Dialogue with PCAOB board member Jeanette Franzel

December 2013

On October 24 and 25, 2013, members of the North American Audit Committee Leadership Network (ACLN) met in New York for their 27th stand-alone meeting. One session was a dialogue with Jeanette Franzel, a member of the Public Company Accounting Oversight Board (PCAOB) since 2012.

This document summarizes the key points that Ms. Franzel and members raised in the discussion, along with background information and perspectives that members shared before the meeting.

Ms. Franzel and the ACLN members discussed a number of topics on the PCAOB’s agenda, delving into details of PCAOB oversight programs as well as the PCAOB’s efforts to engage with audit committees on these issues. The key items discussed are summarized below and described in more detail on the following pages:

  • Enhanced auditor reporting is one element of a holistic approach to transparency and improving the informational value of audits
    The PCAOB’s proposed new standards on the auditor’s reporting model would expand disclosures by the auditor on such issues as “critical audit matters.” The proposal would also expand the auditor’s responsibilities for evaluating other information in the annual report, such as the management discussion and analysis (MD&A), for any material misstatements of fact or material inconsistencies with the financial statements and communicating the results of that evaluation in the audit report. Ms. Franzel welcomed the opportunity for a broad discussion of the auditor’s report. The ACLN members discussed with Ms. Franzel the potential value of such disclosures for investors and potential drawbacks, such as longer and more confusing reports, increased legal liability for the audit firms, and increased costs for issuers. They also addressed other ways of providing more transparency to investors, such as enhanced audit committee or management reporting. Ms. Franzel underscored the benefits of a holistic approach to transparent reporting.

  • Audit quality indicators may provide for better evaluation of audits
    Ms. Franzel and the members touched on the PCAOB’s efforts to develop audit quality indicators that would allow for a more expansive evaluation of audit quality by different stakeholders that would potentially meet their unique needs. They discussed how PCAOB’s inspection process is not intended to provide an overall view of a firm’s audit quality but can provide an indicator of audit quality relative to compliance with existing auditing standards. The thinking about what could be measured and how the audit quality metrics would serve different stakeholders is in the early stages, but Ms. Franzel and the members agreed on the value of pursuing this effort while also coordinating with organizations such as the International Auditing and Assurance Standards Board (IAASB) and the Center for Audit Quality (CAQ) to avoid a multiplicity of competing indicators.

  • The PCAOB is looking to improve clarity of inspections process and subsequent reporting
    The PCAOB is responding to concerns about the timeliness and usability of inspection reports, and it has published guidance for audit committees about the inspection process, including suggested questions to ask their audit firm (see page 12). Ms. Franzel explained that PCAOB uses risk-based criteria to select audits for inspection, and she explained some of the issues identified in PCAOB’s inspections of audits of internal controls over financial reporting. When discussing audit deficiencies identified by the PCAOB, Ms. Franzel acknowledged conflicting perspectives on use of the term “audit failure,” suggesting that an approach based on “gradations of severity” for the deficiencies presented in the public portion of inspection reports may be more helpful to audit firms and audit committees. Ms. Franzel also welcomed the introduction of verbal feedback on good practices to the audit firms by inspectors in the 2013 inspections.

  • The PCAOB and audit committees have complementary objectives
    Ms. Franzel identified the promotion of audit quality and auditor independence as two objectives common to the PCAOB and audit committees. Ms. Franzel emphasized the importance of audit committee input for the PCAOB’s policy-making and standard setting. The PCAOB’s Standing Advisory Group (SAG) has discussed a range of outreach approaches, including town hall meetings and roundtables specifically for audit committees, and improvements to the agency’s website. Ms. Franzel expressed her willingness to visit individual audit committees from both large and small companies to have a structured dialogue on key issues.