Following rounds of public comments, on December 20, 2018, the Public Company Accounting Oversight Board adopted enhanced requirements for Auditing Accounting Estimates, Including Fair Value Measurements and amended standards to strengthen requirements for an Auditor’s Use of the Work of Specialists.
During 1988-2003 the auditing profession adopted three different standards related to auditing accounting estimates, PCAOB Chairman William D. Duhnke, III, pointed out. Those standards also predated the PCAOB’s risk assessment standards. The objective of the standard adopted by the PCAOB on December 20 is to have “a single standard for auditing all accounting estimates that articulates a clearer, more consistent, risk-based approach.” Chairman Duhnke said he believes the new standard “addresses known concerns and is well tailored to address this significant challenging audit area.”
The two companion releases “work hand-in-hand,” Board member Kathleen M. Hamm observed, “because auditors often use the work of specialists in auditing certain accounting estimates…Increasingly, complex accounting estimates dominate financial reporting frameworks. As a result, estimates have significant effects on companies’ reported financial positions and results of operations. They also present a heightened risk of management bias, given their subjective nature.”
The Specialists amendments cover the use of the work of a company’s specialist and of an auditor’s specialist, providing enhanced guidelines for applying a risk-based supervisory approach. Similarly, the Auditing Accounting Estimates standard establishes a uniform, risk-based approach for auditing accounting estimates, including fair value measurements. In her support of the recommendations, Ms. Hamm stated: “Based on what we know today, I believe that each recommendation is sufficiently principles-based and flexible to appropriately accommodate continued innovation around data analytics and emerging technology.”
Board member J. Robert Brown, Jr., noted: “In developing the standard for estimates, the staff, for the first time, considered behavioral economics in rulemaking, which ‘incorporates a more realistic analysis of how people think and behave when making economic decisions.’ “
Chairman Duhnke said the PCAOB would be monitoring the implementation of these requirements, which is for audits of financial statements for fiscal years ending on or after December 15, 2020. Board member Duane M. DesParte pointed out that aligns with the implementation dates for the new Current Expected Credit Loss accounting standard and ISA 540, Auditing Accounting Estimates and Related Disclosures.
The recommendations now await final approval by the Securities and Exchange Commission.
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