Share via

The Public Company Accounting Oversight Board (PCAOB) monitors US listed public company audits to protect the interests of the investors and the public at large. The PCAOB has prescribed standards, including quality standards, that guide an auditor to ensure audits result in quality review.

To meet its purpose, the PCAOB conducts an inspection of audits to unearth the deficiencies in an audit. In a recent inspection, the PCAOB imposed over $2 million in fines on a United States member firm of a top 10 international network of public accounting, tax, consulting, and advisory firms and its two partners in connection with a 2017 audit. The Firm and the partners violated the PCAOB rules and auditing standards in connection with the audit. It was observed that the Firm and the partner failed to evaluate three significant estimates used by the client to value its revenue and accounts receivable, out of which the deficiencies in the procedures performed to test one of the estimates were also discovered in the audit of the client in 2015.

In another disciplinary order, the PCAOB sanctioned the Colombian affiliate of a multinational professional services network, considered one of the Big Four Accounting Firms, for violating the PCAOB rules and quality control standards in connection with a 2016 audit. The PCAOB imposed a fine of $900,000 on the finding that the Firm’s system of quality control failed to provide it with reasonable assurance that the audit work would be performed and documented in accordance with the PCAOB standards. Multiple personnel from the Firm performed audit procedures, obtained audit evidence, and considerably modified audit documentation after the 2016 audit report, and the quality management procedures of the Firm did not flag it. It was observed that the Firm was unable to provide reasonable assurance that its personnel would maintain independence (in fact or appearance) in all circumstances.

These findings are not novel, and the scale of the audit firm is unrelated to these issues. Whether it’s a smaller audit firm with limited resources and access or a more prominent firm with abundant resources and access, these issues remain prevalent across the board. The core question is, what factors provoke or instigate these prevalent issues?

Standards, as per dictionary meaning, refer to a level of quality that is a benchmark for comparison. Hence, every profession sets standards that set a level of expectation to achieve the best out of a process, and accounting is no exception. Accounting standards state the best approach for reporting financial items to promote accuracy and fairness. On the other hand, auditing standards promote the accuracy, consistency, and verifiability of the auditor’s actions and reports. Various professional bodies across the globe devise the standards that drive the quality of audits. It has been observed that standards have become rules that are more violated than implemented. The professional bodies that set standards do not intend to police the implementation but are persuaded by the violations of it. The implications are penalties if a standard is set, and the audits do not meet the standard. However, if the prescribed methods in the standards are embedded in the audit process the need for inspections will reduce.

KNAV Perspective

Auditing is a scrupulous process, and embedding quality standards within it is essential. Just as a manufacturer cannot disregard quality specifications and produce goods that would eventually be rejected, an auditor cannot operate without adhering to standards and eventually risk facing penalties for deficiencies. Saving compliance with standards and best practices for post-audit is not a viable approach. It is imperative to integrate these aspects into the audit process, at every step of the audit.

The integration includes a profound understanding of the standards, keeping a tab on the updates, and incorporation of standards through checklists, audit questionnaires, continuous personnel training, imparting knowledge from recent occurrences, engaging in peer reviews, and actively participating in global events to learn and implement best practices. This integration should be a fundamental priority for any firm conducting audits.