The Public Company Accounting Oversight Board today issued a proposal to strengthen existing requirements and impose a more uniform approach to a lead auditor’s supervision of other auditors.
The Board requests public comment on its proposal by July 29, 2016.
In many audits, particularly those of large, multinational companies, important audit work is performed by accounting firms or individual accountants outside the audit firm issuing the audit report. The proposal addresses the lead auditor’s responsibilities in overseeing those other auditors.
“Investors depend on the lead auditor to provide assurance that there are no material misstatements in audited financial statements or material weaknesses in internal control, no matter where those misstatements or weaknesses may reside,” said PCAOB Chairman James R. Doty. “Today’s proposal is intended to improve the consistency in the quality of engagement partner oversight of other firms engaged to assist in the audit.”
The proposal spells out a lead auditor’s responsibilities for planning, supervising, and evaluating the work of other auditors. The proposal is intended to increase the lead auditor’s supervision of the work of other auditors and to enhance the lead auditor’s ability to prevent or detect deficiencies in the other auditors’ work.
“We know from PCAOB oversight activities that the supervision of other auditors is an issue at some firms,” said Martin F. Baumann, PCAOB Chief Auditor and Director of Professional Standards. “That, and the fact that a majority of the audits of Fortune 500 companies use other auditors, underscores the importance of this proposal.”
PCAOB inspections have found that many engagement partners do a good job of overseeing and coordinating the work of affiliates and other audit firms that participate in the audit. But PCAOB inspectors also encounter engagements that are not well managed, as well as work performed by other auditors that does not meet the objectives of the auditor’s role in the audit.
The proposal includes amendments to current standards and a new standard. These changes include:
- Directing the lead auditor’s supervisory responsibilities to the areas of greatest risk, consistent with PCAOB risk-assessment standards.
- Making clear that, to act as lead auditor, an audit firm must itself audit a meaningful portion of the financial statements.
- Requiring more explicit procedures to prompt the lead auditor to bolster its involvement in the work of other auditors (through enhanced communication and more robust evaluation of other auditors’ qualifications and work).