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From Securities Regulation Daily, December 12, 2018

PCAOB members discuss priorities for the coming year

By John Filar Atwood

Transformation of the inspections process is among the PCAOB’s priorities in the coming year, according to Chairman William Duhnke III. Duhnke, who was joined by the other four board members at the AICPA’s conference on SEC and PCAOB developments, said that the review of the inspections process will be comprehensive and include what the staff says in the reports, how it says it, and how quickly the reports are released.

Duhnke said the board is thinking broadly about how it can help people understand the inspection reports. Options on the table include putting additional information in the reports, or preparing a general report on inspections to release to the public, he stated. The board does not want change just for the sake of change, he added, but is looking at adjustments that it believes will be helpful.

On the board’s near-term agenda is considering the adoption of enhanced requirements for auditing accounting estimates, including fair value measurements, he noted. The board has scheduled an open meeting for next week at which it will consider this issue, as well as amendments to the standards for an auditor’s use of the work of specialists.

Quality control systems. Board member Duane DesParte discussed other near-term priorities for the PCAOB, including the review of audit firms’ quality control systems. This is a preventative measure, he said, in which the board hopes to help firms build quality into their systems to avoid major issues down the road.

If audit firms do a good job with their quality control systems, it could become a basis for them to compete in the future, according to board member Jay Brown. PCAOB findings and strong control systems could set a firm apart from its competitors, in his view.

The board also is focused on engagement with audit committees, DesParte indicated. The board has heard feedback that committees want more information from it, so the board plans to reach out to audit committee chairs, he noted. Also among the priorities is undertaking a horizontal cross-firm thematic review, he said. Rather than focusing on individual firms, as in the past, he noted, this review will look for trends across all audit firms.

Data and technology. Board member Kathleen Hamm discussed the board’s focus on the use of data and technology. New technologies are transformational, she said, so the board will work to ensure that both the PCAOB and firms are prepared for it. She pointed to the board’s data and technology working group, which is studying how firms are using AI, blockchain, and other emerging technologies.

The PCAOB also is examining the question of whether its standards are impeding the growth of emerging technologies, Hamm said. Early indications are that existing standards are flexible enough and are not in the way, she noted, but the board will still work to anticipate changing environments brought on by new technology.

CAMs. The implementation of reporting in critical audit matters (CAMs) is another important effort that is underway, Brown said. Once it is rolled out, the board will review the CAMs that are included in the audit report and determine if it needs to issue additional guidance, he added. Board member James Kaiser noted that the board is already getting feedback from firms’ dry runs with CAMs, so it should start to become clear very soon if additional guidance will be required.

Brown said that he is concerned that the board is going to see a lot of boiler plate disclosure on CAMs. He indicated that once all auditors are disclosing CAMs in their audit reports, the PCAOB will do a post-implementation review of the new requirement.

A broader effort that the PCAOB is undertaking, according to Brown, is to be more open and transparent. He believes the board would benefit greatly from being less opaque. Kaiser said that board recently published its 2019 inspections outlook, and he hopes that will be the beginning of a new communication program for the board.

Kaiser concluded by pointing out that 2018 was a year in which the new board formulated its strategy, and next year it will set out to accomplish it. That will start with getting new standards out on auditing accounting estimates, including fair value measurements, and on an auditor’s use of the work of specialists, he noted, and then turn to getting CAM reporting implemented.

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