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PCAOB Report: Bank Audit Teams Failed to Identify Certain Risks of Material Misstatement

By:
Karen Sibayan
Published Date:
Sep 12, 2024

 

GettyImages-614840826 Audit

On Sept. 9, the Public Company Accounting Oversight Board (PCAOB) staff released a report stating that certain bank audits that the staff reviewed involved instances where engagement teams failed to revisit initial risk assessments that preceded the 2023 bank failures as interest rates continued to rise.

The report describes the PCAOB's inspection response "to the banking events in early 2023 and the continued effects of these bank failures on the banking industry and provides common observations along with a description of good practices from our inspection activities."

The PCAOB said that in some cases, “the interest rate volatility was documented as an operational or business issue with no financial reporting or internal control over financial reporting (ICFR) considerations.” Because of this, the report noted that some engagement teams could not identify through their audits “certain risks of material misstatement despite changes in bank-specific or macroeconomic conditions that indicated increased risk in certain audit areas."

The PCAOB has been encouraging firms to investigate potential risks, such as increased volatility in financial and commodity markets caused by fluctuations in interest rates and inflationary trends since the PCAOB published its 2022 Staff Overview for Planned 2022 Inspections.

In 2023, the PCAOB said that banking sector vulnerabilities were exposed, compelling it to respond by revising its inspection plan. In April 2023, as a response to the bank failures, the PCAOB incorporated additional procedures into its inspection strategy for the rest of the year.

“We took a new approach to gathering information to inform our planning activities and sent a questionnaire to survey 40 U.S. firms that audit at least one bank asking about their audit response to the banking events,” the PCAOB said. “For 13 U.S. firms that audit 10 or more banks, we also asked for specific information about the most recent bank audits performed by the firm. Specifically, we wanted to better understand how firms evaluated emerging and evolving risks in the sector. We were particularly interested in understanding firms’ responses to the rapidly rising interest rate environment, and the firms’ analysis of and work surrounding risks, such as duration risk (exposure to changes in the interest rates) related to investments, concentration risk, and liquidity risk.” 

Some survey results contained in the report highlight that “over 70% of the engagement teams did not identify a risk of material misstatement through reviewing information due to rising interest rates. Over 95% did not identify a RoMM [risk of material misstatement] related to liquidity."  In addition, over 95% did not identify a RoMM through reviewing information from short sellers, analysts, or other publicly available information, and over 65% did not identify any risk of material misstatement related to concentration risks. Finally, over 95% of the engagement teams did not identify a risk of fraud related to investments or related disclosures.

The PCAOB added that a few firms indicated that rising interest rates were a “business-only” risk relating to the bank's operations without directly influencing financial reporting.

Aside from the results of the survey, the PCAOB also included in the report inspections observations and good practices in four areas: risk assessment, sampling, test of controls and fair value measurements.

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