Advisory Panel Discusses Ideas to Increase Transparency of Audit and PCAOB Inspection

June 22, 2023 

During a meeting of the PCAOB’s Investor Advisory Group (IAG), a subcommittee of the panel discussed a set of 11 recommendations that, if implemented, would provide publicly more information about the board’s audit firm inspection process and results, such as the name of the public company whose audit was reviewed in individual inspection reports.

Today, the company name is identified in capital letters only as Issuer A, for example, and some investor advocates have long advocated for greater transparency. It remains to be seen whether the disclosure will ever happen because the board, during its 20-year history, has decided to keep that information secret. Even some IAG members may not be on board, judging from the panel’s discussions.

The discussions took place in Washington on June 7, 2023, and the panel will continue to discuss with a goal of voting on them in the future. The recommendations loosely represent the views of the subcommittee.

The following 11 recommendations were presented by IAG member Alicia Damley, who is a board member at the University of Toronto and Manhattan Graphics Center and co-founder of Aarya Capital. Damley said the following recommendations are in the order of priority.

Set of Recommendations

First, information that was provided by the audit firm and data collected as part of the inspections that are currently made public should be available in a searchable database.

Damley said this will facilitate easier access and analysis of the data. Investors and others can draw meaningful and holistic conclusions about audit quality trends and issues.

The second recommendation was to name the company in inspection reports.

“The Sarbanes-Oxley Act of 2002 did not require that such information be withheld from investors and the public,” Damley said. “The disclosure of the name of a public company will help investors interpret and collate a myriad of other information that’s already made public by the board and also would allow that to interface with other searchable databases that are part and parcel of other regulatory bodies and other entities that share information or provide information regarding that. The ability to be able to cross reference and integrate much more tightly not just within the regulatory fabric but also beyond that would make a significant difference and the key data point that is not available right now is the issuer.”

IAG Co-Chair Amy Copeland McGarrity, chief investment officer of the Colorado Public Employees’ Retirement Association, said she had concerns that negative inspection findings could adversely impact the public company because stock prices will drop when the findings are made public.

There are upsides as well as downsides to making the company name public, Damley acknowledged.

“Clearly some of the pros are that you can now connect this information with the variety of other information that is available. In addition to that, speaking as both an investor as well as an external auditor in my previous life, the fact that the audit was determined to have issues does question quality of the financial statements,” she said. “While in one sense, and speaking only for myself, I do agree with what you’re saying, I am not so sure that the issuer is necessarily scot-free in all of this. There are nuances to all of this. I think ultimately determining what the greater outcome and impact is from an investor and public perspective would be the way in which to assess this as opposed to just with the issuer’s perspective or just from the external audit firm’s perspective.”

McGarrity said the group should continue to discuss it because “there are some far reaching implications there, but I don’t disagree with your conclusion either.”

Third, the subcommittee wants the PCAOB to consider expanding the searchable database described in the first recommendation.

“We understand that the PCAOB has a fair amount of additional information,” Damley explained. “Our subcommittee has previously requested a list of other information that the PCAOB does collect, and unfortunately we do not have that list.”

The subcommittee wants more information about:

1. Companies, such as total assets, total revenue and date of last inspection.
2. Audit engagement details, such as firm tenure, lead engagement and review partner names, audit fees.
3. Date when corrective actions were completed
4. Audit firm details, such as number of audit partners, audit staff, number of independence violations

In terms of the fourth recommendation, the subcommittee wants the PCAOB to make inspection reports publicly available before the date of shareholders’ ratification of external auditor.

Number 5, Damley said the board should disclose, in the inspection report, key risk criteria used to select audit for inspection. If an audit was selected randomly for review, that should be clearly stated.

Number 6, she said the PCAOB should consider making public the specific actions the inspection team asked of the auditor for each audit that did not comply with the standards.

“Waiting to disclose such information in final inspection report essentially diminishes the value relevance of such information to both investors and the public,” she said.

The PCAOB should benchmark its “cycle time,” from the day inspection begins to when the inspection report is issued publicly, with other regulatory agencies like the FDIC so that the public can take a look at the reports more quickly. This is number 7.

Number 8, the subcommittee wants the board to revisit the language in the latest reports, which now include independence findings.

“For example, disclosures pertaining to the independence violations leaves investors and the public to wonder why the board, when informed of the independence violations, took no action to understand the reasons underlying the non-compliance,” Damley said.

Number 9, the board should consider revising the auditor’s report to require the disclosure of the amount the auditors use to assess whether uncorrected audit adjustments were material at the conclusion of the audit; the basis for making that determination; and a list of the audit adjustments that the auditor proposed, that were either material and corrected by management, or determined to be immaterial to the consolidated financial statements but were not corrected.

The 10th recommendation is related to the PCAOB’s Ethics Code 9, Nonpublic Information. It asks the board to do a regular review of EC 9 to make sure it is fulfilling its mandate of protecting investors.

The last recommendation might be outside the board’s purview, but Damley said the PCAOB should consider working on a project that would make audit work papers public after a significant period of time has passed, for example five years.

“Pre-knowledge that the work papers will be made public in the future will further incentivize audit firms to be more thorough in their audits up front, encouraging additional discipline and diligence at the time of the audit,” she said.

[Thomson Reuters]