Securities Regulation Daily PCAOB 2019 annual report cites progress, leaves five-year plan largely unchanged
Wednesday, April 1, 2020

PCAOB 2019 annual report cites progress, leaves five-year plan largely unchanged

By John Filar Atwood

In a year that was reportedly marked by personnel issues and organizational disruption, PCAOB Chairman William Duhnke says the agency took steps to "move the PCAOB along the maturity curve."

The PCAOB released its 2019 annual report in which it discussed the progress made on its operational and strategic objectives but did not touch on any of the internal difficulties the Board reportedly faced during the year. Chairman William Duhnke emphasized that after conducting extensive outreach in 2018, the Board focused last year on implementing changes to advance its strategy and to help the PCAOB mature as an organization.

The report’s high-level look at the Board’s operations and financial results does not include any discussion of issues raised by an October 2019 Wall Street Journal article that reported "internal feuding and personnel issues" that resulted in the departure of several senior staff members. It also does not mention the fact that the SEC had to step in last year and ask Harvey Pitt to review the PCAOB’s corporate governance procedures and appoint SEC Commissioner Hester Peirce as a special liaison to the Board.

By the numbers. The report does include a financial review, in which the Board states that net operating revenues increased by $27.5 million (12 percent) from 2018 to 2019. Total net operating revenue in 2019 for the PCAOB was $264.2 million.

The Board attributes the increase in revenues to the increase in the accounting support fee assessed on issuers and broker-dealers in 2019. The increase in the accounting support fee was due to increases in the PCAOB’s 2019 budget related to higher information technology costs, consulting and professional fees, and planned headcount.

In 2019, the PCAOB received $228.5 million from issuer accounting support fees and $34.3 million from broker-dealer accounting support fees. It received an additional $1.4 million from registration and annual fees from PCAOB-registered public accounting firms.

The PCAOB said that its expenses are largely driven by employee-related costs. In 2019, operating expenses increased by $6.1 million (two percent) from 2018 to 2019. Personnel costs, the Board’s largest expense, increased by $3.6 million in 2019 due to annual compensation increases, employee merit awards, recruiting costs, and an increase in headcount.

Five-year plan. The PCAOB reiterated its five-year strategic plan and the five goals underlying it. They are: (1) drive improvement in the quality of audit services through a combination of prevention, detection, deterrence, and remediation; (2) anticipate and respond to the changing environment, including emerging technologies; (3) enhance transparency and accessibility through proactive stakeholder engagement; (4) pursue operational excellence by the effective use of resources, information, and technology; and (5) develop, empower and reward PCAOB staff.

To drive improvement in the quality of audit services, the Board focused on firms’ quality control systems in 2019. Among other things, the PCAOB issued for public comment a concept release to seek stakeholder input on a potential approach to revising the PCAOB’s quality control standards. It also deployed its first ever target team of PCAOB inspectors to look at selected timely and important issues across the profession, including the review of the audit methodologies of the six largest U.S. firms and how the firms applied those methodologies across multi-location audits.

The Board also decided to redesign the inspections report format based on feedback that the long-standing format is difficult to read and to understand and relies too much on boilerplate language. The PCAOB expects to release the first iteration of the new reports in the first half of 2020.

Enforcement. One of the pillars of improving audit quality, in the Board’s view, is effective enforcement. In 2019, the PCAOB continued to emphasize investigating significant audit failures and issued settled orders that covered higher priority areas, such as a lack of due professional care and professional skepticism, breaches of auditor independence rules, improper alterations to audit documentation, and non-cooperation with Board inspections.

In 2019, the Board issued 30 settled disciplinary orders and sanctioned 19 audit firms and 27 individuals. It issued 17 orders involving U.S. auditors and 13 involving non-U.S. auditors. It also issued 13 orders involving the six largest global accounting firm networks.

Changing technology. To accomplish the goal of anticipating and responding to the changing environment, including emerging technologies and related risks and opportunities, the Board proposes to assess and address the impact of emerging technologies on the quality of audit services and to try to understand and consider investors’ audit expectations. It also intends to assess the changing information security environment in order to understand the related risks.

The PCAOB’s effort to enhance transparency and accessibility through proactive stakeholder engagement will involve improving the timeliness, usefulness, and clarity of agency information. In 2019, the Board spoke to nearly 400 audit committee chairs through the inspections process. In addition, it hosted roundtables with investors and audit committee members and created targeted resources for key stakeholder groups. According to the report, the PCAOB also interviewed and surveyed investors, audit committees, and preparers as part of its interim analysis of CAMs.

Staff development. In order to promote a high performing workforce, the PCAOB took a number of steps in 2019 including launching a new learning management system and implementing upgrades to its performance management system. It also refined its pay and incentive structures and created new strategic performance metrics. According to the report, the Board enhanced its human resources support through an HR business partner model.

In order to eliminate organizational barriers to collaboration, transparency, and engagement, in 2019 the PCAOB created a new internal communications position to spearhead communications to PCAOB staff in a consistent manner. It also launched an internal communications platform to all staff about change initiatives taking place at the PCAOB.

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