Insights | Vedder

Key Takeaways

With the increased prevalence of special purpose acquisition companies (SPACs), cybersecurity issues, environment and social governance-focused companies, and the use of artificial intelligence, the Staff of the SEC expects audit firms to ensure that their risk assessments and audit processes are appropriately evolving.

The PCAOB continues to examine instances of exam cheating at audit firms, as evidenced by a recent record $25 million fine.

The SEC and PCAOB regularly coordinate and seek complimentary remedies to maximize the protection of the public. For example, while the PCAOB cannot impose secondary liability for contributory negligence, the SEC can. Additionally, while PCAOB proceedings have certain confidentiality restrictions, the SEC’s public proceedings help keep the public and professionals informed.

In conducting internal investigations, businesses and their counsel should carefully (1) ensure that all relevant data is being preserved, (2) consider privilege issues when communicating with former employees, and (3) determine the appropriate time to consider self-reporting violations to regulators.

The Staff of the SEC continues to discuss the benefits of meaningful cooperating and self-reporting by firms when firms discover misconduct or potential violations.Further, the Staff stated that complying with prior settlements or orders is critical; in the event there is another issue in the future, that will play a role in the Staff’s view of potential remediation.

The PCAOB has enhanced its inspection programs, including by establishing an inspections quality group to ensure a consistent quality of their inspections work.The PCAOB has also created a “target team” of inspectors, who perform inspections work across firms to review areas of emerging risks. Finally, in the past year, the PCAOB has launched an initiative to better understand firm culture and address the “root cause” of issues stemming from deficient cultures.

According to PCAOB Staff, audit deficiency rates remain “unacceptably high,” and there continues to be a “downward trend” in audit quality. Consequently, the PCAOB has increased transparency and revamped inspection reports to provide more information, including relating to Part II criticisms. The Staff also encourages audit firms to engage in a meaningful dialogue with the Staff during the 12-month period following their final inspection report to discuss remediation plans.

The PCAOB Staff expects “complete access” to audit workpapers during the inspection process, which requires inspectors to (1) have sole discretion to select audit engagements for review, (2) have the ability to retain information needed to support their inspection work, and (3) have direct access to interview all relevant personnel. In instances where information may be restricted, such as Confidential Supervisory Information relating to banking activities, firms are expected to remove such information prior to providing workpapers to the PCAOB inspectors but provide the inspectors a complete list of items that were removed.