PCAOB staff report outlines 2025 inspection priorities

The Public Company Accounting Oversight Board outlined its priorities for 2025 inspections in a PCAOB staff report.

The PCAOB will continue its inspection focus on public companies in the financial, real estate and information technology sectors — those industries and sectors with specialized accounting that may be negatively impacted by economic and geopolitical volatility, where the PCAOB has previously found a higher number of deficiencies, or where companies are more likely to have a going concern risk.

The financial sector is affected by interest rates and commercial real estate exposure in loan portfolios and investment securities. The report urges auditors to exercise professional skepticism in evaluating significant assumptions used in the allowance for credit losses and in the valuation of commercial mortgage-backed investment securities, and assessing a public company’s liquidity when evaluating the classification of investment securities. 

The long-term impact of the pandemic on the commercial real estate sector, after many employees switched to remote work, remains to be seen. Public companies with significant commercial real estate holdings have high levels of debt, and their ability to refinance that debt may be impacted by changing interest rates and tightening credit. These factors may also affect the valuations of properties and discounted cash flows analyses. Auditors should valuate real estate assets with greater skepticism and judgement, the report recommended. 

Information technology companies — including technology, hardware and semiconductor companies — tend to have complex financial statement accounts, disclosures and internal controls. The sector is also continually challenged with the adoption of new technologies, like artificial intelligence, and the resulting demand for more sophisticated chips that increases the valuation risks associated with inventory. Disruptions to the supply chain can also impact revenue recognition, and the risk of fraud in this sector is often heightened due to earnings pressures. 

The PCAOB will continue its focus on companies engaging in merger and acquisition activities or business combinations, broker-dealers that file compliance reports, others that provide customers with various investment opportunities, and public companies that have changed their supply chain or logistics. 

The PCAOB plans to continue performing inspections with a focus on areas that pose a heightened risk to audit quality. The emphasized areas of inspection for 2025 include audit areas with prior execution challenges, audit areas where new auditing standards are being applied, critical audit matters, audit areas with increase use of technology (including the use of generative AI) at public companies and broker dealers, crypto assets, quality control procedures and culture at audit firms. 

“Inspecting audit firms is one of the most important tools the PCAOB uses to protect investors,” PCAOB chair Erica Williams said in a statement. “We encourage audit firms and audit committees to read this report, which provides timely perspectives to drive improvements in audit quality.”