Audit Standard Proposals PAIBs Should Care About

The Public Company Accounting Oversight Board (PCAOB) has proposed changes to its auditing standards that might be overlooked because they were issued on the same day as final rules were issued related to the updated audit report. The new audit report includes discussion of Critical Audit Matters for the first time in the U.S.  This is an important development, but it should not cause us to overlook the proposed rules that were issued at the same time. The new rules focus on auditing accounting estimates and using the work of specialists.  Those areas are critically important.  The FASB is forcing more and more fair value accounting into our financial statements and footnotes. Therefore these estimates are taking on an increasingly important role in getting the financial statements right, i.e. free from material misstatement.

The parts that CPAs in business might be interested in include rules to look at the work of an outside specialist employed by management and view any potential management bias more skeptically. This is not only going to have a significant impact on the cost of the audit, but also on the cost of the specialist the company hires to help them value assets.  This is because the specialist will no longer be able to put the same reliance on management’s assertions about future cash flows from the business or assets being valued.

To sum it up, neither your auditor nor the valuation specialist you hire, will be able to trust you.  That is a harsh statement, but one that is not necessarily just hyperbole.  The PCAOB says the new rules are based on what they are seeing in their inspection reports.  I agree the increasing reliance on valuations that require management assertions as a key input certainly gives nefarious management an increased opportunity to do bad things in the financial statements.

I’m also sure there are examples of such behavior that were not necessarily caught by auditors in the PCAOB inspection reports.  We all know there are bad actors out there; otherwise we would not talk about “undue” pressure to hit earnings targets, and we wouldn’t have the litany of examples that gave us the creation of the PCAOB in the first place.  The question I have is do the inspection reports distinguish between management bias from non-PAIBs and management bias from PAIBs?

PAIBs who are CPAs operate under the same code of ethics as auditors with one major exception; we don’t have to be independent of our employer.  Other that that, we have the same responsibility to the public to make sure investors in public companies are protected and put ahead of our own personal interests.   If these new standards are going to raise dealing with management bias to another level, don’t we as fellow CPAs deserve recognition for our commitment to mitigate bad management bias?  Or should we all be treated like we are guilty until proven innocent even though we take the same oath to protect the public as out auditor colleagues?

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