Accounting
PCAOB releases CAMs guidance for auditors of small firms
Published
1 week agoon
The Public Company Accounting Oversight Board is rolling out a new series of staff publications targeted at auditors of small public companies, starting with one on critical audit matters, as board members face the likelihood of a deregulatory emphasis under the incoming Trump administration and probable changes in board composition.
The PCAOB released the first of the new series of staff publications, “
The PCAOB staff is continuing to identify a great many deficiencies related to critical audit matters. CAMs are a relatively new requirement from the PCAOB. A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements; and involved especially challenging, subjective or complex auditor judgment.
This edition of Audit Focus highlights key reminders on determination, communication and documentation of CAMs, along with the PCAOB staff’s perspectives on some of the common deficiencies, such as not accurately describing how a CAM was addressed in the audit, plus good practices that the staff has observed related to CAMs, such as use of practice aids.
PCAOB board members George Botic and Christina Ho discussed the recent inspection findings during a panel discussion Wednesday during Financial Executives International’s Current Financial Reporting Insights conference.
“When you think about where our inspectors see repeated observations, deficiencies, if you will, particularly in Part I.A, which are for the firms not obtaining sufficient appropriate audit evidence, things like revenue recognition, inventory, allowance for credit losses in the financial sector, areas around business combinations, allowance for allocation of purchase price, things such as that, as well as long-lived assets, goodwill, intangibles, evaluation, those are some of the more frequent areas,” said Botic. “ICFR certainly is one as well in the internal control space. But those areas, those themes, really haven’t changed. Sometimes we’ll see more of one versus another.”
During its inspections last year, the PCAOB saw some improvements at the largest firms, even though audit deficiency rates still appear to be high, with 46% of the engagements reviewed in 2023 having at least one deficiency significant enough to be included in Part I.A of the inspection report, excluding broker-dealer audit inspections, according to a
“There appears to be some improvement in terms of the deficiency rate trend for the largest firms,” said Ho. “It’s probably too soon to tell whether that is going to be the ongoing trend. Also for triennial firms, the spotlight also highlighted the fact that the deficiency rates are not improving.”
She pointed out that financial restatements are another way to look at the situation. “Obviously, the deficiency rate is not the only measurement of audit quality,” said Ho. “We also look at restatements, which I think for many of the preparers and audit committees that I talk to, and even investors, they focus on that metric a lot. The multiple metrics paint a picture.”
Botic sees advantages in having several such metrics. “The audit process is one of the most complex processes, probably in business,” said Botic. “When you think about all the judgments that you all go through for your financial statements and preparing them, then the auditor makes his or her own risk assessment judgments, it’s an incredibly complex process. So I agree, not one metric necessarily is the only metric for sure. We’re inspecting the audit, so our inspectors are looking at what the auditor did or didn’t do, as the case may be, and as part of that, we may identify the accounting was wrong. That is one possibility, as Christina mentioned, the categorization of the reports. But in my view and from my prior life as well, and spending a lot of time in inspections, I actually think that the spread from the inspection deficiency rates for the filers that we looked at compared to the restatement number, I think that’s actually … reflective of the success of our inspection program.”
Ho recently
Accounting Today asked Ho during a press conference after the FEI CFRI session about the political pressure she faced, especially with President-elect Trump’s administration coming in and perhaps replacing PCAOB board members as happened during his first administration as well as the Biden administration.
“Like I said in my LinkedIn post, I’m not a political person,” Ho responded. “When I was at Treasury, I worked under two different administrations as a career person, and I always feel like accounting shouldn’t be political. But obviously, elections have consequences, and I’m not living in a cocoon that I’m not aware of what’s going on. I really do think that it’s in the best interest of the capital markets for political influence to be minimized to technical areas that require expertise, and that’s how I operate, whether I was in Treasury or even at the board here. I often feel like the areas we work in, auditing and accounting, are specialized and require expertise and I hope that the experts can always be allowed to voice their views and also do their job well.”
The PCAOB has been facing
“One of the really important things that regulators should do is to listen,” said Ho. “We should take comments very seriously and we should not rush into adopting standards or rules when we don’t have enough evidence to support the benefits and also the effectiveness of those proposals.”
She acknowledged that the increased risks and responsibilities of auditors, as well as the potential penalties, may be one factor that’s making it harder to attract young people to the accounting and auditing profession.
