I am pleased to be with you today at this important meeting between the PCAOB and the representatives of the academic community who have an interest in our work. We share the goal of seeing accounting students enter the profession with the highest possible level of preparation for the responsibilities that they will face as accountants and auditors. I support the efforts of our Office of the Chief Auditor to focus in this meeting on some issues that can be taken back to the classroom.
In my remarks, I would like to bring you up to date on some of the PCAOB 's efforts in the international arena. Specifically, I want to talk about my work with IFIAR, the International Forum of Independent Audit Regulators and also give you some insight into the important contributions that the PCAOB's staff has made to supporting IFIAR's work and how that work, in turn, aids the PCAOB is fulfilling our mission. I hope it may be of interest to you and your students.
IFIAR GAQ Working Group
I currently serve as the Chair of IFIAR's Global Audit Quality Working Group. We are a group of nine regulators, from Australia, Canada, France, Germany, Japan, the Netherlands, Singapore, the United Kingdom, and the United States, who meet several times a year with the leaders of the global audit networks to discuss issues relating to audit quality. Our objective is to urge or, perhaps more accurately, pressure the global audit networks to drive quality throughout their member firms around the world.
Many of you may already be aware that IFIAR conducts an annual survey of its member regulators' global inspection findings. This survey was first conducted in 2012 and the results of the survey have been published for five consecutive years. This survey was suggested by the PCAOB and has always been conducted primarily by PCAOB staff, including members of our Office of International Affairs with assistance from staff members from the Division of Registration and Inspection, the Office of Research and Analysis and our office of Information Technology.
The survey was designed to identify common findings in the inspections of audits of public companies around the globe. The survey has found a high level of commonality in the audit issues identified by audit regulators in different countries. The survey has also tracked a consistently high rate of findings. In the most recently released survey, the overall rate of findings showed that the audits of 42% of public entities that were inspected had at least one finding.
The most frequent areas of findings were accounting estimates and fair value measurement, internal control testing, audit sampling and revenue recognition. The survey defines a finding as a failure in an audit to obtain sufficient audit evidence to support an opinion that the financial statements are fairly stated. PCAOB staff, working with a task force of international regulators, designed the survey methodology and the definitions of the term "finding" that have now become widely used by regulators in preparing the survey responses.
After seeing these high rates of findings year after year, the GAQ Working Group challenged the global network firms to reduce their rate of findings by twenty-five percent (25%) within four years. We started this initiative in 2016, so we are on the second survey since it was initiated and we plan to report publicly on progress at the two year interim point in early 2018.
The progress is being measured only in the inspections conducted by the nine working group members and reported to the IFIAR survey. We are confining the initiative to results from the 9 working group members rather than the larger group of 30 or so regulators who contribute to the annual survey because we can more easily monitor the consistency of the reports of the smaller group into the survey.
The starting rate of findings for the working group's members was 39%. If the firms achieve the goal we have set for them, their inspected audits with one or more finding would be reduced to about 30%. That is still an unacceptably high percentage of findings, but it is a start. We are fully aware that there are many issues with the larger IFIAR survey, including that the regulators reporting each year are not always the same, and that inspection methods around the world, including selection methodology and areas reviewed, also can vary. But by confining this initiative to a smaller group, we hope to be able to mitigate some of these problems.
The quantitative goal we have set gives the global network firms for the first time a specific and measurable goal to strive for, and this puts a greater degree of accountability around their efforts. We hope that by going through this exercise the firms will think more deeply and strategically about how to reduce inspection findings. The PCAOB, with about 900 foreign accounting firm registrants, may also benefit from the initiative if it leads to improvements in audit quality for non-US firms that participate in audits of our domestic companies.
Due to the length of time it takes for improvements in firm audit methodologies and practices to show up in the IFIAR survey, we do think the full four year period is needed to show the improvements we have targeted.
Root Cause Analysis
Both the PCAOB and IFIAR are studying the root causes of audit failures. The GAQ working group will be focusing specifically with the global audit networks on the root cause of failures to consistently execute audits without flaws. We have already spent significant time with the firms discussing the root causes of specific audit failures and how the firms determine the underlying causes of failures that result in inspection findings and failed audits. We want to go deeper in this area to understand the root cause of why, even when causes of specific failures are identified and addressed, the firms cannot drive consistent execution of their audits. At the PCAOB, we have pushed audit firms to deepen their root cause analysis efforts and through IFIAR we are trying to encourage that on a global level.
An increasingly unified chorus of voices, both inside and outside the profession, has been warning the PCAOB and other regulators that audit is on the brink of a great transformation. We know the academic community is already embracing this change and audit firms are calling for talent coming out of universities with training in data analytics and computer sciences. The global audit networks are leveraging the capabilities of new technologies and making investments that will introduce new efficiencies and audit techniques that we as regulators need to understand. As we are doing at the PCAOB, we have launched an effort through the GAQ working group to track these developments and share them with the members of IFIAR. Going forward, part of this effort will include trying to understand whether auditing standards need to be revised to accommodate advances and whether our inspections techniques and selections will need to evolve.
Another focus area for the GAQ working group with the global audit networks has been project management by the audit networks. This has also been an area of growing interest at the PCAOB. The members of the working group have reached a consensus that good project management is emerging as central to audit quality. It is a relatively compelling and intuitive point: When the work of an engagement is well-paced, and accomplished in a timely fashion throughout the work period, engagements are of higher quality. You probably observe this in the work of your own students.
When the work slips into the last minute, engagement teams have a harder time maintaining their skepticism and executing high quality audits. The firms are noticing this and starting, to various degrees, to monitor how the engagement teams set timelines and meet those deliverable dates. The firms are leveraging technology in a variety of ways to do this. I am optimistic that better project management will help boost audit quality once the firms effectively implement these systems and processes globally. I think this will be an interesting area for further study by academics and I look forward to incorporating your work into our ongoing conversations around this topic with the firms.
In conclusion, the auditing profession that we regulate and that you study and train students to enter, is on the threshold of unprecedented change. These changes are also occurring in a world that despite what may appear to be halts or even reverses, will only grow ever more globally interconnected. We need to work closely together to monitor these changes and to shape them to the extent we can to ensure the continuing relevance and, indeed, the survival of a strong accounting and auditing profession.