COVID Colors Baruch/CPT Conference

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The 15th Annual Audit Conference on Ensuring Integrity, jointly sponsored by Baruch College and the NASBA Center for the Public Trust, was held on December 1-2, and every session took some note of how COVID-19 has been impacting the profession. As in other years, the conference took place on the same day as the Rockefeller Center Christmas tree’s lighting, but both events this year had virtual attendance. The first conference speaker, Tracy Harding, who is Chair of the Auditing Standards Board and Chair of the Maine Board of Accountancy, remarked that there is concern about COVID’s impact on the audit risk model and whether there is sufficient focus on changes to clients’ internal controls as more people are working remotely.

Baruch Professor Douglas Carmichael asked if there is a movement to more principles-based standards. Mr. Harding replied that the ASB believes its standards should be grounded in principles, to allow them to stand the test of time. At the same time, standards need to be clear in order to guide auditors when they are applying professional judgement. Barbara Vanich, Deputy Chief Auditor at the Public Company Accounting Oversight Board, pointed out that those in enforcement would like everything to be specific, as it is difficult to run an inspection when so much is left to professional judgement. For example, Ms. Vanich said: “The confirmation standard makes sense, but how do you do that in a world where there is practically no paper?” The PCAOB is monitoring how firms are dealing with COVID and meeting with firms and international regulators on this topic.

Several types of possible auditor bias were summarized by Oklahoma State University Professor Audrey Gramling, including: looking for things that confirm existing beliefs, attributing higher quality based on history, or rushing to confirm. Professor Carmichael asked how standards can deal with audit teams believing that, if the client was dishonest, it would not be a client of the firm. Professor Gramling said the client’s honesty could come up during an audit team’s brain storming session. Bob Dohrer, RSM International chief operating officer and former ASB Chair, recalled the ASB had held many discussions about requiring the auditor to search for contradictory information. They concluded that the emphasis should be on the auditor’s awareness to bias that might exist and that should drive the auditors. Reference was made to Mr. Dohrer’s article in the June Journal of Accountancy about the opportunities for fraud.

Partners from several major firms addressed how COVID-19 has impacted their clients’ risk profiles. The firms have had to alter their work programs in response to changes in clients’ internal control environments, as controls have been shifted to accommodate more people working remotely. Dollar amount thresholds, when controls come into place, have also needed to change. Some internal audit groups have become involved in management when their companies were operating in an all-hands-on-deck environment, which effected the auditor’s ability to use the internal audit group’s work. Auditor independence issues have come up when small companies do not have enough staff, so they call on their accountants. There has been a real concern about the authenticity of documents, which has caused auditors to look for other sources of confirmation.

Looking ahead, three panelists who had previously worked with the federal regulators agreed that changes in the Securities and Exchange Commission and the PCAOB are anticipated with the new administration. This will begin with the appointment of a new SEC Chairman, as Jay Clayton resigned as of the end of 2020. Changes at the SEC will filter to the PCAOB level. If there is an increase in funding to the PCAOB, there will be an increase in enforcement activities. Claudius Modesti, the first director of the PCAOB’s Division of Enforcement and Investigations, said the PCAOB’s focus is now on its Quality Control Concept Release published in 2019 https://pcaobus.org/Rulemaking/Docket046/2019-003-Quality-Control-Concept-Release.pdf. The PCAOB’s next step will be the release of a rule that will be open for public comment, which will then lead to a final rule. Mr. Modesti wondered if that rule is prescriptive, assigning roles to individuals, and they do not meet those standards, will the firm then be responsible?

Jeff Mahoney, General Counsel for the Council of Institutional Investors, noted there is “growing chatter” in the District of Columbia, both from the SEC and other parties, about including climate change information in disclosures. “ESG [environmental, social and governance metrics] is a huge issue in the investor community,” Mr. Mahoney stated. The IFRS Foundation’s Consultation Paper on Sustainability Reporting https://cdn.ifrs.org/-/media/project/sustainability-reporting/consultation-paper-on-sustainability-reporting.pdf?la=en has attracted a lot of interest, he observed.