PCAOB finds audit firm culture impacts quality

The Public Company Accounting Oversight Board is providing guidance on how audit firm culture can contribute to audit quality, along with insights for auditors on improving audit committee communications and a video on the new confirmation standard.

In a staff spotlight report Thursday, the PCAOB released the results of an in-depth review of culture at a group of auditing firms, including over 150 interviews with partners at the biggest firms. The report found that audit firm culture can drive audit quality, both positively and negatively. 

“Indeed, an audit firm’s culture contributes to the audit firm’s ability to deliver a quality audit,” said the report. “Culture may also detract from audit quality, particularly if leadership says one thing but rewards another.”

The report also found a correlation among centralization, standardization and audit quality. The amount of centralized and standardized processes, tools and templates at the audit firms can help ensure consistent application and promote audit quality. The PCAOB staff found that audit firms with cultures marked by more centralization and standardization seem to have fewer deviations in their procedures nationally, along with fewer deficiencies.

A remote or hybrid work environment can affect audit firm culture. The audit firm partners interviewed for the report suggested that the pandemic and the remote or hybrid work environment impacted the audit firms’ apprenticeship model for on-the-job training, dissemination of culture, and professional skepticism.

Audit firms need to promote a culture of accountability to support audit quality, according to the report. Negative audit quality events, such as internal and external inspection deficiencies, restatements and independence violations, at some audit firms aren’t sufficiently evaluated or attributed to firm personnel. There’s a lack of timeliness of performance evaluations at some audit firms, with negative events being considered the following year instead of the current year.

Some of the audit partners surveyed had concerns about the competency of certain firm personnel and the appropriateness of how engagements at the firm are staffed. The respondents expressed concern that the push for use of shared service centers is removing foundational skills and experiences from firm personnel. That could call into question the use of so-called “Centers of Excellence” at some firms.

Audit leadership seems to be sending mixed messages. Some of the survey respondents indicated that audit firm leaders send mixed messages to the line partners and other personnel about the incentives and penalties for audit quality events. In their view, audit firms need to ensure the factors that drive adjustments to partner compensation align with behaviors that promote audit quality and are clearly communicated to employees at the firm.

“The PCAOB continues to be concerned about recent trends in audit quality as reflected in the overall deficiency rates in our recently published inspections reports,” said the report. “Sustainable improvements in audit quality are needed.”

Audit committee communications, confirmations

Separately, the PCAOB released Wednesday a report on audit committee communications. The PCAOB staff is continuing to see a large number of deficiencies related to auditor communications with audit committees. The report provides some reminders about communications related to the use of other participants during the audit, overall audit strategy and select audit results, and other matters required by PCAOB standards and rules.

Some of the problems seen by the PCAOB staff relate to required communications, such as auditors not communicating to audit committees all the critical accounting policies and practices used by the company. 

On the positive side, the staff pointed to some good practices related to audit committee communications, such as using structured templates and providing guidance on completing those templates.

Separately, the PCAOB staff posted a video Wednesday to help auditors prepare for implementation of the new audit confirmation standard, AS 2310, which takes into account the newer technology now being used for confirmations.