Audit regulators will propose new rules in 2014 for how auditors should audit accounting estimates, including fair value measurements, and how firms should manage their own internal audit quality control.

The Public Company Accounting Oversight Board frequently criticizes audit firms in their inspection reports over their audit of fair value measurements and other accounting areas where estimates and judgment are common. The PCAOB has become alarmed in recent years by the “number and frequency of adverse inspection findings pertaining to estimates and fair value measurements,” said PCAOB Chief Auditor Marty Baumann at a national accounting conference.

The staff is proposing a standard that would replace a number of the board's interim standards, or standards the board adopted at its outset under Sarbanes-Oxley from existing professional standards, said Baumann. PwC even called on the PCAOB in an inspection response to step up its pace of work on new auditing standards in this area to help clarify what is expected of auditors. "In our view, the consistency of audit execution, not only within a single firm but across the profession, can be greatly enhanced with standards that reflect the increasingly complex accounting and auditing environment in which we operate," wrote Bob Moritz, PwC chairman and senior partner, and Tim Ryan, US assurance leader for PwC.

On the quality control side, little appears in inspection reports because the board is required under Sarbanes-Oxley to keep its concerns private and allow firms a year to remediate quality control problems. If after a year firms have not resolved quality control problems to the board's satisfaction, then the board is free to republish the report with the concerns described, which the board has done with three of the four Big 4 firms and several smaller firms. The PCAOB recently published guidance on what it takes to satisfy its concerns in a way that would keep those concerns permanently sealed, not long before it republished an inspection report for Deloitte settling a dispute over its quality control remediation efforts. The board plans to begin the rulemaking process with a concept release to gather views, said Baumann.

The news of pending proposals likely is welcome to Brian Croteau, deputy chief accountant at the SEC, who recently chided the PCAOB at the same accounting conference for dragging its feet on some long-discussed improvements to auditing standards. “Standards such as auditing estimates, including fair value and use of other auditors and specialists, have been on the PCAOB's agenda and talked about at various meetings for years now but have still not even advanced to a public proposal,” he said. “It's time to make progress by advancing these projects to proposal for public input. SEC staff continues to stand ready to work with the PCAOB to get these projects, which may have the most potential to improve audits.”

PCAOB spokesman Colleen Brennan said the board's agenda calls for adoption of a standard on related parties and a proposal on using the work of specialists and other auditors in the first quarter of 2014.

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