On August 10, 2018, the Public Company Accounting Oversight Board (PCAOB or Board) released a draft of its five-year strategic plan and sought public comment on the plan through September 10, 2018. This represents the first time that the Board has solicited public input to a draft strategic plan, and follows the Board's announcement in April of a public survey to permit stakeholder input on the strategic plan even in advance of the draft's release. In a speech on May 17, 2018, at the Deloitte/University of Kansas Auditing Symposium (Kansas Speech), PCAOB Chairman William D. Duhnke III announced that after the public comment period, the Board plans to finalize the strategic plan in November 2018.[1]
Coming on the heels of a complete turnover of the Board and the subsequent departure of numerous senior personnel, the process by which the Board is crafting its strategic plan provides further evidence—if any were necessary—that this Board intends to seek out new ways to operate and to fulfill the PCAOB's mission.
This post surveys the current state of the Board's three most important functions—standard setting, inspections, and enforcement—in light of the Kansas Speech and the draft strategic plan, and offers some thoughts concerning what stakeholders might expect as the PCAOB moves forward.
Standard Setting
In recent years, the PCAOB's standard-setting process has vacillated between a focus on structural changes to the audit process—such as disclosure of critical audit matters (CAMs) and exploring whether audit firm rotation could be viable—and so-called “blocking and tackling" issues—in the words of former U.S. Securities and Exchange Commission (SEC) Commissioner Daniel Gallagher—that beef up the procedures that auditors are required to perform. After the adoption last year of a new auditor's reporting model that includes CAMs, the pendulum now seems to be swinging back toward more mechanical standards. The Office of the Chief Auditor's current Standard-Setting Agenda includes items relating to auditing estimates, the use of specialists, the supervision of other audit firms, and going-concern provisions.
The just-released draft strategic plan is consistent with this apparent approach. The plan sets as an objective that the standard-setting process should better incorporate economic and risk analysis. It also reaffirms the PCAOB's recently adopted commitment to conducting post-implementation reviews of its standards, and aims to make better use of the Board's data, which will likely include inspections data and could also incorporate any insights into global audits that the Board is obtaining through the recently adopted Form AP, which requires firms to disclose what other firms participated in an audit.
It remains to be seen whether the emphasis on economic analysis will slow the progress of the standards on which the Office of the Chief Auditor is currently working. From the draft plan, it also seems unlikely that the development of new standards will involve any new push toward structural change as long as the current Board remains in place.
Inspections
Inspections is the PCAOB function that both received the most attention in Chairman Duhnke's Kansas Speech and about which the draft strategic plan seems to most clearly express that there is a need for change. This signals that the inspections process likely will undergo some fundamental review under the current Board.
In his Kansas Speech, Chairman Duhnke praised the effect that inspections have had on audit quality but noted that many firms “appear to have 'plateaued' in their progress toward achieving improved inspection results." Given that, he offered a litany of ways in which the Board might respond, including by introducing more random inspections, focusing more on quality control systems, and rethinking how inspections results are communicated to the public. The draft strategic plan is even more explicit: one of the key articulated objectives is to “[c]onduct inspection activities to facilitate more timely and relevant feedback to our stakeholders." This signals that the current Board believes that one of the most important changes it can make to the PCAOB is specifically to improve the speed and usefulness of its inspections process. What this means beyond an attempt to generate faster turnaround in inspection reports is still unclear, but stakeholders—including registered firms, issuers, and audit committees—who have specific comments about inspection reports will likely find a receptive ear among Board members willing to make changes to the PCAOB's core process.
Enforcement
The PCAOB's enforcement program appears to receive a less defined vision in the draft strategic plan. The primary objective related to enforcement articulates an intent to “[e]nforce accountability and deter improper conduct by addressing violations of PCAOB standards and rules, and related federal securities laws." This seems to be a fairly generic description of the PCAOB enforcement program. The objective goes on to note that enforcement will be “prompt," that it will prioritize “those issues that pose the greatest risk to investors and are most likely to deter improper conduct," and that the PCAOB will collaborate with the SEC in carrying out its enforcement efforts, something it already is statutorily mandated to do.[2] It is possible that some of the commentary in the plan might signal that the Board is not interested in “broken windows"-type enforcement of low-level offenses, but that remains to be seen in practice. In any event, combined with the recent notable departures within the PCAOB's Division of Enforcement and Investigations (Division) (with Claudius Modesti departing in May after 14 years in that position), the draft strategic plan might signal that the PCAOB enforcement program is at a crossroads, with both its leadership and its enforcement priorities in play. This could present an opportunity for stakeholders with strong views to provide input that may help to shape the Board's perspective concerning what the Division should look like going forward.
Conclusion
No matter which PCAOB function is most important to a particular stakeholder, it appears that the Board is strongly receptive to fresh ideas and a fresh outlook and parties may wish to comment on the Board's draft strategic plan against this backdrop.
This post was prepared by Michael Scanlon and David Ware.
[1] See “PCAOB Transitions for the Future" (May 17, 2018).
[2] See Section 105(b)(4)(A) of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7215(b)(4)(A).