Empowering and Modernizing Responsibilities of the Auditor in Conducting an Audit

Date:
May 13, 2024
Speaker:
Kara M. Stein, Board Member
Event:
PCAOB Open Board Meeting
Location:
Virtual

Good morning. I am pleased that the staff has been able to craft a standard that modernizes, consolidates, and simplifies the auditor’s most basic responsibilities that are integral to an effective audit. 

Empowering the Auditor and Modernizing Responsibilities

Importantly, the new standard empowers the auditor to exercise professional skepticism and professional judgment through all stages of the audit. Moreover, the standard continues to emphasize that auditors have a duty of loyalty to investors. The foundation for auditor loyalty to investors was established by the Securities and Exchange Commission in 1930s: 

“[T] he auditor must realize that, regardless of [previous] positions[s]…of reporting to managers or to owner-managers, [the auditor] must recognize fully [the] responsibility to public investors by including activities of management [] within the scope of work and reporting [] to investors.”

That is why I am particularly pleased the final standard before us this morning anchors the role of the auditor in the obligation to protect investors. When faced with competing interests of multiple stakeholders, the auditor need only refer to the very first paragraph of this standard:

  • The auditor has a fundamental obligation to protect investors….
  • “This responsibility transcends an auditor’s relationship with management and the audit committee…”

Let there be no uncertainty in the mind of the independent auditor: loyalty to the investor – unequivocally – is mandated by this standard. US Securities and Exchange Commissioner Kathleen Casey said that the resiliency of our capital markets can only be assured by: “a common understanding that investors must always be our primary focus.”  I could not agree more.

Technology

Technology has always had and will continue to have its effect on the presentation and the audit of a company’s financial statements. Today’s standard contains the fundamental responsibilities integral to every audit. The auditor’s responsibilities remain constant regardless of the adoption of new and innovative technologies. 

Auditors remain empowered to develop and apply new tools and techniques in an audit if auditors adhere to the fundamental principles of due care, professional skepticism, and professional judgment. 

Moreover, the deployment of new techniques and technologies must conform to paragraph .01 of the new standard, which bears reiterating: "The auditor has a fundamental obligation to protect investors."  Accordingly, any deployment of technology that acts adverse to this requirement would be a violation of the standard. 

Presented Fairly

The second issue I wanted to briefly discuss is the auditor's role in assessing whether the financial statements are fairly presented. Many commenters objected to the auditor having a stand-back responsibility to evaluate whether management had fairly presented the company’s financial statements. 

As an independent party, the auditor is uniquely situated to make an informed judgement, with access to public and nonpublic information; all material facts and circumstances underlying the financial statements; and a view into management’s intent. 

As enterprises, global markets, and the way audits are conducted continue to evolve, such stand-back judgments may be increasingly necessary. 

I hope that the Board will reapproach this issue in the future as the role and importance of the auditor continues to evolve, making it clear that the independent auditor has the authority to make such an informed determination.

The Importance of Auditor Challenge to Audit Quality 

Investors have no tolerance for an independent auditor's work that nods without challenge. Too often, an auditor’s failure to maintain professional skepticism has been revealed to the markets at the same time as management’s misrepresentations or fraud. The standard before us today, for the first time, reorients and empowers the independent auditor with the freedom and the requirement to decide issues in an unbiased and objective manner. This is especially important when the auditor's conclusions may be contrary to the interests of management.

AS-1000 emphasizes an auditor’s professional and legal obligations to exercise professional judgment and professional skepticism free from bias and interference, to challenge and evaluate information freely. 

There should be no doubt in the minds of company managers, audit committee members, investors, or other stakeholders about the Board’s commitment to preserve and protect the interests of investors.

Before I conclude, I would like to thank the members of the staff who brought this project to fruition: from the Office of the Chief Auditor: Dominika Taraszkiewicz , Ekaterina Dizna, Hunter Jones, Cheryl Hennig, and Akiko Upchurch; from the Office of Economic and Risk Analysis: Michael Gurbutt, and Dylan Rassier; and from the Office of the General Counsel: Connor Raso, Vince Meehan, and Katie Reilly. Thank you for your hard work on this standard.