Trends in Audit Oversight and Audit Quality I Q N U T - PowerPoint PPT Presentation

Trends in Audit Oversight and Audit Quality I Q N U T University of Kansas A E L Auditing Symposium G I R T I Y T Y Jeanette M. Franzel, Board Member Public Company Accounting Oversight Board May 20, 2016 PCAOB: P Protecting the he Pub ublic I Int nteres est thr hrough A Aud udit Ov Over ersight

Disclaimer  The he views I I express t today are re mi mine ne a alo lone ne, , and nd do do not n t necessarily r refl flect the the v views of of the the Boa Board, o othe ther Boa Board Members, or or PCAOB sta staff. 2

PCAOB at a Glance  Statutory mission areas  Registration, inspection, enforcement, standards  Staff: 876 (budgeted for 2016)  2016 Budget: $257.7 million  Registered Firms: 2,100 (1,200 U.S., 900 foreign)  950 report no activity subject to PCAOB oversight  2016 Inspections (estimated):  10 annual, 140 triennial US, 62 triennial foreign  75 broker and dealer auditors 3

Equity Markets Around The World Global E Equity M Market C Cap $ $62.8 T Glo lobal l Equity M Marke ket Cap p for U. U.S. T Trad aded C Compan anies: $ : $32.6 T Trilli llion on Europe pe, A Africa, Middle E East t $11. 11.7 T T Asia a Pacific $23.1 T T US US $25.1 T T Americas as, exclu luding US $2.9 T $2. T Data Source: World Federation of Exchanges, as of December 31, 2015 4

Market Cap for Issuers Audited by non-U.S Firms $8.2 Trillion market cap audited by non-US firms $1.8 Trillion (22%) market cap audited by firms in blocked jurisdictions Canada $925 B Caribbean $33 B European Union $3,134 B ($435 B) Europe (except EU) $648 B Central America $161 B Asia $2,615 B ($1,339 B) South America $413 B Oceania $139 B ($0) Africa & Middle East $162 B Central America – Mexico and Panama Europe (except EU) – Norway, Russian Federation, Switzerland, & Turkey Caribbean – Bermuda and Jamaica Oceania – Australia and New Zealand South America – Argentina, Brazil, Chile, Colombia Peru and Venezuela Africa & Middle East – Israel and South Africa European Union – Austria , Cyprus , Czech Republic , Belgium , Denmark, Finland, France, Germany, Greece, Hungary, Ireland , Italy , Luxembourg, Asia – China , Hong Kong , India, Indonesia, Japan, Malaysia, Netherlands, Poland , Portugal , Spain, Sweden and United Kingdom Philippines, Republic of Korea, Singapore, Taiwan, and Thailand * The countries labeled in red are jurisdictions where the PCAOB is currently prevented from conducting inspections and that have firms subject to PCAOB inspection as of 12/31/2015. The numbers in red are the aggregate market cap of issuers, as of 12/31/2015, audited by firms in these blocked jurisdictions. Data Sources: Firm data is from Audit Analytics and Market cap is from Standard and Poor’s and is as of December 31, 2015. 5

Firms Registered with the PCAOB 2500 2,3 ,397 2,3 ,388 2,3 ,363 2,3 ,319 2,2 ,201 2,1 ,107 2000 1189 1202 1198 1208 Other Firms (substantial 1160 role, pending withdrawals, 1155 1500 no work subject to PCAOB oversight) Firms that audit Brokers 1000 516 499 and Dealers but not 507 480 435 Issuers** 368 500 Firms That Audit Issuers * 692 687 658 631 606 584 0 2010 2011 2012 2013 2014 2015 ** Based on firms that issued opinions for issuers in the specified year. Data is from Audit Analytics. *** Firms that indicated in their Form 2 for the specified year they audited broker-dealers, but did not issue opinions for issuers in the specified year. Data is from Audit Analytics. 6

PCAOB Inspections Conducted 253 253 252 252 250 9 9 228 228 219 219 215 215 9 Issuer uer F Firm m 212 212 9 62 10 Inspection ons 10 77 200 53 41 57 63 150 Domestic Annual Foreign Triennial 100 181 167 166 161 Domestic Triennial 153 142 50 0 2010 2011 2012 2013 2014 2015 Broke ker-Dea ealer Firm I Inspection ons 75 66 60 45 8 2010 2011 2012 2013 2014 2015 7

