Statement on Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit with Another Accounting Firm
I support this proposed standard because I believe it is important that there be clarity about the role of the lead auditor in engagements where a number of other auditors are involved. It is important that the lead auditor's engagement partner and engagement team in PCAOB audits understand what is required of them by our standards when they assign work on an audit to another auditor, and then review and rely on that work in forming their opinion. This proposed standard will strengthen those requirements by more clearly defining the lead auditor's responsibilities when using the work of other auditors, including by defining "engagement team" to extend the range of supervision to cover other auditors for whose work the lead auditor currently assumes responsibility under AS 1205.
A growing number of audits, particularly audits of global enterprises, are being conducted by more than one firm, legally distinct from one another, but commonly affiliated in a global network. The use by the lead auditor of such other auditors in an audit, often located in a different country, and at times in several different countries, can provide a number of benefits, including competitive and efficiency benefits, by allowing lead auditors to leverage the use of locally-licensed auditors. The locally licensed auditors may have language skills and knowledge of local culture and business practices that can be a great benefit to the lead auditor if properly used and supervised. The use of other auditors in a multinational environment, however, also introduces a number of challenges that can lead to inadequate audit performance.
As discussed in this proposal, the PCAOB's inspection reports show a significant number of findings in the conduct of multinational audits, including in the work performed by other auditors. Such findings are not, however, confined to the United States. The International Forum of Independent Audit Regulators' annual survey of inspection findings, including findings from more than thirty audit regulators around the world, has identified, for a number of years, supervision of group audits as a frequent area of inspection findings in the audits of public interest entities. In the four years that the survey has been conducted, there has not been a meaningful reduction in the number of those findings, which, to me, strongly suggests the need for closer examination and possibly amendments of the standards governing supervision of other auditors. To this end, the Global Audit Quality Working Group of IFIAR, which I Chair, is undertaking an effort, working with the six largest global network firms, to take a closer look at group audit issues with a goal of deepening our understanding about the root causes leading to these issues. We will also focus on how the auditing firms are remediating these issues and assuring audit quality across their networks. At the same time, the Global Audit Quality Working Group is also undertaking a coordinated multi-jurisdictional inspection of a single multinational audit performed across several countries in order to enhance the regulators' insight into the communications and understanding among and between the group auditors.
It is my understanding that some firms today have guidance and policies for the conduct of audits involving other auditors that exceed what is required by our current standards, but that is not true for all firms. It is important that the standards demand a level of performance in the supervision of other auditors that is consistent and that will assure a high and uniform level of audit quality whether an audit is conducted by a single firm or by many firms. Our current inspections show that some lead auditors, even where they themselves meet the requirements of the current standards, fail to detect inadequate work by other auditors that they engage. The proposed standard will be beneficial both to elevating the performance expectations in the standards, and also to prospective enforcement of the audit firms' obligations to supervise other auditors in accordance with the standards.
I would like to thank the staff of the PCAOB for their hard work in developing this proposal. In particular, Dima Andriyenko, Marty Baumann, Lillian Ceynowa, Matt Goldin, Stephanie Hunter, Hunter Jones, Joon-Suk Lee, Denise Muschette Wray, John Powers, Robert Ravas, Greg Scates, Andres Vinelli, and Keith Wilson. We are also indebted to the staff of the Securities and Exchange Commission for their thorough and thoughtful review of this proposal as it was developed. I support today's proposal and I look forward to reviewing the comments we receive in response. In particular, I hope that we will receive helpful input on our economic analysis and thoughts on the benefits and costs of the proposed standard.