Fraud comes first for PCAOB

Finance departments may be in for tougher questioning from auditors. The Public Company Accounting Oversight Board (PCAOB) announced in mid-April that it will be prioritizing fraud-related risks in audit inspections this year, according to a new report.

The PCAOB, a nonprofit corporation under SEC jurisdiction that oversees public company audits and regulates auditors, inspects selected audits throughout the year to double check the quality and accuracy of auditors’ work and sets annual priorities for those inspections.

This year, the PCAOB said that inspectors would be “increasing focus on fraud-related audit procedures” in its “Staff Priorities for 2023 Inspections” release, citing the potentially growing fraud risk posed by macroeconomic uncertainty and disruption.

“They [PCAOB] are saying that when there's times of change, and there's economic turbulence, the risk of fraud goes up,” Andi McNeal, vice president of education at the Association of Certified Fraud Examiners (ACFE), told CFO Brew. “And we expect auditors to be on the ball about that.”

As a result, finance departments at public companies may find that auditors are going to be probing a little deeper this year, including more questions about organizational fraud risks and controls, McNeal said.

“I would imagine some organizations are going to hear different lines of questioning,” she said. “Maybe you’re going to be asked by the more senior-level folks about some of these risks as opposed to just the staff levels sending the checklist of questions that they’ve been asked to send.”

Long time coming…This new focus on fraud comes after the PCAOB found that audit deficiencies increased significantly and audit quality declined in 2022, driven in part by difficulties in adapting to new critical audit matters requirements. The SEC has also emphasized the importance of the auditor’s role in fraud detection. In October 2022, Paul Munter, the SEC’s chief accountant, warned that auditors need to move beyond traditional audit checklists and be more active in considering and detecting fraud.

“Audit responses should be tailored to the identified fraud risk and dynamic to changing business environments if auditors are to fulfill their professional responsibilities to consider fraud and to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error,” Munter wrote.

That means that CFOs may need to pay closer attention to fraud risk, compliance, and procedures now that auditors have been given the mandate to seek out fraud, says Matt Kelly, editor of Radical Compliance, a newsletter that follows corporate compliance and governance issues

“There is definitely, I think, a change in emphasis here,” Kelly told CFO Brew. “When both agencies are telling auditors, ‘You need to do this,’ that is the message that CFOs also need to think about.”

Call me maybe? There are several processes and procedures that the PCAOB is targeting that finance departments will have to pay attention to this year, particularly whistleblowing. The PCAOB is directing auditors to ask management about receiving and handling any “tips and complaints regarding the company's financial reporting.” Finance teams at some companies may have to work across the organization to answer those questions, according to Kelly.

“If you have a corporate compliance department, the finance team should probably be talking to them because they usually run the internal reporting hotline,” said Kelly. “Ask the compliance team, how can we be sure that we are handling all of our internal reports in a consistent and systematic way?”

Changing course. McNeal sees the PCAOB’s new scrutiny as part of a global rethinking of the auditor’s role in detecting fraud and a way to avoid the kinds of fraud that triggered economic crises in the past.

“I do think the PCAOB listing this as No. 1 on their audit objective list shows that this is back on their agenda,” said McNeal.

As part of that new emphasis on fraud, the PCAOB said that crypto and financial services audits are also due for more scrutiny this year from inspectors. The PCAOB also said that it was expanding the number of audits to be inspected in 2023. That’s a welcome change for Kelly.

“Whether that’s plain, old accounting fraud or newfangled fraud involving crypto or SPACs or something else, you know, fraud is still fraud, and people have to think about it,” said Kelly. “I’m glad that the PCAOB is telling auditors to do this. I hope auditors can live up to those expectations.”—DA