AICPA proposes auditing standard to encourage professional skepticism

The American Institute of CPAs’ Auditing Standards Board is proposing a new standard aimed at fostering more professional skepticism among auditors.

The proposed Statement on Auditing Standards, Auditing Accounting Estimates and Related Disclosures, would supersede an earlier Statement on Auditing Standards, SAS No. 122 section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, and amend several other sections of the AICPA Professional Standards.

The move comes amid reports of widespread problems in the audit market as Big Four firms and smaller firms run afoul of regulators like the Public Company Accounting Oversight Board for not being sufficiently skeptical about their clients’ financial statements. The PCAOB released an annual report this week indicating that its inspectors found deficiencies at firms that audit broker-dealers remained at a troublingly high level last year and in some areas even got worse compared to the previous year (see PCAOB sees continuing problems in broker-dealer audits). The percentage of reviews with attestation and other deficiencies also got worse, going from 40 percent in 2017 to a 54 percent majority in 2018.

Regulators in Europe and the U.K. are contemplating far-reaching reforms in the audit market in the wake of a series of high-profile accounting scandals that could force firms to avoid consulting services. The fear is that auditors are letting their clients off the hook too readily and not being sufficently skeptical about their financial statements, leaving investors without sufficent protection.

“This proposed standard breaks down the various aspects of management estimates, thus addressing one of the biggest challenges auditors face and allowing auditors to focus their efforts on unique aspects like subjectivity and estimation uncertainty,” said AIPCA chief auditor Robert Dohrer in a statement. “The focus on unique aspects are intended to enhance the effectiveness of the auditor’s procedures as they relate to management estimates in general.”

The proposed standard part of a bigger project at the AICPA to enhance audit quality. The AICPA’s Enhancing Audit Quality Initiative launched in 2014, is an effort to align all the AICPA audit and assurance-related activities with the goal of supporting firms’ quality improvement. The proposed SAS aims to help auditors address the complicated situations that can occur, thanks to new accounting and auditing standards that include estimates and related disclosures, and enhancing the auditor’s focus on factors driving estimation uncertainty and potential management bias.

The AICPA’s Auditing Standards Board hopes the proposed changes will spur auditors to exercise more professional skepticism and enhance the quality of their audit work.

The AICPA is asking for feedback on the proposed standard, which should be sent to Sherry Hazel at Sherry.Hazel@aicpa-cima.com by Nov. 22, 2019.