (substantial role, pending withdrawals, no work subject to PCAOB

• versight)

Firms that audit Brokers and Dealers but not Issuers** Firms That Audit Issuers *

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PCAOB Inspections Conducted

Issuer uer F Firm m Inspection

• ns

Broke ker-Dea ealer Firm I Inspection

• ns

8 45 60 66 75 2010 2011 2012 2013 2014 2015 181 161 167 166 153 142 62 41 77 53 57 63 9 10 9 9 9 10 50 100 150 200 250 2010 2011 2012 2013 2014 2015 Domestic Annual Foreign Triennial Domestic Triennial 215 215 252 252 212 212 253 253 228 228 219 219

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Inspection Results for U.S. Big 4 Firms

• Risk-based selection of issuers and audit areas
• Not intended to be representative
• Results represent an indicator of quality and a source of identifying

potential systemic quality control problems

0% 10% 20% 30% 40% 50% 60% 2010 2011 2012 2013 2014

Percentage o

• f I

Inspected I Issuers w with P h Part I Findings

DT EY KPMG PWC

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Audit Areas:  Auditing Internal Control (AS 5)  Auditor Response to Risk of Material Misstatement (AS 13)  Auditing Accounting Estimates (AU 342)  Audit Sampling (AU 350)  Auditing Fair Value Measurements & Disclosures (AU 328) Financial reporting areas:  Revenue  Accounts receivable  Inventory  Business combinations  Goodwill

PCAOB Inspections: Areas of Frequent Findings

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General Improvements at Large Firms

 Tone at the Top

 Focus on audit quality backed by actions and resources

 Improvements in firms’ systems of quality control  Training in complex audit topics  New practice aids and checklists

 Professional skepticism  auditing fair market value and management estimates  ICFR

 Coaching and support to audit teams  Monitoring of quality

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State of Audit Quality

 Large U.S. firms have made significant improvements in audit

quality

 Continued remediation is needed to strengthen QC systems

and monitoring to prevent audit deficiencies

 Need for increased focus on quality across the global

networks and at affiliated firms

 U.S. triennial firm results are nuanced due to the changing

mix of firms inspected each year and changes in client base

 Implications for future inspections approaches

 Addition of non-risk-based selections (“randomization”)  Potential for shifting inspection focus to testing of a firm’s QC system

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Audit Quality Indicators

Treasu asury A ACAP 2 P 2008 Report, C Concentrat atio ion and C Compe petit itio ion

 Recommend that the PCAOB, in consultation with auditors,

investors, public companies, audit committees, boards of directors, academics, and others, determin mine t the feasibil ility y of developing key indicators of audit quality and effectiveness and require auditing firms to publicly disclose these indicators.

 As

Assuming d develop lopment a and d disclos losure of

• f indicators of
• f audit q

quality are f e fea easibl ble, require the PCAOB to monitor these indicators

 “A key issue in the public company audit market is what drives

competition for audit clients and whether audit quality is the most significant driver.”

Final Report of the Advisory Committee on the Auditing Profession (ACAP), Oct. 6, 2008, pp. VIII:14-15

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PCAOB’s AQI Project

 PCAOB Concept Release, July 1, 2015

 To seek public comment on the content and possible uses of a group

• f potential “audit quality indicators.”

 May provide new insights about how to evaluate the quality of audits

and how high quality audits are achieved.

 Taken together with qualitative context, the indicators may inform

discussions among audit committees and audit firms.

 Enhanced discussions, in turn, may strengthen audit planning,

execution, and communication.

 Use of the indicators may also stimulate competition among audit

firms focused on the quality of the firms’ work and, thereby, increase audit quality overall.

 28 potential indicators: audit professionals, process, results.

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PCAOB’s AQI Project – Next Steps

 Encourage voluntary use and experimentation with AQIs  Monitor voluntary use and related market developments  Outreach and feedback from audit committees and other

stakeholders

 Continue the development of AQIs and advance thought and

practice in their usage

 Potentially publish additional information related to AQIs  Other issues

 Time horizon for next steps  Linkages with quality control standards project and root cause efforts  Assessment of qualitative factors and context  Public reporting vs. use by firms and audit committees  Highly concentrated audit market

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Projects:

 Transparency about Participants in the Audit (Approved)  Audits Involving Other Auditors (Board Proposal, April 12, 2016)  Auditor’s Reporting Model (Board Reproposal, May 11, 2016)  Going Concern (PCAOB Practice Alert No. 13)  Auditing Estimates, Including Fair Value Measurements

(Expected Proposal, 4th Qtr. 2016)

 Auditor’s Use of the Work of Specialists (Expected Proposal,

4th Qtr. 2016)

 Quality Control Standards (Research and outreach)

Effort to improve process:

 Top to bottom review of process  Use of environmental scans and improved research approach  Integrating economic analysis  Project-based coordination with IAASB

Standard-Setting

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Additional PCAOB Focus Areas

 Outreach and dialogue with audit committees  ICFR dialogue with preparers, auditors and audit

committees

 Development of the broker-dealer inspection program  Integration of economic analysis in standard-setting  Analysis of risks to audit quality presented by the

audit firm business model

 Consideration of the impact of technology, data

analytics, and “big data” on the audit.

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Standing Advisory Group, May 18, 2016 Discussion of Current and Emerging Audit Issues

 Economic Developments  Use of data/ data auditing  Auditor's role – non-GAAP measures  Impact of FASB materiality proposals  Revenue recognition transition  Cybersecurity  Auditing forward-looking assumptions  Disruptive technology changes  Mandatory audit firm rotation in the European Union  Whistleblower Activity

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Audit of the Future