As the regulatory landscape continues to evolve in 2024, audit committees play a pivotal role in ensuring audit quality and integrity within organizations, particularly in the dynamic and complex landscape of the financial industry. The 2024 Public Company Accounting Oversight Board (PCAOB) report outlines several risks that audit committees should consider when discussing them with management1.
PCAOB's 2024 Inspection Priorities
The PCAOB outlined its 2024 inspection priorities, emphasizing areas such as digital assets, cybersecurity, and the quality of audit processes. It encourages audit committees to use the inspection priorities spotlight as an important tool to help firms plan and perform high-quality audits.
| PCAOB highlights overall business risks in 20242 |
|---|
1. Persistent, high interest rates, tightening of credit availability, and/or inflationary challenges |
2. Disruptions in the supply chain and rising costs |
3. Business models that are significantly impacted by rapidly changing technology |
4. Geopolitical conflicts |
5. Financial statements that include areas with a higher inherent risk of fraud, estimates involving complex models or processes, and/or presentations and disclosures that may be impacted by complexities in the public company’s activities |
Areas of inspection emphasis within the financial industry include:
- Ongoing changes in interest rates can have a material effect on a company’s liquidity position
- Allowance for loan and lease losses
- Classification of investments as available for sale or held-to-maturity
- Valuation of investments in hard-to-value securities
- Ability to meet margin requirements
- Ability to meet long-term debt obligations
- An entity’s ability to continue as a going concern
Audit committee considerations for inspection:
- Gauge the organization's ability to stay informed about internal and external environments, risks, events, and opportunities affecting resilience.
- Evaluate the board's effectiveness in overseeing emerging and evolving external risks, including geopolitical changes, economic instability, and climate risk.
- Determine if the board has access to necessary information and expertise and maintains the professional skepticism required to challenge management effectively.
Financial Reporting & Audit Quality
The PCAOB’s July 2023 Spotlight3 highlighted recurring audit deficiencies, particularly in revenue reporting, accounts influenced by business combinations, inventory, long-lived assets, (e.g., goodwill and intangible assets), and equity transactions. These deficiencies have shown a consistent pattern, with significant estimates, evidence, and/or data and reports often contributing to these issues. The PCAOB staff anticipates that around 40% of the audits reviewed will exhibit one or more deficiencies, marking an increase from 34% in 2021 and 29% in 2020, documented in Part IA of the individual audit firm’s inspection report.
Audit committee considerations for financial reporting and audit quality:
- Evaluate the organization's audit processes in areas identified by the PCAOB as having recurring deficiencies, such as revenue reporting, business combinations, inventory, long-lived assets, and equity transactions, to ensure robustness in estimates, evidence, and reporting practices in light of the increasing trend of audit deficiencies.
- Review and adapt the organization's quality control (QC) standards in anticipation of the PCAOB's new QC standards for 2024. Focus on the proactive identification, management, and remediation of audit quality risks, while leveraging the PCAOB's enhanced resources for improved transparency and accessibility of audit deficiency information.
- Assess if management has identified financial reporting items and disclosures with increased restatement risk through regular risk assessments.
- Evaluate management's readiness to manage potential financial or reputational risks associated with broader reporting requirements and demands for enhanced transparency.
Conclusion
With the landscape continuously shaped by regulatory changes, technological advancements, and evolving risk profiles, audit committees are critical in securing audit quality, financial integrity, and organizational resilience. The PCAOB's 2024 Inspection Priorities underscore the importance of robust oversight in cybersecurity, digital assets, and QC standards. Going into 2025, the PCAOB pointed out it will continue emphasizing the industries and sectors with specialized accounting and/or that may be negatively impacted by uncertainties and volatility in the economic and geopolitical environment, with the financial sector as a top priority.4 Regional banks and mutual funds with Level 3 investments will capture more attention.
The audit committee's adaptability, vigilance, and strategic oversight will be instrumental in steering organizations for the remainder of 2024. By prioritizing these focus areas, audit committees can not only help to enhance audit quality and financial reporting, but they also contribute significantly to their organizations’ long-term success and resilience.
If you have questions about the PCAOB’s 2024 report, please reach out to one of our professionals at Forvis Mazars.
- 1 “PCAOB Spotlight: Staff Priorities for 2024 – Inspections and Interactions with Audit Committees,” assets.pcaobus.org, December 2023.
- 2“PCAOB Staff Outline 2024 Inspection Priorities with Focus on Driving Improvements in Audit Quality,” pcaobus.org, December 20, 2023.
- 3“Spotlight: Staff Update and Preview of 2022 Inspection Observations,” assets.pcaobus.org, July 2023.
- 4“PCAOB Staff Outline 2024 Inspection Priorities with Focus on Driving Improvements in Audit Quality,” pcaobus.org, December 20, 2023.