The Public Company Accounting Oversight Board voted Tuesday to propose a standard on the general responsibilities of the auditor in conducting an audit, updating a group of old interim standards it inherited from the American Institute of CPAs in 2003.
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The PCAOB is asking for public comments on the proposal by May 30, 2023.
The PCAOB, under a mostly new set of board members, was tasked last year by the Securities and Exchange Commission with updating the older standards it inherited from the AICPA when the PCAOB was formed after passage of the Sarbanes-Oxley Act of 2002 (
"Our capital markets never stop evolving, and PCAOB standards must keep up to keep investors protected," said PCAOB chair Erica Williams in a statement. "This proposal would modernize standards that are foundational to audit quality, ensuring they are fit to meet today's challenges."
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The proposed standard recognizes auditors' fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor's reports, and makes clear that obligation governs the auditor's work under the standards of the PCAOB, Williams noted during a statement at an open meeting Tuesday of the PCAOB board members and staff.
"Second, the proposal also makes clear that, due to the importance of the role of the engagement partner, it is essential that the engagement partner is actively involved throughout the audit," she added. "As noted in today's standards, the engagement partner is responsible for the engagement and its performance. Hence, it is the engagement partner's responsibility to provide informative, accurate and independent audit reports. This is why we are proposing to clarify what is expected of the engagement partner when planning, supervising, reviewing and documenting engagement activities. Third, we are proposing to modernize aspects of the audit documentation standard. Specifically, we are proposing to shorten the time to assemble the final audit documentation from no more than 45 days to 14 days. An auditor's documentation provides the evidence to support whether the engagement complied with PCAOB standards."
PCAOB board members noted that in the old days, auditors used to rely on paper to document their audits, but nowadays most auditors use software for audit work papers and other documentation.
"Back in 2004, many firms documented at least part of their procedures using paper-based systems," said Williams. "As we have observed through our oversight activities, today most, if not all, of the documentation is now occurring electronically. Because of this, it takes firms significantly less time to compile a complete and final set of audit documentation compared to when AS 1215 became effective."
The proposal also involves other aspects of auditor conduct. "Today's proposal reinforces the essential role auditors play in our financial reporting ecosystem, protecting investors through objective and independent assessment of management's financial reporting and internal controls," said PCAOB board member Duane DesParte. "Today's proposal also addresses core principles and responsibilities of the auditor, including reasonable assurance, due professional care, professional skepticism, independence, competence and professional judgment. These principles are hallmarks of the auditing profession and are fundamental to the performance of high-quality audits. While these foundational principles and responsibilities are covered in our existing standards, today's proposal reframes them in a more concise presentation, eliminates outdated and inconsistent language and incorporates updates for changes in the auditing environment; thereby making our standards more relevant and easier to read, understand and apply."
He noted that the proposal also emphasizes the lead engagement partner's responsibility to exercise due professional care in supervising and reviewing the audit.
Detailed questions are included throughout the proposal, and commenters are encouraged to (1) comment on any or all topics, (2) respond to any or all questions, (3) provide feedback in areas not covered by specific questions, and (4) provide any evidence that informs commenters' views.
"While not intended to change existing requirements, I am interested in whether and how the reframed requirements might impact the nature, timing and extent of lead partner engagement on audits, especially audits of more complex entities with multiple business units or spanning multiple geographies," said DesParte. "I am also interested in the feasibility of the proposed accelerated audit documentation completion date, especially for smaller firms."
Smaller auditing firms will also be expected to provide feedback on how the proposed standard would affect them. "This proposed standard adds a new requirement to accelerate the archival deadline of audit documentation from a maximum of 45 days to 14 days," said PCAOB board member Christina Ho. "I am especially interested in reading comment letters from small/medium registered firms and emerging growth companies (EGCs) responding to the list of questions, and in particular, questions on whether the proposed amendment to accelerate uniformly for all firms, regardless of size, the documentation completion date is appropriate. I am also interested in reading any comments on: (1) our assumptions that the use of electronic workpapers enables auditors to assemble a final set of audit documentation in less time; and (2) the significance of the perceived benefits to investors."
Ho began chairing the PCAOB's new Technology Innovation Alliance Working Group last year to investigate the use of auditing technology and she indicated the PCAOB may need to play a greater role in this area in light of recent banking failures.
"The proposed release represents an incremental step forward in the PCAOB's standard setting agenda," she said. "But we still have much work ahead of us, particularly in leveraging data and technology to further the public interest mission of the PCAOB. I cannot emphasize enough that the PCAOB, as a standard-setter, must have a bold vision — a vision that is forward-looking and focused on adapting our auditing standards to fit not only current uses of technology but also future uses of emerging technologies to increase audit quality and investor protection. Recent turbulence affecting our financial institutions and our financial markets bolster my view that the PCAOB must strive to 'look around corners' by making better use of the data we collect and unlocking its value."
PCAOB board member Kara Stein, a former SEC commissioner, traced the history of the concept of auditor independence to a statement by Colonel Arthur Carter in 1933, when he was president of the New York State Society of CPAs. "He said, 'It is generally regarded that an independent audit of any business is a good thing.' While no singular figure was personally responsible for the establishment of the independent public company audit, independent audits of the financial statements of public companies became the cornerstones upon which investor confidence in the capital market would be rebuilt after the Great Depression," said Stein. "This organization, the Public Company Accounting Oversight Board, was created almost 70 years later to help preserve and strengthen that cornerstone. Colonel Carter's vision of Certified Public Accountants ensuring the accuracy of financial statements included in public securities offerings and in the follow-on annual reports of public companies was enacted into law. Expectations were set without clearly defined roles and responsibilities."
"That is why I am particularly pleased that the proposed standard before us this morning anchors the role of the auditor and the obligation to protect investors," said Stein. "This fundamental obligation of the auditor is clearly and unambiguously set forth in the first paragraph: 'Auditors have a fundamental obligation to protect investors.' This paragraph further instructs the auditor that investor protection is a touchstone for their work and is how their work will be judged."
PCAOB board member Anthony Thompson also supported the proposal. "I support this proposal, which includes the new standard AS 1000 that brings together and modernizes our traditional standards, which address the general responsibilities of the auditor, including due professional care and professional skepticism," he said. "The proposal also includes amendments to understand this, which clarify the due care responsibilities of the engagement partner and reduce the period for archiving audit documentation. Together the proposed AS 1000 and related amendments reaffirm the core principles and responsibilities of auditors, yet also reflect changes in the auditing environment."
Among those changes are the remote and hybrid working environment of many auditors since the COVID-19 pandemic of recent years.
"The auditor's role in the effective functioning of the capital markets cannot be underestimated," said Thompson. "AS 1000 streamlines the key principles and responsibilities, including due professional care, professional skepticism, independence, ethics and competence that build strength and trust in our capital markets. When these attributes are absent from an audit, it elevates the risk of investor harm. AS 1000 and related amendments further clarify the engagement partners' due care responsibility to align with existing supervision and review requirements. The auditing profession relies on an apprenticeship model. It is therefore imperative that engagement partners perform their due care responsibilities to ensure that the professional judgment exercised and audit conclusions reached during an audit are properly supported. This is particularly heightened in a hybrid working environment."
