Audits facing internal controls ‘perfect storm’

Auditors face a “perfect storm” in the area of internal control over financial reporting, Public Company Accounting Oversight Board (PCAOB) member Jeanette Franzel has claimed.

Speaking in Florida, she noted that management and auditors will be navigating the updated Committee of Sponsoring Organizations of the Treadway Commission (COSO) "Internal Control — Integrated Framework" at the same time that external audit firms take measures to respond to PCAOB inspection findings associated with their audits of internal control.

“Unfortunately, over the decades, we've seen multiple cycles in which company management and internal and external auditors simply didn't get it right in the area of internal control, resulting in failures to effectively define, understand, implement, and assess internal control,” Ms Franzel explained.

A decade on from the Sarbanes-Oxley Act, she wants to take a fresh look at internal control over financial reporting to prevent and detect material misstatements, and protect investors. Tackling this “perfect storm”, Ms Franzel added, demands the attention of all participants in the financial reporting and auditing chain.

She said: “This fresh look necessarily will involve management, internal auditors, external auditors, audit committees, and the PCAOB working together constructively to fulfill our respective responsibilities in the system of assurance over financial reporting.”

The hope is to establish “constructive” discussions between public companies and audit firm as management considers potential changes to internal control based on the updated COSO Framework. Ms Franzel noted that PCAOB inspection results have offered insights into areas where external auditors need to strengthen audits.

Feedback has shown a lack effective communication between audit firms and public companies about issues in internal control over financial reporting (ICFR). For example, there have been cases of audit firms telling issuers that the PCAOB insists on detailed procedures such as the use of screen prints’ to document certain systems-related features. “I assure you that the board is not requiring procedures at that level of detail,” said Ms Franzel.