“I have certainly heard many anecdotal comments about the regulatory environment making the profession less attractive,” said Ho. “I’ve heard from people who talk about how they don’t want to do public company audits because of the inspections, and also our posture on enforcement. If you are not allowed to get indemnified, you know, as an individual, if something happened and there’s in your sanction, certainly people consider that as an increased risk for what they do. I think these things have an impact on the attractiveness of the profession and certainly impact talent. That is some of the anecdotal information I’ve heard. I’ve also heard from smaller firms that they are trying to stay under the 100 number because that will move them into annually, inspected so that they can stay under 100 so they don’t have to be inspected every year. Those kind of comments certainly concern me, because I don’t think this audit marketplace can afford less competition and also less talent. These are things that I think about and I’m concerned about.”
The PCAOB typically inspects each firm either annually or triennially (i.e., once every three years). If a firm provides audit opinions for more than 100 issuers, the PCAOB inspects them annually. If a firm provides audit opinions for 100 or fewer issuers, the PCAOB, in general, inspects them at least every three years.
Ho was also asked about the
“I have a good relationship with the IIA organization, and I actually have been an internal auditor before,” said Ho. “I understand what they do and their values and why it’s important. I certainly think that they play a key role in fostering the trust of the capital markets, because they are in the company. Different data that have been published that the external auditor, they come in and focus on the financial statements and the internal control over financial reporting. Their scope is limited to that, whereas the internal auditors are covering the entire company and the operations and and they have access to much more information and people than external auditors, so they play a key role in facilitating the trust. It looks like they are also focusing a lot on modernizing their standards. They have done that, and then they have been really focusing on AI as well. So I think that it’s important to make sure that all the key players in the financial report ecosystem are working together so that we can collectively ensure the quality of the financial reporting and the audit.”
Accounting Today also asked about the role of artificial intelligence and data analytics programs in auditing and if they could be degrading audit quality without the human element being present.
Ho pointed out that the PCAOB has published a
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Reducing the disparity in will-writing between Black and white households would shrink the racial wealth gap in America, according to a new study.
Eliminating the so-called will gap would cut the stubbornly wide difference in wealth among the two races by “a modest but meaningful” 10% over three generations, according to a working
“It’s a pretty easy thing to do to write a will — relative to, say, saving a lot more money,” said Gal Wettstein, a senior research economist with the center and one of four co-authors of the report, alongside Jean-Pierre Aubry, Alicia Munnell and Oliver Shih. “We think that it’s a pretty low-hanging fruit in terms of making progress.”
Their conclusions followed
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Despite a significant narrowing of the ratio of wealth between white and Black households between 1880 and 1950, it has stayed around 6-to-1 in recent decades amid “evidence that it has been growing wider since the 1980s,” according to the study.
The center’s number-crunching, using data from the University of Michigan
That reflects a juxtaposition in which “many African American households are gaining in income and are very quickly moving into the middle class, upper middle class” yet feel a sense of “intimidation to step into an office, an investment firm’s office, and engage in a conversation of, ‘Hey, I’d like to start investing,'”
“Oftentimes they feel comfortable having a conversation with someone that might have experienced the same thing that they have,” David said. “‘I finally am at a place in my life where I can start saving and investing. I want to learn more. I’d like to start investing. Oh, you’re the same way, you’re first generation. Wow, I don’t feel as intimidated. So starting with $25,000, that’s all right.’ Being able to have a comfortable conversation with like-minded and perhaps like-history individuals oftentimes needs to take place.”
Without those conversations, the heirs to a deceased relative who’s bequeathing an asset, such as a home, without a valid will miss out on benefits such as property tax deferrals, an easier sales or insurance process and the ability to “to pass along their assets in a way that preserves their value,” Wettstein said. For most Americans of any background, their home is likely to be their most valuable asset, he noted.
“Having a will can increase the economic value of the bequest,” he said. “Without a will, houses are passed along to heirs according to whatever the state default rules are, and those generally divide the asset between the heirs.”
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To calculate the potential impact of writing a will, Wettstein and the other researchers performed two different simulations “to account for the shortcomings of each of these two ways” of measuring the effect of will-writing “on bequests and of bequests on late life wealth,” he said. Each of the two simulations of a scenario in which Black households had a will at the same rate as those of white ones since 1980 resulted in a 10% reduction in the racial wealth gap.
“The racial wealth gap has proven to be a persistent problem, and one reason may be that Black decedents have a much lower likelihood of having a will,” the study said. “The robust finding is that such a change would have modestly but meaningfully reduced the wealth gap — by about 10 percent — by the time today’s prime-age workers reach their peak wealth years (ages 60-70) in 2040. While no one change is likely to completely close the racial wealth gap, interventions that increase the will-writing of Black households are one promising avenue for policy exploration.”
