PCAOB Survives And Continues To Share Guidance With Audit Committees

Despite the future of the Public Company Accounting Oversight Board coming under threat, the PCAOB continues to release guidance, implement rules, conduct inspections and pursue enforcement actions. While the PCAOB remains safe for now following the Senate parliamentarian striking a provision in the One Big Beautiful Bill Act that would have eliminated its funding and folded its responsibilities into the Securities and Exchange Commission, there remains a political appetite to do away with the PCAOB. Whether the political will is strong enough, especially considering other priorities that Congress is likely to focus on, remains to be seen. In the meantime, auditors and audit committees should expect the PCAOB to remain engaged.

Actions recently taken by the PCAOB include hosting workshops to assist with the implementation of the new quality control standard, reporting on broker-dealer audits, and releasing new inspection reports and enforcement actions. Most pertinent to audit committees is the release of the PCAOB's 2024 report of its findings from discussions with audit committee chairs.

The PCAOB also published an article reminding prospective auditors what they should consider prior to engaging with a company and the responsibilities of successor auditors. Audit committees should be prepared for these questions and considerations, which include:

• Whether there have been changes to the ownership, control,management or directors at the company;
• The qualifications of the company's management team andaudit committee;
• Risk factors at the company, such as previous restatements ormaterial weaknesses, integrity of management and potentialindependence concerns; and
• The consideration of opening balances and reauditengagements of successor auditors

The passage of the Sarbanes-Oxley Act in 2002 elevated the important role and responsibilities of the audit committee and enhanced the oversight of the auditors of public companies. Given their respective responsibilities, the PCAOB actively seeks to communicate with audit committee chairs throughout the year to inform the PCAOB's priorities and future inspection activities.

In 2024, the PCAOB interviewed 272 audit committee chairs, up from 230 in 2023. Of the 272 audit committee chairs interviewed, 78% had not previously spoken to the PCAOB, 77% had over 5 years' experience serving on an audit committee and 46% had over 10 years' experience doing so.

Key takeaways from this year's audit committee chair conversations include:

• Attributes Impacting Relations Between Audit Committee and Auditors: The PCAOB asked audit committee chairs what made for a positive relationship between the audit firm and the audit committee. Key factors identified that contribute to positive relations between the audit committee and the audit firm include: communication (including frequent and transparent updates and availability for meetings); coordination among the auditor, the audit committee and management; and technical expertise along with public company auditing experience (and the retention of individuals with this experience).
• Importance of Firm Inspection Reports: Firm inspection reports and other information made publicly available by the PCAOB about auditors help inform the decisions of audit committees regarding whether to reappoint their auditor and when selecting a new auditor. The audit committee chairs noted that auditors tend to summarize the key findings in the PCAOB inspection reports for the audit committee and discussions generally focus on the key findings of the inspection reports and measures that the audit firm has taken to address those findings.
• Economic and Geopolitical Environment: Many audit committee chairs noted that they had discussions with their auditors regarding how the audit team planned to address economic and geopolitical uncertainties while conducting the audit. Risks related to elevated interest rates, fraud and technology, supply chain disruptions, and inflation were frequently mentioned concerns for audit committee chairs. We expect these to be common discussion topics again in the current year audit cycle.
• Audit Committee Communications with the Auditor: 63% of audit committee chairs reported having robust discussions with their respective auditors, exceeding the required scope of communication. These discussions touched on revenue recognition, lease accounting, current expected credit losses, cybersecurity disclosures, and the SEC's climate-related disclosure requirements. Critical accounting matters (CAMs) were also robustly discussed, although some audit committee chairs noted CAMs should be briefer, use less technical language, and be drafted in a more company-specific manner (and it should be noted that how and when CAMs are communicated is being researched by the PCAOB to determine whether there is a need for guidance or changes to PCAOB standards, or if other regulatory action is necessary to improve reporting of CAMs, as recommended by the Members of the Investor Advisory Group).
• Use of Artificial Intelligence in the Audit: Both optimism and caution dominated thoughts regarding the use of emerging technologies such as artificial intelligence (AI) and automation in audits. Audit committee chairs noted that they see AI as having the ability to enhance the performance of audit procedures, are excited about the ways automation and analytics can enhance efficiencies in the audit process and are interested in how the AI-associated efficiencies may help reduce audit fees. Conversely, audit committee chairs are also concerned about auditors becoming overly reliant on AI such that the auditors lose the professional skepticism necessary to successfully complete audits. Proper training of auditors to utilize new technologies, including AI, was also raised in interviews as a concern. In particular, audit committee chairs noted that while AI has the potential to enhance the performance and efficiency of audits, it should not lead to auditors overly relying on AI outputs. Audit committee chairs want assurances that human oversight is not replaced and want audit firms to ensure auditors are trained to challenge AI outputs rather than accept them at face value.