I join my colleagues in thanking the staff for this recommendation, which is the first standard-setting recommendation for this new Board.
Multi-national companies can be complex, particularly when significant operations or sales occur around the globe. It is not uncommon for operations to be conducted in countries with different cultures, languages, business practices, and legal architectures. Correspondingly, the assurance teams responsible for auditing multi-national companies can be complex.
The size and complexity of an audit may require a wide variety of firms and individuals to be involved, including foreign audit firms and auditors. And that is our focus today – on the firms and individuals involved in multi-location audits.
Advances in technology, automation, algorithms, and even artificial intelligence cannot replace the skepticism and professional judgment of individual auditors. In fact, professional judgment will always be an essential element, because it can be augmented, but never replaced with technology.
The journey required to update this standard appears to have been long and laborious. Updates to the standard were initially proposed in April 2016, with a supplemental release in September 2017 and another supplemental release in September of last year. However, this standard is a necessary complement to the Board’s oversight to address adverse audit outcomes, which can be driven by poor coordination and communication amongst auditors.
The staff have cleverly developed a mix of both principles and rules to address audit deficiencies and weaknesses that have been observed. The amended standard amplifies the lead auditor’s requirement for planning and supervising the work of audits involving accounting firms and individual accountants (“other auditors”) by requiring a risk-based supervisory approach. It also dictates certain procedures that lead auditors must perform in order to rely on the work that the other auditors perform, such determining whether the work was performed as instructed and assessing whether additional audit evidence needs to be obtained.
I believe that the most significant improvement, however, is the requirement for the lead auditor to understand, assess, and respond to the other auditor’s knowledge, skill, and ability. This includes the other auditor's knowledge and experience with independence and ethics requirements.
In addition, investors are well served by new and enhanced requirements for the lead auditor to determine the sufficiency of its own participation – that means the firm signing the report has performed a meaningful portion of the audit in addition to closely supervising the work of the other auditors.
Again, I want to thank the staff, including Stephanie Hunter, Andrew Cleve, and Hunter Jones from the Office of the Chief Auditor, as well as Tian Liang and John Powers from the Office of Economic and Risk Analysis. I would also like to acknowledge the important contributions of Lillian Ceynowa, who is no longer a member of the staff, but was integrally involved in this project for several years.