Accounting
Private equity isn’t a silver bullet for accounting firms
Published
2 hours agoon
November 21, 2024While the influx of private equity into the accounting profession has brought much-needed capital and a welcome alternative to firms, it’s definitely not for everyone, say experts.
In fact, the overwhelming majority of accounting firms won’t ever make a PE deal, Allan Koltin of the Koltin Consulting Group told attendees of Accounting Today’s inaugural PE Summit, held this week in Chicago.
“Private equity is not a silver bullet,” he said in his keynote address. “If you don’t do PE, that doesn’t mean you won’t be successful. But you do need to figure out what you’re going to do” to solve the issues of access to capital and resources that PE deals help with.
It’s important that firms can be successful without private equity — because many of them won’t be able to access it.
“Half the firms that want to go with PE can’t,” said Koltin, who is a co-chair of the PE Summit. “If you’re in the bottom half of earnings in accounting, you won’t be a good fit. I get calls from PE firms that want to pull out from a deal because they’ve looked at the firm’s numbers and don’t want to make an offer. ‘We don’t want to insult them.'”
Koltin and a number of other experts at the conference described the “quality of earnings” review that PE firms do as strenuous examination that often happens later in the process than accountants might expect that kind of due diligence to occur — and that can kill a deal.
“It seems like a lot of deals have happened, but believe me, the same number or more have died,” Koltin explained.
What’s more, while most of the earliest deals in the profession seem to have turned out well, that’s no guarantee that will be the case going forward.
“If you hear nothing from me, this is what you need to know: Not every PE deal will be successful,” Koltin warned. “There will be some home runs, and some good ones, and some that just don’t work.”
“There are going to be winners and losers,” agreed Phil Whitman, a co-chair of the event and CEO of Whitman Transition Advisors, in a panel session on the first day of the conference. “I bet there will be more winners than losers, but there are going to be losers, so you have to do due diligence, on both sides of the deal.”
So far, the PE deals are so good
Experts at the PE Summit were quick to point out that none of this should suggest that private equity has not been a net positive for the profession.
“Private equity brought to the landscape a new awareness of the issues that accounting firms are facing, and a sense of urgency started kicking into place,” said Bob Lewis, the third co-chair of the event and president of The Visionary Group.
Added Whitman, “Private equity is the white knight that came riding in to save day. They’ve got a better answer related to talent acquisition; they’ve got a better answer to firms’ succession challenges. We haven’t been able to solve those on our own.”
“PE firms raised the bar on our profession,” according to Koltin. “They’re making it more competitive. They’re making tougher decisions faster. They’re taking the partnership model and making it work better.”
The initial wave of accounting firms to make PE deals, almost by definition, have been those that were a great fit for that type of investment.
“Every single one of the deals that has been done seems to be working,” said Koltin. “If you open up the playbook of EisnerAmper and Citrin Cooperman — it’s been magical. They’ve hit it out of the park.”
That success comes down to matching up the right players on either side of the deal.
“It starts with a great accounting firm — strong leadership, strong organic growth, lots of next-gen talent,” explained Koltin. “And what would I look for in a PE firm? A PE firm that understands the people business. … I want a resource enabler — ‘You were successful before you met us. … We don’t want to get in your way.'”
Accounting
PCAOB adopts far-reaching firm and engagement metrics and firm reporting standards
Published
3 hours agoon
November 21, 2024The Public Company Accounting Oversight Board voted Thursday to adopt new requirements for auditing firms to report on various metrics for both the firm and its engagements, as well as change the annual reports the firms submit to the PCAOB.
The changes involve two standards, on
Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. These metrics — which will further PCAOB oversight activities and which can be used by investors, audit committees, and other stakeholders — cover the following eight areas:
- Partner and manager involvement;
- Workload;
- Training hours for audit personnel;
- Experience of audit personnel;
- Industry experience;
- Retention of audit personnel (firm-level only);
- Allocation of audit hours; and,
- Restatement history (firm-level only).
“The goal of this project before us today is to provide additional information about audit firms and their audits in both a consistent and comparable manner to bolster confidence, strengthen oversight, and empower investors and audit committees to make better informed decisions and help drive audit quality forward,” said PCAOB chair Erica Williams in a statement at an open meeting Thursday. “Today, investors and other stakeholders lack information about audit firms’ practices and their engagements — some of which may be shared with company management or their audit committees. Through this project, investors, audit committees and other stakeholders will have access to the same valuable information on firms and their engagements to help them make knowledgeable decisions regarding audit firms and investment related choices.”
