Lewis Ferguson, a member of the Public Company Accounting Oversight Board, recently provided guidance to audit committees on how committees might use new, publicly available information regarding other accounting firm(s) that participate in an audit. As previously noted, beginning with public company audit reports issued after June 30, 2017, registered public accounting firms must disclose on PCAOB Form AP (1) the name, location and extent of participation of each other accounting firm participating in the audit whose work constituted at least 5% of total audit hours and (2) the number and aggregate extent of participation of all other accounting firms participating in the audit whose individual participation was less than 5% of total audit hours. (See posts from December 17, 2015 and June 29, 2017.) Form AP also has a requirement for disclosures regarding audit engagement partners, which has been in effect since January 2017.
In an article in Accounting Today, written with PCAOB Special Counsel Zoe Sharp, Mr. Ferguson notes that while the engagement partner aspect of Form AP has received significant media attention, the other participant part "may be far more interesting as a source of information as it unfolds because it will contain new information about multinational audits than has heretofore been available to the general public." According to Mr. Ferguson, 80% of Fortune 500 companies undergo a multinational audit (an audit involving several affiliates of a global auditing network or other unrelated auditors in various countries), and 55% of all U.S. public companies have multinational operations. He observes that "most companies have foreign operations, but we do not yet know how those operations are being audited." As a result of the new disclosures, "we are about to see how much of an audit is being performed by foreign affiliates of the lead auditor," many of which will themselves have been inspected by the PCAOB.
Based on conversations with audit committee members in the United States, Mr. Ferguson suggests that "audit committee members are often not focused on, or in some cases even very aware of, the component parts of the audit conducted by the 'other auditor.'" Many audit committee members may also be unaware of the availability of PCAOB inspection reports on the foreign firms that perform significant components of an audit. In this regard, Mr. Ferguson recommends:
Audit committee members should be asking their auditors about these global inspections and whether there are findings in the inspections of their lead auditor's affiliates. If they are not asking that question already, I believe this new disclosure will draw audit committee attention to the magnitude of the percentage of the audits performed by affiliates or other component auditors rather than by the United States firm and therefore to the significance of their participation.
The role of other auditors, particularly foreign audit firms, in the audit process continues to be an area of focus for the PCAOB. In April 2016, it proposed revised auditing standards for supervision of the work of other auditors by the lead auditor. The PCAOB staff is working on a supplemental request for comment on revisions to the proposal, which it currently anticipates presenting for Board action in the third quarter of 2017.
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