Inspection Results for U.S. Big 4 Firms Percentage o of I Inspected I Issuers w with P h Part I Findings 60% 50% 40% DT EY 30% KPMG PWC 20% 10% 0% 2010 2011 2012 2013 2014 Risk-based selection of issuers and audit areas • Not intended to be representative • Results represent an indicator of quality and a source of identifying • potential systemic quality control problems 8

PCAOB Inspections: Areas of Frequent Findings Audit Areas:  Auditing Internal Control (AS 5)  Auditor Response to Risk of Material Misstatement (AS 13)  Auditing Accounting Estimates (AU 342)  Audit Sampling (AU 350)  Auditing Fair Value Measurements & Disclosures (AU 328) Financial reporting areas:  Revenue  Accounts receivable  Inventory  Business combinations  Goodwill 9

General Improvements at Large Firms  Tone at the Top  Focus on audit quality backed by actions and resources  Improvements in firms’ systems of quality control  Training in complex audit topics  New practice aids and checklists  Professional skepticism  auditing fair market value and management estimates  ICFR  Coaching and support to audit teams  Monitoring of quality 10

State of Audit Quality  Large U.S. firms have made significant improvements in audit quality  Continued remediation is needed to strengthen QC systems and monitoring to prevent audit deficiencies  Need for increased focus on quality across the global networks and at affiliated firms  U.S. triennial firm results are nuanced due to the changing mix of firms inspected each year and changes in client base  Implications for future inspections approaches  Addition of non-risk-based selections (“randomization”)  Potential for shifting inspection focus to testing of a firm’s QC system 11

Audit Quality Indicators Treasu asury A ACAP 2 P 2008 Report, C Concentrat atio ion and C Compe petit itio ion  Recommend that the PCAOB, in consultation with auditors, investors, public companies, audit committees, boards of directors, academics, and others, determin mine t the feasibil ility y of developing key indicators of audit quality and effectiveness and require auditing firms to publicly disclose these indicators.  As Assuming d develop lopment a and d disclos losure of of indicators of of audit q quality are f e fea easibl ble, require the PCAOB to monitor these indicators  “A key issue in the public company audit market is what drives competition for audit clients and whether audit quality is the most significant driver.” Final Report of the Advisory Committee on the Auditing Profession (ACAP), Oct. 6, 2008, pp. VIII:14-15 12

PCAOB’s AQI Project  PCAOB Concept Release, July 1, 2015  To seek public comment on the content and possible uses of a group of potential “audit quality indicators.”  May provide new insights about how to evaluate the quality of audits and how high quality audits are achieved.  Taken together with qualitative context, the indicators may inform discussions among audit committees and audit firms.  Enhanced discussions, in turn, may strengthen audit planning, execution, and communication.  Use of the indicators may also stimulate competition among audit firms focused on the quality of the firms’ work and, thereby, increase audit quality overall.  28 potential indicators: audit professionals, process, results. 13

PCAOB’s AQI Project – Next Steps  Encourage voluntary use and experimentation with AQIs  Monitor voluntary use and related market developments  Outreach and feedback from audit committees and other stakeholders  Continue the development of AQIs and advance thought and practice in their usage  Potentially publish additional information related to AQIs  Other issues  Time horizon for next steps  Linkages with quality control standards project and root cause efforts  Assessment of qualitative factors and context  Public reporting vs. use by firms and audit committees  Highly concentrated audit market 14

Standard-Setting Projects:  Transparency about Participants in the Audit (Approved)  Audits Involving Other Auditors (Board Proposal, April 12, 2016)  Auditor’s Reporting Model (Board Reproposal, May 11, 2016)  Going Concern (PCAOB Practice Alert No. 13)  Auditing Estimates, Including Fair Value Measurements (Expected Proposal, 4 th Qtr. 2016)  Auditor’s Use of the Work of Specialists (Expected Proposal, 4 th Qtr. 2016)  Quality Control Standards (Research and outreach) Effort to improve process:  Top to bottom review of process  Use of environmental scans and improved research approach  Integrating economic analysis  Project-based coordination with IAASB 15

Additional PCAOB Focus Areas  Outreach and dialogue with audit committees  ICFR dialogue with preparers, auditors and audit committees  Development of the broker-dealer inspection program  Integration of economic analysis in standard-setting  Analysis of risks to audit quality presented by the audit firm business model  Consideration of the impact of technology, data analytics, and “big data” on the audit. 16