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PCAOB Looks to Audit Evidence, Auditor Independence as New Items on Agenda

Chris Gaetano
Published Date:
Sep 9, 2020
The Public Company Accounting Oversight Board (PCAOB), in its latest meeting, pledged to look into how technology has changed audit evidence procedures, and to change auditor independence standards to conform with new Securities and Exchange Commission rules.

On auditor independence, the PCAOB noted that the Securities and Exchange Commission (SEC) last year slightly loosened the rules for situations when an auditor has a credit relationship with the audited entity. Previously, an accounting firm was not considered independent if it had a lending relationship with an entity having record or beneficial ownership of more than 10 percent of the equity securities of either the firm’s audit client or any entity that is a controlling parent company of the audit client, a controlled subsidiary of the audit client, or an entity under common control with the audit client.   

Under the new rules, the analysis focuses only on beneficial ownership, rather than both record and beneficial ownership; replaces the existing 10 percent bright-line shareholder ownership test with a "significant influence" test; adds a "known through reasonable inquiry" standard with respect to identifying beneficial owners of the audit client’s equity securities; and excludes from the definition of audit client, for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The SEC further proposed to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships. The proposed change would also alter the definitions of “affiliate of the audit client,” “audit and professional engagement period” and “investment company complex."

The PCAOB said that, without conforming amendments, the objectives of the SEC’s rulemaking may not be fully achieved. In addition, it warned that confusion may arise if certain terms are used in both the PCAOB’s and the SEC’s independence rules, but are defined differently. Currently the PCAOB is monitoring the progress on the second proposal and developing a recommendation for the Board’s consideration, if adopted.

The audit evidence agenda item is in recognition of the increasing prevalence of technology-based tools and the increasing availability and use of information from sources external to the company. The PCAOB said it will be assessing whether these developments require a change in either standards or guidance. Staff will pay particular mind to observations from the board's oversight activities, changes to audit firms' methodologies, academic research, outreach with stakeholders, and the requirements of other standard setters and regulators. It hopes to eventually develop a recommendation.

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