Although hiring a former PCAOB staffer and using their insider knowledge to improve your inspection rate is highly frowned upon as KPMG learned in 2019, the PCAOB does throw audit firms a bone and release things like the December 20th “Staff Priorities for 2024 Inspections and Interactions With Audit Committees” spotlight [PDF] to warn them what to look out for in future inspections. Assuming no one but select audit partners actually read this crap, let’s take a look at how auditors should expect increased vigilance in 2024 so everyone can be better informed and stock up on KY.
The PCAOB calls it “Inspection Enhancements,” what we want to call it isn’t appropriate for a PG-13 website.
Inspection Enhancements in 2024
Consistent with Goal 2 in the Board’s Strategic Plan 2022-2026, we will take steps to enhance the PCAOB’s inspection program in 2024. We are also continually improving our inspection program, using a data-driven and risk-based approach, with a focus on riskier engagements and audit areas as described further in the section “Selections and Prioritized Sectors/Industries.”
Oh goody. We look forward to the PCAOB fining more foreign audit firms performing audits of non-US companies then bragging about how many fines they levied for the year because somehow that protects our capital markets.
The first and most important thing auditors should be aware of ahead of the 2024 inspection season: the PCAOB will be inspecting more engagements.
Increasing the number of engagements reviewed – Each year, several factors influence the number of public company and brokerdealer audits that we select for inspection.
These include prior inspection results and the emerging risks pertaining to a particular audit firm or industry. During 2024, in our efforts to enhance investor protection, we plan to increase the number of engagements we select for review at our annually inspected firms in response to heightened risks in certain industry sectors.
Inspection reports helpfully include historical info on how many audits were selected for review, the below screenshots show these numbers from 2021 reports for Deloitte, EY, KPMG, and PwC (in alphabetical order and not arranged by who has the most prestige, most revenue, or hugest swinging dick which covers both categories).
OK so total audits selected for review are actually down from 2019, at least at Big 4 firms. Maybe this won’t be a big deal in 2024. Maybe they just mean they’ll inspect every single Marcum audit to be extra petty about that SPAC thing.
Next, the PCAOB will expand inspection procedures. In other words, get ready for that paper to be pushed even harder.
During 2023 we began, and in 2024 we will continue, to perform inspection procedures on every engagement selected to assess compliance with certain aspects of the auditing standards related to independence, fraud, audit findings, audit committee communications, Form AP reports, the auditor’s report, engagement quality review, and audit documentation.
These additional procedures enhance the robustness of inspections that assess audit firms’ compliance with applicable laws, rules, and standards.
TLDR “We will not be climbing down from your ass in 2024, if anything we’ll be burrowing further in Lemmiwinks style.” And God forbid you people not file a Form 3 in a timely manner or YOU WILL BE PUNISHED. You’ve been warned, auditors.
Next up, culture.
Increasing focus on a firm’s culture of integrity and audit quality – Audit firms continue to face challenges delivering quality audits as evidenced by (1) the increasing trend of audit deficiencies in recent years and (2) deficiencies identified that have recurred for numerous years. We are interested in why these deficiency trends are not improving and whether audit firms’ cultures are playing a role in this failure to improve. See the section “Review of Culture at Firms.”
I mean maybe you people are just being too nitpicky and that’s why trends aren’t improving? Sure we haven’t had an Enron in 21 years but what exactly has the PCAOB been doing these past 20 years other than finding new things to write-up auditors for? They snag a decent fish every now and then, sure. But so much of it feels pointless, especially if audit deficiencies (as defined by the PCAOB) remain high. Highlighting this comment from my recent post on the PCAOB requesting a budget increase and SEC contrarian Hester Peirce asking what for??
The PCAOB doesn’t have a clue how to improve audits.
For all we know, the audit deficiency rate has reached an irreducible minimum.
It writes new standards to have something to do.
It seems to follow Parkinson’s Law, “work expands to fill the time allotted to it”.
And this comment, too:
So with all these problems, how many restatements of financial statements have occurred as a result of a PCAOB inspection? Can they be counted on less than 2 hands, 1 hand?
Anyway, firm culture.
“Review of Culture at Firms.”
To consistently execute quality audits, a firm’s senior leadership needs to promote and embrace a culture of integrity and audit quality (sometimes referred to by audit firms as “tone at the top” or firm culture). Therefore, as described above, as an enhancement to our inspection program, we have created a small team to initially evaluate culture across the “U.S. Global Network Firms” category of firms inspected by the PCAOB. This initiative includes interviewing firm personnel and evaluating other documentation, as deemed necessary, as part of our QC procedures. We will use this information to inform our understanding of audit firms’ cultures and the impact on audit quality. Aggregated results will be included in a future publication.
Fab. Everyone be sure you have your employee surveys and code of conduct pledges properly filed.
The last two items on the 2024 to-do list are improvements the PCAOB is committing to on their end:
Performing quality inspections – Since 2019, the PCAOB has operated the Inspections Quality Group, an internal program aimed at applying best practices across inspection activities. In 2024, this group will continue to drive excellence across our inspection function by assessing the quality, consistency, and efficacy of our inspections.
Improving the timeliness of inspection reports – Considering the recommendation of the PCAOB’s Investor Advisory Group, we are taking additional steps to streamline our internal processes to enable timelier issuance of inspection reports. We are renewing our focus in this area and are committed to
delivering meaningful results.
Cool. They’ve done some good work in this area, like the tool they launched this summer that makes it much easier to search through inspection reports to find nitpicky nonsense you, and by you I mean me, can tangentially reference in mean articles about how useless the PCAOB is.
There’s some more stuff in the spotlight like what areas they’ll be focusing on in 2024 — M&A, business combinations, broker-dealers, blah blah — you can read it yourself if you care.