Accounting Regulators Step Up Rules Amid Declining Pool Of Qualified Talent

By Marc Blythe, and Sal Sarabosing

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The preparation of reliable accounting and financial information has always been a high-pressure task. It requires unquestionable independence and supportable precision. Over the past few years, novel and long-persisting challenges have forced public companies and their external auditors to continually adapt to seismic shifts reshaping the business environment.

The labor market is tight across industries, but according to recent years of AICPA Trends reports, the decline in accounting professionals predates other (often more apparent) pandemic-induced worker shortages. This translates into fewer people entering the accounting profession, which is a multiplier for existing challenges. In an industry built upon an apprentice model, a drop in degrees and a rise in retirements weigh heavily on the industry’s readiness, especially as recent years have seen a significant influx of companies entering capital markets through SPACs and IPOs.

As these newly public companies continue to influence the audit marketplace, CPAs and auditors face increased regulatory hurdles from the Public Company Accounting Oversight Board (PCAOB) and SEC aimed at maintaining high-quality standards. In fact, nearly half of the financial executives surveyed by the Financial Education & Research Foundation said 2021 audits required greater effort to support than those the year prior. They pointed to the expanded scope of their audits, organizational structure changes, divestitures and economic uncertainties as the reasons why. 

Additionally, the PCAOB has recently proposed a new standard that would require audit firms to better manage risks to audit quality and require, among other things, an annual evaluation of their system of quality control. Example areas of quality control include prevention or detection of improper alteration of work papers in connection with a PCAOB inspection, failure to obtain engagement quality review of issuer audits for multiple years and support for implementing a risk-based approach through the audit. This all equates to continued pressure on auditors.

Key Observations From Recent PCAOB Inspections Of Audit Firms

Amid the aforementioned professional environment, the PCAOB continues to reinforce its objective of upholding the highest standards in accounting through financial reporting for public companies. The PCAOB has set the tone for external audits since 2007. We have reviewed the inspection reports for the top 10 accounting firms nationally and aggregated a few observations/potential focus areas for those responsible for financial reporting.

The PCAOB has communicated that its goals are to improve the quality of audit services, respond to emerging technologies, enhance transparency and detect (and prevent) audit deficiencies. Since the creation of the PCAOB, technology and subscription services accounting have altered the accounting industry. As the industry shifts, so has the focus of the PCAOB, which has identified these areas of heightened dependency for review to safeguard the integrity of external audits.

  • The effectiveness of IT general controls: With the industry’s dependency on technology and overall growth in ERP software addressing accounting and finance marketplace needs, the PCAOB has zeroed in on the controls governing how a company’s tech is designed, implemented and utilized. Each information technology general controls (ITGC) element plays a unique role in an entity’s control effectiveness when deficiencies exist, from program change management to password policies and IT operations.

  • The accuracy and completeness of information provided by entity (IPE) & key reports: Consistent with the high level of technology being used industrywide, a company’s calculations and decision-making are more dependent on outputs from this technology (e.g., making sure spreadsheets are accurate). As such, the PCAOB is focusing on the controls and efforts placed on information produced by the entity audit and compliance.

  • The precision and accuracy of management review controls: The PCAOB has directed its attention to ensuring management is applying precision and accuracy in their reviews. Asking the questions: Are review controls designed and executed appropriately? Are controls precise enough to detect significant issues? Did the organization conduct an impact analysis once a deficiency was identified?

  • The segregation of duties and access to master serial advanced technology attachment (SATA) maintenance: The segregation of duties is a foundational building block of sustainable risk management and internal business controls. The PCAOB is looking deeper into who owns (and has access to) an entity’s data. This includes identifying those with access to initiate, change, execute and review transactions or who conduct master data maintenance and own master data files.

With the PCAOB homing in its focus on these areas, here are three actions company finance leaders can take to ensure compliance and focus internal resources on their core business operations.

  1. Consider outsourcing financial reporting activities.

Let a team with technical knowledge, expertise, experience and resources handle the complexities, and ever-changing regulations, of financial reporting to ensure its completeness, accuracy and compliance. By outsourcing their financial reporting, CEOs, CFOs, managers and accounting departments can proficiently navigate the shifting business terrain, revolving people and alleviate mounting pressures to stay on top of and in compliance with the industry’s regulatory changes.

  1. Talk to your auditors.

For public entities, it’s critical to understand the areas their auditors are acutely focused on to ensure alignment between internal and external teams. Open communication is the key to getting to an answer sooner rather than later and with enough time for remediation—if needed.

  1. Review your IT environment.

With a growing industrywide dependence on technology, it is essential for management to review their IT stack to understand how dependent their company is on technology. Only then can they truly understand if there are gaps in their dependencies or if there is a need to manage controls in a new way. Organizations should be laser-focused on ITGCs. Tech-forward companies need even more guardrails around their technology to ensure accuracy.

Those responsible for preparing and overseeing the preparation of reliable accounting and financial information for public and private companies are in a pressure vacuum. A challenging environment now exists due to the shifting business landscape, rise in technology, diminishing labor force, increase in public companies, regulatory changes and unforeseen global events. Companies don’t have to navigate this alone. By outsourcing financial reporting, communicating openly with external auditors and taking a deeper look at their technology environment, public company leaders can weather shifts that come their way.

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