Statement on Proposed Auditing Standard on Auditing Accounting Estimates, Including Fair Value Measurements, and Proposed Amendments to Auditing Standards For Auditor’s Use of the Work of Specialists

I support the Proposed Auditing Standards that have been presented to the Board today. Both of these standards provide strengthened and clarified standards for auditors' performance in some of the most critical areas of the audit.

Accounting Estimates, Including Fair Value Measurements

Our proposed standard on Estimates and Fair Value Measurements will present in one standard what we previously set forth in three separate standards. This should make the standards easier to use and understand. In addition, the standard will drive attention towards the potential for management bias in estimates, and will call for sustained professional skepticism from the auditors when dealing with estimates and fair value measurements.

Auditing estimates and fair value measurements is inherently challenging and is an area where audit firms are struggling to consistently do what the standards require. In the first global Survey of the International Forum of Independent Audit Regulators ("IFIAR") Members' Audit Inspection Findings, and in the following four surveys, the rate of findings in these areas has been consistently high. When IFIAR started the survey in 2012, inspection findings involving estimate issues including fair value measurement and loan loss provisioning made up 20% percent of the total number of reported findings.^[1] Audit failures involving estimates, including fair value measurements and loan loss provisioning continued to appear in the top three most common findings, globally, in the IFIAR survey reports. Each year, these findings made up at least 20% of all findings reported in the survey.^[2] The trend continues, and in 2016, of all the audits inspected in the area of fair value measurements and allowance for loan loss, 32% had findings in this area.^[3]

While we cannot reduce the challenges inherent in auditing estimates, we can present clear standards that emphasize the importance of risk assessment, awareness of the possibility of management bias and the need for professional skepticism to support the performance of high quality audits. We also can reduce the number of standards covering a single topic, since multiple standards can lead to potential confusion and inconsistent practice. I am pleased that our proposal does so.

The Auditor's Use of the Work of Specialists

Given the common involvement of specialists in the development of estimates, it makes sense that our standard regarding the Use of the Work of Specialists is being proposed at the same open meeting. These proposed amendments more rationally categorize specialists into the three categories: specialists employed by the audit firm; specialists outside the audit firm but engaged by that audit firm in connection with an audit, and specialists employed by the company being audited. In addition, the amendments will emphasize the need for the auditor to give extra attention to and evaluate the work of a specialist employed by the company being audited since that specialist is not independent of the company.

I look forward to receiving comments on both proposals. I thank the teams at the PCAOB in the Office of the Chief Auditor, as well as our Office of General Counsel and the staff of the Securities and Exchange Commission for their excellent work.