Over the past several days, the PCAOB has taken a number of steps to make clear that it remains active during the COVID-19 crisis. For example, after issuing only one settled enforcement order during the first three months of 2020, the PCAOB has issued two settled orders in the past week. Both concerned smaller firms, but they serve to demonstrate that the Board is still carrying out its enforcement mandate.
Two other recent actions by the PCAOB also
are worth highlighting: on April 17, the PCAOB requested
comment from stakeholders on the implementation of its critical audit
matters (CAM) standard,
and on April 21, PCAOB Chairman William Duhnke, together with SEC Chairman Jay
Clayton and other SEC leadership, issued
a statement concerning emerging market risks. We review both of these developments below.
CAM
Request for Comment
In its order approving the adoption of
the PCAOB’s CAM standard in 2017, the SEC stated, in part:
[I]t will be important
to closely monitor the implementation of the Proposed Rules, including
potentially issuing incremental implementation guidance (if needed), providing
PCAOB staff to be available to respond to questions and challenges as they
arise, and completing a post-implementation review as soon as reasonably
possible, including some analysis between effective dates for CAMs. The
Commission expects the PCAOB to take such steps.
Responding to that directive, the PCAOB
stated on April 17 that it “is conducting surveys and targeted interviews of
impacted stakeholders including auditors, preparers, audit committee members,
investors, and other financial statement users.”
To supplement that outreach, the PCAOB is also accepting comments from these
and other stakeholders about the CAM standard and its implementation. The PCAOB
request for comment specifically noted an interest in learning, among other
things: (i) what effects the inclusion of CAMs in audit reports have had for
financial statement users, (ii) what factors made some CAMs more useful than
others, and (iii) whether CAMs have affected communications between
auditors and audit committees. Importantly, the PCAOB is also interested in
hard data from the audit industry concerning the costs involved in implementing
the CAM standard.
The PCAOB has shown that it is
receptive to expressed concerns about the regulatory burdens created by its
standards. To the extent that audit firms and other stakeholders have strong
views concerning the costs and benefits of the CAM standard, the PCAOB’s
request for comment is an ideal opportunity to make those views known. We would be happy to review these
considerations with any party that it is interested in commenting.
Emerging
Market Risks
On April 21, SEC Chairman Clayton, PCAOB
Chairman Duhnke, SEC Chief Accountant Sagar Teotia, and the directors of the
SEC’s Division of Corporation Finance and Division of Investment Management
issued a joint statement, “Emerging Market Investments Entail Significant
Disclosure, Financial Reporting and Other Risks; Remedies are Limited.” The
statement notes that “in many emerging markets, including China, there is
substantially greater risk that disclosures will be incomplete or misleading
and, in the event of investor harm, substantially less access to recourse, in
comparison to U.S. domestic companies.” One aspect of this risk that the statement
discusses at length is the inability of the PCAOB to inspect audit work by
Chinese firms, including Hong Kong firms auditing mainland China companies.
Perhaps more important, however, is the final paragraph concerning the PCAOB’s
view of emerging-market audit work more generally:
In connection with our
ongoing efforts to address a number of issues related to the quality of
financial reporting and auditing in emerging markets, we have been meeting with
senior representatives of the six largest U.S. audit firms and representatives
of their global networks. To be clear, these discussions with the audit firms
are not intended to be a substitute for the PCAOB inspecting audit work and
practices of PCAOB-registered accounting firms in China with respect to their
audit work of U.S.-listed companies. These meetings have included discussions
regarding audit quality across their global networks and the importance of
effective and consistent oversight of member firms globally, including those
operating in China and other emerging markets. In each of these meetings, the audit firms have recognized their
responsibilities as auditors and acknowledged the importance of consistent
audit methodologies across their global networks. We were clear in sharing our
expectations that they fulfill these responsibilities. (emphasis added)
While the ongoing dispute between the
United States and China in relation to audit workpaper access garners a
significant amount of the press attention directed toward the PCAOB, it is
important to keep in mind that the PCAOB’s concerns regarding the quality of
audit work in emerging markets are far broader than China alone. The PCAOB
actively inspects audit firms in dozens of emerging markets, and its
enforcement program has included a number of enforcement actions against both
large and small firms that are located in, or audit issuers (including
affiliates of U.S. issuers) in, emerging markets. We interpret Chairman
Duhnke’s April 21 statement to indicate that this focus will continue for the
foreseeable future.
In light of this statement, audit
committees should consider making inquiries of their auditors concerning (i) the
extent to which the firm’s audit planning includes procedures related to operations
in emerging markets, (ii) the means by which the firm plans to perform
procedures in such emerging markets, including its planned reliance on the work
of other (including associated) audit firms, and (iii) the means by which the
firm plans to help ensure audit quality for those aspects of the audit.
For additional information regarding
this post, please contact the authors Michael Scanlon, a partner in Gibson
Dunn’s Washington D.C. office, and David Ware, of counsel in Gibson Dunn’s
Washington D.C. office and a former Associate Director in the PCAOB’s Division
of Enforcement and Investigations.