In the past year at the PCAOB, we’ve had a lot of change. At the beginning of the year, and for the first time since the PCAOB was created in 2003, we had an entirely new set of five board members join. That’s been really exciting, with them thinking through why we do things and doing a lot of outreach in their strategic planning activities.

The board just adopted a new strategic plan a few weeks ago, but my remarks will be about the Office of the Chief Auditor’s activities.

I want to start by talking about changes that we’ve made to provide greater transparency to what we’re doing in the Office of the Chief Auditor related to standards. The board is trying to think through enhanced engagement with stakeholders. This was part of a change that we made to our standards setting and research projects. Then I’ll provide specifics about some of our research and standards setting projects, and what you can expect in the near term.

Website Updates

Previously in the Office of the Chief Auditor, we would publish a quarterly standards setting update as a PDF; we have moved away from that. In October, we launched a new webpage, and we’ve gotten good feedback. This allows us to update projects as developments occur, rather than just quarterly. Also, we can include more information; each project has its own page so that you can go and see additional information rather than going through a lot of different places trying to find it.

You can also sign up for updates, so if one of our projects changes, you get an e-mail. The website is also a mobile-friendly design.

Each project page includes the objective and the most recent action for the project. It includes background information, as well as status; that is, what we’re working on now and what you can expect next. In addition to the new project pages, we also enhanced the description of our standards setting process. It talks about what we go through in connection with considering projects for our research agenda or standards setting agenda. That starts with what we call an environmental scan to understand current or emerging issues. We’ve done a lot of consideration of that, including our June Standing Advisory Group [SAG] meeting. We’ll be talking to the board in 2019 about any further projects to add to our research and standards setting agendas.

Current Projects

Next, I want to talk about specific projects. At our June SAG meeting, several board members were very supportive of moving through those projects that were close to the end in the pipeline. Those are the accounting estimates project, the specialist project, and the other auditors project.

As noted on our website, the staff plans to make a recommendation to the board on accounting estimates and fair value before the end of the year. [Editor’s Note: The standard on accounting estimates was adopted on December 20, 2018; see Release 2018-005.] As for accounting estimates, there was a 2017 proposal to replace the board’s existing three standards with one new standard, with the goal of enhancing and aligning the requirements regarding accounting estimates and fair value measurements, and also encouraging professional skepticism and devoting greater attention to potential management bias. It also would add a new special topics appendix to address certain matters relevant to auditing fair value of financial instruments, including information from pricing sources. The goal has been for us to keep our project on accounting estimates and specialists together, because specialists are so often used in auditing accounting estimates and fair value measurements. [Editor’s Note: The amendments on specialists were also adopted on December 20, 2018; see Release 2018-006.]

On specialists, a 2017 proposal would amend the evidence standard to add a new appendix addressing the work of a company specialist based on the risk assessment approach in our standards. It would also add a new appendix on supervising auditor-employed specialists, and replacing the current standard on using the work of a specialist with a new standard that sets forth requirements for auditor-engaged specialists.

The other project we’re actively working on is a project on other auditors. The board had previously issued a proposal and also a supplemental request for comment on that, so it’s had much public outreach. We even see with Form AP disclosures that other auditors can be used quite extensively in certain audits. We’ve seen over 60 other auditors used on just one audit engagement. We are moving forward to strengthen the requirements regarding the auditor’s supervision of other auditors and a more uniform approach within our standards on how that should be done. I expect there would be more on that in early 2019.

Completing those three projects is requiring significant staff resources for us. In early 2019, we plan to work with the board to evaluate the other projects on our research and standards setting agenda, and also to see if the board would like to add any additional projects based on input from our environmental scan. All of that will be under the umbrella of aligning our agenda with the board’s strategic goals. There are a couple of areas that I want to point out where we are devoting significant attention. One is quality control; we know the IAASB has a proposal, and we have a person working on that task force monitoring the IAASB’s activities. We also had a discussion with our SAG last week and our Investor Advisory Group earlier in November on quality control, so I would expect further developments in 2019.

Additional Projects

Data and technology is another very significant project—ways to better improve the audit, what we could do to improve our standards. That’s a big focus, and we’ll continue to see more in 2019.

The new auditor reporting standard is a big change for auditors. The audit report for about 70 years had been a standardized opinion. The board adopted changes to the standard; everything but critical audit matters has already gone into effect.

An area where we’ve received a number of questions has been auditor tenure, so the staff has issued guidance to assist with implementation. We issued another update at the end of 2017, and the most recent update was in August 2018. It provides information and addresses some of the questions we had been hearing about determination of tenure, as well as other areas.

Critical Audit Matters

The big change in auditor reporting will be the communication of critical audit matters (CAM). The board provided for a phased effective date to give auditors time to implement that part of the standard, so it didn’t go into effect with the other changes earlier this year. For audits of large accelerated filers, the communication of CAMs becomes effective for fiscal years ending on or after June 30, 2019, and for audits of all other companies to which the requirements apply, December 15, 2020.

The big change in auditor reporting will be the communication of critical audit matters (CAM).

The board excluded certain entities from applying the communication of CAMs: emerging growth companies, brokers and dealers, investment companies other than business development companies, and pension plans. Those companies could voluntarily choose to disclose.

So what is a CAM? It’s a matter that’s communicated or required to be communicated to the audit committee that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment. It’s really intended to get at those matters that kept the auditor up at night. What are the most significant issues in the audit? The board indicated that it expected in most audits that the auditor would identify at least one CAM.

The standard includes factors for the auditor to consider, and it also lists the communication requirements to be disclosed in the audit report, which would include: identifying the CAMs, describing the principal considerations that led the auditor to determine that it was a CAM, describing what the auditor did to address the CAM in the audit, and then referencing to the financial statement a counterdisclosure.

Investors are very excited to see this. They are hopeful that auditors will provide audit-specific information, and interested in learning what the significant issues are for the auditor. We know that many auditors are already working on doing pilot testing and dry runs of CAMs, working with audit committees and management. We’ve been hearing some very positive feedback. We’re very encouraged that this is happening, so that once it does go into effect, it’s not catching anyone off guard. We know it’s a big change, and if questions come up, we want to hear what those are.

Form AP and AuditorSearch

Form AP and AuditorSearch is something also that went into effect a few years ago. It was a huge effort for the board to issue any standard requiring disclosure of the engagement partner name and other participants in an audit. It seems to be working very well now, with firms filing Form APs for audits that have been completed.

AuditorSearch is a feature on our web-site where auditors, investors, academics, and others can search information, look up names of an audit, look up names of engagement partners, and see what other audits have been done. Over 730,000 people have performed searches on AuditorSearch. There’s an option to download every single Form AP that has been filed, and that’s been used 9,600 times. We also have been receiving questions from academics about the search features, and we’re looking to do research now that this information is available in public.

More than 28,000 Form APs have been filed. The first one was filed February 1, 2017, the first day this went into effect. It continues to grow and be even more valuable over time, where others will be able to see trends. Our investors told us at our recent meeting that they’d like the PCAOB to provide more transparency around some of these statistics, so that is something the board is giving consideration to.

Jennifer Rand, CPA is deputy division director and deputy chief auditor at the PCAOB, Washington, D.C. The above is an edited and condensed transcript of her remarks at the conference. The views expressed are the author’s own personal views and not necessarily those of the PCAOB, its board, or its staff.