PCAOB adds projects on auditor independence and audit evidence

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The Public Company Accounting Oversight Board updated its research and standard-setting agendas Tuesday, adding auditor independence to the standard-setting agenda and adding a project on audit evidence to its research agenda.

Changes contemplated in the auditor independence standard would make targeted amendments to existing PCAOB independence rules to conform them to changes the Securities and Exchange Commission is considering to its independence rules.

Last June, the SEC adopted amendments to its auditor independence requirements in terms of the analysis that needs to be done to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client. Last December, the SEC proposed additional amendments to Rule 2-01 of Regulation S-X, "Qualifications of Accountants." The SEC’s proposed amendments, if adopted, would amend Rule 2-01 to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships under Rule 2-01. In some circumstances, such loans aren’t currently allowed under PCAOB Rule 3500T, "Interim Ethics and Independence Standards," which requires registered public accounting firms and their associated persons to comply with the American Institute of CPAs' interpretations and rulings under Rule 101 of the its Code of Professional Conduct, to the extent they’re not superseded or amended by the PCAOB.

The amendments proposed by the SEC in December also include revisions to the definitions of several terms in Rule 2-01, such as “affiliate of the audit client,” “audit and professional engagement period” and “investment company complex.” The PCAOB said that unless the rules are amended to conform with the SEC’s changes, the objectives of the SEC’s rulemaking may not be fully achieved, and confusion may arise if certain terms are used in both the board's and the commission's independence rules, but defined differently. Several commenters on the SEC’s proposed amendments urged the SEC and the PCAOB to work together to keep the auditor independence requirements aligned.

In terms of the audit evidence research project that’s now being added to the PCAOB agenda, the PCAOB plans to consider whether standard-setting or staff guidance are needed to deal with the increasing prevalence of technology-based tools and the use of information from sources outside a company, both in the financial reporting process and as audit evidence. The PCAOB noted that advances in technology and expanded use of data from external sources are affecting the nature, timing, preparation and use of financial information and, in turn, the nature and extent of information available to auditors. It also pointed out that emerging technologies used in generating financial information could affect how auditors assess the accuracy, completeness, relevance and reliability of audit evidence.

“Auditors are expanding their use of technology-based tools, including data analytics, to plan and perform audits,” said the PCAOB. “The increasing availability and use of information obtained from sources external to the company has the potential to result in diversity in practice with respect to how auditors evaluate the relevance and reliability of that information.”

The PCAOB also plans to change its approach to managing its standard-setting and research agendas. Going forward, it plans to include in its agendas only specific projects where it anticipates it will have a public milestone, such as a proposal, a staff publication or a concept release, in the next 12 to 18 months.

The PCAOB said it has removed "Going Concern" from its standard-setting agenda and "Other Information and Noncompliance with Laws and Regulation" from its research agenda. After pursuing significant work on both projects, the PCAOB concluded there’s no need right now to change its standards or take other action on those topics, despite the economic crisis that is forcing many businesses to close.

The projects on "Quality Control," "Other Auditors" and "Data and Technology" remain on the PCAOB’s agendas as priorities.

“Although we have removed certain topics from our research and standard-setting agendas, we continue to monitor relevant developments on these and many other topics, particularly in light of the COVID-19 pandemic,” said the PCAOB. “Our monitoring activities — along with prior research, new challenges, or other issues that may arise — could result in new projects being added to our agendas in the future.”

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