Reporting of firm-level metrics will be required annually on a new Form FM, for firms that serve as the lead auditor for at least one accelerated filer or large accelerated filer. Reporting of engagement-level metrics for audits of accelerated filers and large accelerated filers will be required via a revised Form AP, which will be renamed “Audit Participants and Metrics.” Finally, limited narrative disclosures will be allowed (but not required) on both Form FM and Form AP to provide context and explanation for the required metrics.
After issuing its proposal in April on firm and engagement metrics, the PCAOB received feedback from a wide array of commenters and made some changes to the amendments as originally proposed
- Reduced the metric areas to eight (from 11);
- Refined the metrics to simplify and clarify the calculations;
- Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
- Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)
For the new requirements, the PCAOB also established a phased-in implementation to provide smaller firms with more time. The requirements will take effect for firms that audit more than 100 issuers first, and for other firms, the requirements will take effect the following year.
However, PCAOB board member Christina Ho, believes the new requirements were drawn up too hastily. “Our votes today are unprecedented,” she said in a statement at the meeting Thursday. “Never in the history of the PCAOB has the Board rushed to adopt new standards and rules in the middle of a historic transition to new SEC leadership, let alone adopt standards and rules that are not ready. The Firm and Engagement Metrics was proposed on April 9, 2024, and we received 46 comment letters. If adopted today, it will set the record for this Board as the fastest adopted standard which only took 226 days (7.5 months). The average number of days from proposal to adoption for the five standards adopted by this Board to date was 448 days (15 months), with an average of 32 comment letters. Essentially, although the Firm and Engagement Metrics proposal has over 40% more comment letters than the average of 32, it took half as much time as the other standards adopted by this Board. Political expediency is not evidence-based policymaking. Haste naturally harms work product quality, which will not escape any keen eyes.”
Firm reporting standard
For the firm reporting standard, the amendments adopted by the PCAOB on Thursday will modernize its annual and special reporting requirements to facilitate the disclosure of more complete, standardized and timely information by registered public accounting firms. Much of the information will be disclosed publicly, such as enhanced fee, governance and network information, as it currently is. But other information that;s potentially proprietary, sensitive or developing will be available to the PCAOB only for oversight.
The amendments enhance the required current reporting of information by registered firms on the PCAOB’s public Annual Report Form (“Form 2”), and the Special Reporting Form (“Form 3”) in several key areas:
Financial information – On Form 2, all registered firms will need to report additional fee information. The largest firms will also be required to confidentially submit financial statements to the PCAOB.
Governance information – On Form 2, all registered firms will be required to report additional information regarding their leadership, legal structure, ownership, and other governance information, including reporting on certain key quality control operational and oversight roles.
Network relationships – Registered firms will be required to report a more detailed description of any network arrangement to which a registered firm is subject. That includes describing the network’s structure, the registered entity’s access to resources such as audit methodologies and training, and whether the firm shares information with the network regarding its audits (including whether the firm is subject to inspection by the network).
Special reporting – For annually inspected firms, the amendments include a new confidential special reporting requirement for events material to a firm’s organization, operations, liquidity or financial resources, such that they affect the provision of audit services.
Cybersecurity – On Form 3, confidentially, registered firms will be required to promptly report significant cybersecurity events to the PCAOB. On Form 2, registered firms will also be required to periodically and publicly report a brief description of any policies and procedures to identify and manage cybersecurity risks.
Updated description of QC policies and procedures – A new form will require any firm that registered with the Board prior to the date that the PCAOB’s new quality control (QC) standard becomes effective (December 15, 2025) to submit an updated statement of the firm’s quality control policies and procedures pursuant to the QC standard.
After the original proposal in April on firm reporting, the PCAOB received input that caused it to modify the requirements to focus on specific disclosures that should be most useful to PCAOB staff, investors, audit committees and others. Among other changes made since these amendments were first proposed, the PCAOB:
- Streamlined fee disclosure requirements;
- Eliminated the proposed requirement that financial statements conform to an applicable financial reporting framework (such as U.S. generally accepted accounting principles) and instead prescribed certain minimum financial statement reporting requirements;
- Streamlined requirements related to firm governance and network arrangements;
- Maintained the Form 3 reporting timeframe of 30 days for existing special reporting items to ease potential burden – particularly for smaller firms – while still requiring more timely reporting of events of sufficient significance and urgency (such as cybersecurity); and,
- Modified the material event reporting requirement to better focus on information relevant to a firm’s audit practice – and limited the material event reporting requirement to firms that are annually inspected.
The amendments are subject to approval by the Securities and Exchange Commission. If they’re approved by the SEC, they will become effective in stages. The PCAOB is encouraging firms and others to carefully review the “effective date” sections in both adopting release documents to understand the various phases. The PCAOB intends to issue resources to assist firms with implementation of these requirements.
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