Today I participated in a panel session on auditor objectivity and skepticism at the Annual Meeting of the American Accounting Association and used slides (available to the right under "Related Information") to describe related PCAOB professional standards and oversight activities.
It may be a bit unusual for a PCAOB Board Member to quote specific provisions of auditing standards. But today, the words of the standards can stimulate discussion and focus us on the critical and continuing importance of professional skepticism and objectivity in the audit process.
Academic research and PCAOB standards and oversight emphasize that professional skepticism is fundamental to the role and performance of auditors. The application of professional skepticism throughout the audit is a foundational aspect of audit quality and the integrity of the audit process.
Investors and the public rely on this audit process to work. High quality auditing by independent and objective auditors is key to the effective functioning of our capital markets and the protection of investors and the public interest.
Yet, the PCAOB and other regulators around the world have expressed concern about the continued high rate of audit deficiencies identified in their inspections and other oversight activities. And many of these deficiencies appear to be associated with the insufficient exercise of professional skepticism.
Deconstructing the application of professional skepticism in auditing is complex and crosses multiple disciplines, including auditing literature, theory, and practice; corporate governance; business models; human behavior; and ethics.
I applaud the efforts of the academic community in its research and examination of professional skepticism, and hope that it will provide a bridge to a more successful practice of skepticism in auditing.
In my presentation, the views expressed are my own, and do not necessarily reflect those of the PCAOB Board or staff.
PCAOB professional standards reflect the importance of professional skepticism throughout the audit process.
The framework for auditor objectivity and professional skepticism is reflected in PCAOB professional standards. The standards demand the appropriate application of professional skepticism throughout the audit process, and emphasize that professional skepticism:
- is a component of the auditor's general duty of care that applies throughout the audit;
- is an attitude that includes a questioning mind and a critical assessment of the appropriateness and sufficiency of audit evidence; and
- comprises three elements — auditor attributes, mindset, and actions.
The three elements of professional skepticism — auditor attributes, auditor mindset, and auditor actions — permeate the entire audit process and are integral to audit quality. These elements of professional skepticism interact dynamically as auditors respond to conditions and pressures that change or arise during the audit. As a result of skeptical judgments made during the planning and performance of the audit, for example, the level of skill and expertise needed, as well as other auditor actions and audit work conducted are likely to change during the audit.
The standards also emphasize the importance of exercising professional skepticism when considering the possibility that a material misstatement due to fraud could be present. As part of exercising professional skepticism, the standards require ongoing questioning of whether the information and evidence obtained suggests that a material misstatement due to fraud has occurred. Additionally, the standards state that in exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest.
The attached slide presentation provides details about how these elements of professional skepticism are integrated into the PCAOB professional standards.
Knowing Skepticism When You See It?
The many considerations that shape an auditor's professional skepticism make it challenging to assess its application by an individual auditor, an audit team working on a particular audit, or across an audit practice.
Even when it is clear that a failure of professional skepticism has occurred, the underlying root causes and reasons for the failure are often multifaceted and therefore, hard to pinpoint. Academics and members of the profession have struggled to find ways to detect and assess professional skepticism throughout the conduct of an audit. Part of this challenge arises from the need to better understand how the elements of professional skepticism can be associated with specific auditor qualities and audit processes.
Research also shows the need to study and better understand the influence of pressures and threats to auditor attributes, mindset and actions that are involved in appropriately applying professional skepticism throughout the audit process. A better understanding of these threats and pressures can assist in identifying and implementing appropriate safeguards to mitigate against them to improve the reliability and quality of audits.
The attached slide presentation also includes highlights of some PCAOB observations and findings about the consequences of insufficient auditor professional skepticism in audits; some of the impediments that auditors may confront in exercising professional skepticism; and some actions that firms, engagement partners, and individual auditors can take to more effectively exercise skepticism.
Call to Action
In examining the issue of professional skepticism in auditing, it is important to highlight the ultimate objective of audits — to provide an independent and objective assessment of financial reporting for the benefit of investors and the public interest.
The PCAOB professional standards make clear that objectivity and professional skepticism must be manifest in the capabilities of audit firms and staff, the judgment they apply in selecting the appropriate audit procedures and conclusions, and the conduct of the audit work.
Our inspection results all too often show that substantial progress is needed in order to more consistently achieve the appropriate application of professional skepticism throughout the audit process and across audits.
Additional efforts are needed to better understand how the framework of professional skepticism applies across varying audit situations. This may enable practitioners to find ways to monitor the application of professional skepticism and recognize and respond to its threats throughout the audit process. Finally, we need to develop a high level of awareness and attention to these issues at all levels in the profession.
The good news is that regulators, academics, and audit firms are increasingly focusing their attention on advancing the understanding and application of professional skepticism. In particular, we are seeing some exciting academic interest in this issue, and collaboration among the academic community and the profession in working to advance theory, training, and practice in this critical area.
The American Accounting Association has shown tremendous leadership over the years in promoting excellence in accounting education, research and practice, which is vital to a strong profession. I applaud the efforts of the academic community in its thought leadership and proactive work with a wide range of stakeholders — including regulators, investors, audit committees and practitioners -- on the issues of professional skepticism, with a view toward improving audit quality and investor protection.