The Public Company Accounting Oversight Board’s (PCAOB) “Target Team Inspections” consists of inspectors who focus on emerging audit risks and other topics the PCAOB believes could have important implications as audit teams aim to improve audit quality now and in the future.
Recent PCAOB inspections identified the following three audit risk areas:
- First audits after traditional IPOs or de-SPAC transitions.
- Audit team reliance on shared services centers (SSC).
- Climate-related matters.
Audit teams, already stretched thin, are feeling the pressure of closer scrutiny from the PCAOB due to a noticeable decline in observed audit quality. Overcoming current audit challenges – specific to the above focus areas and beyond – is imperative moving forward, and the work must begin now. Audit teams will increasingly be looking to management to engage in their audit responses to best navigate these challenges.
Audit Quality by the Numbers
The PCAOB estimates 40% of audits they review “will have one or more deficiencies that will be included in Part I.A of the individual audit firm’s inspection report.” Approximately 46% of audits are expected to have one or more deficiencies in Part I.B as well.
This persistent upward trend over the last several years is a troubling sign, with PCAOB chair Erica Y Williams stating, “These findings are absolutely unacceptable, and audit firms must make changes to turn things around and live up to their responsibility to investors.” The Target Team focus areas may provide additional insights into auditors’, and by extension management’s, future areas of focus.
The inspection report found the following:
- 20% of post-IPO audits contained deficiencies. Instances of deficiencies were in some cases caused by a departure from GAAP “in the presentation of deferred revenue” and the failure to test the accuracy of “labor hours used as an input to record revenue,” among other reasons.
- Positive signs for audit quality when relying on shared services centers (“SSC”), such as SSC personnel continuity between audit cycles, additional layers of review over SSC deliverables, and effective coordination between SSC and the U.S. firm.
- Registrants’ increased focus, communication, presentation, and disclosure considerations relating to Environmental, Social, and Governance (ESG) issues in anticipation of forthcoming ESG reporting requirements from the SEC.
These targeted reviews will likely influence the areas of the business in which auditors will increase scrutiny. Therefore, companies should expect more questions relating to areas such as revenue recognition and ESG and be prepared with appropriate responses. In addition, audit teams may increase their use of SSC, which may lead to challenges with coordination.
The Path Forward
In the second half of 2023 and into 2024, audit firms have shifted their attention to respond to what’s viewed as a “breaking point in audit quality.” Firms turning the corner successfully are focusing on:
- Standardizing audit procedures and deliverables.
- Getting ahead of new accounting standards and policies by better understanding what regulators are thinking before audit season becomes time- and labor-intensive.
- Increasing audit partner engagement earlier in the audit process.
- Formulating proactive frameworks and responses to expected complex, judgmental areas (e.g., defining emerging risks).
Additionally, new PCAOB Target Team focus areas for audits of 2023 financial information will include risks associated with:
- Distributed ledger technology.
- Interim reviews of certain banks.
- Multi-location audits.
- Significant or unusual events and transactions.
Management, along with their auditors, should be prepared to address these ongoing and forthcoming audit inquiries.
Fortunately, the audit process doesn’t have to be managed alone. CrossCountry Consulting’s audit-readiness experts help companies reduce audit friction and see around audit curves. To navigate the audit challenges of today and tomorrow, contact CrossCountry Consulting.