September 25, 2020

One Guy at the PCAOB Thinks the PCAOB Should Consider Its Language

Aha! Pointy-headed professors aren't the only ones who think the PCAOB's use of the term "audit failure" is totally dramatic and possibly unnecessary.

From the JofA:

The PCAOB’s use of the term “audit failure” in its inspection reports of audit firms appears to have caused confusion and misunderstanding about the severity of inspection findings among investors, audit committees, and others, PCAOB member Jay Hanson said Wednesday.

Hanson said he is troubled by the PCAOB’s use of the term “audit failure” in inspection reports. He wants the board to stop using the term in the reports. Hanson made the remarks during a speech at the CBI Pharma/Biotech Accounting & Reporting Congress in Philadelphia.

AMEN, bro! The CAQ agrees:

Cindy Fornelli, the executive director of the Center for Audit Quality (CAQ), said in an email that the CAQ and the public company audit profession recognize the importance of the PCAOB inspection process and view it as a valuable input for continuous improvement in audit quality. But the CAQ believes investors, auditors, and audit committees could benefit from more clarity and context in PCAOB inspection findings.

“We share board member Hanson’s concerns about the use of the term ‘audit failure’ in PCAOB inspection reports, because the term can be misleading,” Fornelli said. “As board member Hanson pointed out in his speech, ‘very few [PCAOB] inspection findings … can be linked to a problem in the company’s financial statements, and restatements arising out of [the] inspection process are rare.’ ”

What's a good alternative? Why not just stick with "deficiency" as explained in PCAOB reports? As previously discussed, "failure" implies, well, a failure. To a reasonable person unfamiliar with the PCAOB's definition of "failure," it's not out of the question for said reasonable person to assume it means an actual failure (as in "these financial statements cannot be relied upon") rather than a failure on the part of the auditors to show the PCAOB their work.

This is a dangerous area for the PCAOB to screw around. Hanson made it clear in his remarks that audit failure doesn't mean financial statements are misstated but "it means that the auditor did not do enough work to know whether they are misstated."

So wait, can financial statements be trusted or not?

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