Public Company Accounting Oversight Board member Jeanette Franzel told a group of accounting educators that lack of professional skepticism is one of the main reasons for the prevalence of audit deficiencies found in the PCAOB’s inspections of the work of auditing firms.

In a speech Monday at the American Accounting Association’s annual meeting in Anaheim, Calif., Franzel noted that academic research and PCAOB standards and oversight emphasize that professional skepticism is fundamental to the role and performance of auditors.  “Yet the PCAOB and other regulators around the world have expressed concern about the continued high rate of audit deficiencies identified in their inspections and other oversight activities,” she said. “And many of these deficiencies appear to be associated with the insufficient exercise of professional skepticism.”

She pointed out that PCAOB professional standards demand the appropriate application of professional skepticism throughout the audit process, and emphasize that professional skepticism is a component of the auditor’s general duty of care that applies throughout the audit and is an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence.

“The three elements of professional skepticism—auditor attributes, auditor mindset, and auditor actions—permeate the entire audit process and are integral to audit quality,” she said. “These elements of professional skepticism interact dynamically as auditors respond to conditions and pressures that change or arise during the audit. As a result of skeptical judgments made during the planning and performance of the audit, for example, the level of skill and expertise needed, as well as other auditor actions and audit work conducted are likely to change during the audit. “

Franzel noted that the PCAOB’s standards also emphasize the importance of exercising professional skepticism when considering the possibility that a material misstatement due to fraud could be present. “As part of exercising professional skepticism, the standards require ongoing questioning of whether the information and evidence obtained suggests that a material misstatement due to fraud has occurred,” she said. “Additionally, the standards state that in exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.”

Franzel acknowledged that the underlying reasons for a failure in professional skepticism are often multifaceted and hard to pinpoint.  The PCAOB has issued a practice alert listing some of the challenges that auditors may confront in exercising professional skepticism, such as unconscious human biases and other circumstances that can cause auditors to gather, evaluate, rationalize, and recall information in a way that is consistent with client preferences rather than the interests of external users. Scheduling and workload demands can also cause pressures that might lead auditors to seek audit evidence that is easier to obtain rather than evidence that is more relevant and reliable, to obtain less evidence than is necessary, or to give undue weight to confirming evidence without adequately considering contrary evidence.

“The PCAOB professional standards make clear that objectivity and professional skepticism must be manifest in the capabilities of audit firms and staff, the judgment they apply in selecting the appropriate audit procedures and conclusions, and the conduct of the audit work,” said Franzel. “Our inspection results all too often show that substantial progress is needed in order to more consistently achieve the appropriate application of professional skepticism throughout the audit process and across audits.”

Franzel noted that regulators, academics and audit firms are increasingly focusing their attention on advancing the understanding and application of professional skepticism. The PCAOB is also seeing more academic interest in the issue of professional skepticism among auditors, with collaboration between the academic community and the auditing profession to advance theory, training and practice in this area.

She credited the American Accounting Association with showing tremendous leadership over the years in promoting excellence in accounting education, research and practice, adding, “I applaud the efforts of the academic community in its thought leadership and proactive work with a wide range of stakeholders—including regulators, investors, audit committees and practitioners—on the issues of professional skepticism, with a view toward improving audit quality and investor protection.”

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