Statement in Support of The Auditor’s Use of Confirmation, and Other Amendments to PCAOB Standards

Remarks as prepared for delivery

Thank you, Chair Williams.

The adoption of this standard advances the Board’s strategic goal to modernize our standards. The promulgation of a confirmation standard preceded the PCAOB.  The Board adopted the AICPA confirmation standard as an interim standard in 2003. 

At various times in our history, the Board has grappled with this standard.  In 2009, the Board issued a concept release; in 2010, the Board issued a proposal, and in 2022, the Board issued a re-proposal. With each step, the Board has evaluated, considered, and reconsidered stakeholder input. The version of the standard that we adopt today has benefited from the feedback the Board received via the comment process.

I support adoption of the new AS 2310. The new requirements strike the right balance.  They reinforce the importance of confirmation as an audit procedure that touches nearly every audit, and they reflect modern day methods of confirmation.

The original standard was promulgated at a time when confirmations were typically conveyed in paper form, via mail, for example. Given the proliferation of the use of technology in the confirmation process, including to confirm balances and transactions, our confirmation standard should also evolve to contemplate current auditing practices.

In performing an audit, the evidence obtained provides the basis for verifying management’s assertions. Audit evidence is of no value if it is not reliable. As such, auditors have long followed the premise that external audit evidence – or evidence obtained from a knowledgeable source that is independent of the company – is more reliable. It is less susceptible to management bias or manipulation. And, correctly designed and executed confirmation procedures can provide one of the most reliable external pieces of audit evidence available to auditors. Particularly, when the auditor maintains control over the confirmation process, which is a requirement retained in the new standard. The new standard underscores the fundamental importance of confirmations as a uniquely reliable source of audit evidence, of course, when appropriately designed and executed.

The new standard includes additional guidance for auditors. It provides auditors with direction in situations where it would not be feasible to obtain information directly from an external source about accounts receivable, such as in some industries where there is a long history of customers not responding to paper-based confirmations.

In addition, the new standard provides specific direction for circumstances where the auditor is unable to confirm, and includes examples of alternative audit procedures. These principles-based aspects of the new standard reflect that application of confirmation procedures must be flexible to account for a variety of circumstances.

Lastly, the new requirements emphasize the importance of Audit Committee oversight. Significant risks are already required to be communicated to the audit committee through AS 1301. For significant risks associated with either cash or accounts receivable, the new standard requires the auditor to communicate to the audit committee when the auditor did not perform confirmation procedures or otherwise obtain audit evidence by directly accessing information maintained by a knowledgeable external source. In order for Audit Committees to effectively oversee the audit, they need to be informed of decisions critical to auditing areas of significant risk.

The adoption of this new Confirmation standard is the culmination of tremendous efforts over many years.  It is another step in the Board’s efforts to advance audit quality, in furtherance of our investor protection mandate. 

For their efforts in getting us to this finish line, I would like to thank Barb Vanich, Dima Andriyenko, Lisa Busedu, David Hardison, Heather Jossem, and Dani Verbeck in the Office of the Chief Auditor; Martin Schmalz, Mike Gurbutt, Tian Liang, Tasneem Raihan, and John Cook in the Office of Economic and Risk Analysis; and Annie Yan, Keisha Patrick, and Connor Raso in the Office of the General Counsel.  For their valuable input and perspectives, I would like to thank the Division of Registration and Inspections and the Division of Enforcement.

I also would like to thank my fellow Board members and my staff for their efforts on this project. 

Finally, I would like to thank the Securities and Exchange Commission’s (SEC) staff, including the staff of the SEC’s Office of the Chief Accountant, for their support and assistance.