In a spotlight released by the PCAOB just a few days ago [PDF] the auditors of auditors laid out inspection priorities for 2022, among them increased risk of missing material misstatements (say that 5x fast) due to staff turnover and remote audit work. Oh, and supply chain disruption, the shitty economy, and Rona are also on the radar.
- Increased initial public offerings (IPOs) and merger and acquisition (M&A) activities, including transactions with special purpose acquisition companies (SPACs);
- Widespread disruption in supply chains;
- Continued negative effects of the COVID-19 pandemic, especially in high-risk industries;
- Increased volatility in financial and commodity markets due to fluctuations in interest rates and inflationary trends; and
- Audit firm-wide risks, such as the heightened degree of staff turnover and risks arising from auditing in a remote environment, including the risk that auditors will not identify misstatements that could be material.
The current economic environment changes the risk landscape and may increase existing financial reporting and audit risks or create new ones — including fraud risks — for public companies and broker-dealers (“companies”), reads the Spotlight. Ongoing supply chain disruptions mean PCAOB inspectors will focus on how auditors addressed auditing and accounting risks like unreasonable assumptions affecting the timing and amount of revenue recognition, unreasonable assumptions used in projections to account for business combinations (M&A), earnings manipulation as a reaction to margin pressures driven by rising costs, and financial, economic, and business uncertainty that impacts the required assessment to evaluate threats and uncertainties concerning a public company’s ability to continue as a going concern. Meaning things are wiiiiiiild out here and the PCAOB expects auditors to account for this landmine field of risk.
The document also contains a passive-aggressive reminder that auditors must be independent both in fact and appearance. “In our inspections, we continue to identify a high rate of deficiencies that suggest some audit firms may not have appropriate quality control (QC) systems in place to provide reasonable assurance to prevent violations of Securities and Exchange Commission (SEC) and PCAOB independence rules. Given the importance of auditor independence to the public’s trust in the quality of audit services, and the historical deficiencies identified, independence will remain an area of focus in 2022,” it says.
If none of the above has gotten through to auditors, here are some key reminders listed out in handy numbered list for easy reference by the PCAOB.
As auditors during the course of 2022 continue to plan and perform their audits, we remind them of the following:
Exercise professional skepticism in evaluating the reasonableness of management’s representations, estimates and forecasts, due to the uncertainty and volatility of the economic environment.
Consider whether the remote or hybrid working environments at public companies and broker-dealers creates new or increased risks of material misstatement, including any fraud risks.
Remain alert to changes in the public company’s, the broker-dealer’s, or the auditor’s circumstances which may give rise to situations that could impair auditor independence.
Consider implications arising from the current economic environment while performing procedures for acceptance and continuance of clients and engagements.
Consider the nature of the public company or broker-dealer, the risks of material misstatement, and each audit engagement team member’s knowledge, skill, and ability when assigning work to engagement team members and determining the necessary extentof supervision.
Sounds like a fun year for auditors!