Chocolate chip cookies might look like their oatmeal raisin cousins from ten feet or so, but your taste buds will always beg to differ. Things that look, sound, or even act the same from a distance can be entirely different when you're up close and personal. Finance leaders need not look further than PCAOB vs AICPA audits for proof of this time-tested dynamic – and it pays to understand those critical differences.
Thankfully, the external audit gurus at Embark are well-versed in the intricacies of both the PCAOB and AICPA sides of the audit fence. Put another way, we know our stuff. So, on that note, we want to share a few insights on the two to give your team a more informed perspective, helping you prepare for whatever an independent auditor might throw your way.
Understanding AICPA Audits: Origins and Focus
By far the older of the duo, the American Institute of Certified Public Accountants (AICPA) was founded in the 1940s to help auditors better perform their tasks, with the more modern set of its self-regulatory audit standards taking root in the 1970s. The group has a diverse set of responsibilities ranging in everything from preparing and grading the CPA examination and public financial education programs to – the topic du jour – setting audit standards for every size of company, not to mention non-profits and government entities.
You're right if you think such varied tasks seem like an awful lot for a single organization to handle. You'd also be correct in surmising that an AICPA audit has a distinctly less stringent focus, given its auditor-friendly roots. Simply put, it's an audit opinion that concentrates on providing assurances to stakeholders that an organization's financial statements are accurate, reliable, and free of material misstatements.
Therefore, while the concurring partner is still meant to bolster the integrity of the process, the review is much lighter and non-evasive. Also, an AICPA audit has a comparatively longer timeline and is substantially lower in risk for a company, at least when compared to a PCAOB audit. On the other hand, the PCAOB has absolutely no jurisdiction over the audit process, so there are definitely some key differences between the two.
Recent Changes to AICPA Audits
The times they are a-changin', and the AICPA is no exception. In keeping up with highly dynamic expectations and a demanding marketplace in general, the AICPA has rolled out significant updates to the AICPA auditing standards in recent years. So, let's unpack what's new(ish) in the AICPA's playbook:
- Introduction of SAS No. 145: In October 2021, the AICPA issued Statement on Auditing Standards No. 145. This new standard revamps how auditors identify and assess risks of material misstatement.
- Focus on Internal Controls and IT: SAS No. 145 pays special attention to a company's system of internal control and the role of information technology in audits.
- Effective from December 2023: These new standards are in play for audits of financial statements for periods ending on or after December 15, 2023.
- Enhanced Risk Assessment: The standard aims to sharpen the auditor's eye when it comes to evaluating a company's risk landscape, making sure nothing significant slips through the cracks.
With these changes, AICPA audits are poised to be more thorough and attuned to the complexities of modern business environments.
PCAOB Audits: Enhanced Scrutiny and Public Trust
If an AICPA audit is the kinder, gentler side of the audit coin, then a PCAOB audit is the more intense and scrutinizing one. In fact, its very name and founding speak volumes – the Public Company Accounting Oversight Board, founded in 2002 as a part of the Sarbanes-Oxley Act (SOX).
The PCAOB was formed in direct response to the many accounting scandals from that era that, collectively, shook investor confidence and broke the public's trust in many publicly traded companies. Given the industry's dynamic nature, PCAOB adopts a forward-looking perspective to keep pace with changes in the financial environment, helping to ensure ongoing investor protection.
Therefore, the focus of a PCAOB audit engagement has a distinct bent toward a company's stakeholders and providing the investing public with clarity, accuracy, and accountability. As such, a PCAOB audit will have two opinions, one for financial statements and the other, internal control over financial reporting (ICFR), regarding your control environment and effectiveness. The auditor will typically have a lower materiality threshold due to the public nature of the company and the involved risk. This corresponds with a lower scoping materiality as well.
Recent Changes to PCAOB Audits
It's not like the PCAOB has been lagging, though. In a bid to strengthen investor confidence and adapt to the rapidly changing financial sphere, the PCAOB has been very busy, making noteworthy strides in the PCAOB auditing standards and practices:
- Record-Setting Action in 2023: The PCAOB took more formal actions on standard setting and rulemaking in 2023 than in any year over the past decade.
- New Standard for Auditor's Use of Confirmation: This long-awaited standard brings a fresh approach to how auditors verify information, enhancing the reliability of audit outcomes.
- Anticipated Proposals and Adoptions: Look out for proposals on Quality Control, Noncompliance with Laws and Regulations, and technology-assisted audit procedures. These are established to refine the audit process further.
- PCAOB's Commitment: There's a strong drive to modernize standards and rules, ensuring they meet the needs of today's investors and the broader financial community.
These updates signify the PCAOB's continued dedication to upholding the integrity and trustworthiness of public company audits. Important stuff, to say the least.
PCAOB vs AICPA: Key Differences and Other Considerations
While we've dissected the technical differences between PCAOB and AICPA audits, there's more to the story. It's not just about the rules, of course, but what they mean in practice. To that point, we have some additional considerations to mull over:
- Stakeholder vs. Investor Focus: AICPA audits tend to concentrate on providing stakeholders with assurance about the accuracy of financial statements. In contrast, PCAOB audits have a laser focus on investor protection and the public interest.
- Materiality and Scope: PCAOB audits are often more stringent with a lower materiality threshold, reflecting their public nature and higher risk profile.
- Evolving Practices: Both AICPA and PCAOB are continuously updating their practices, responding to changes in technology, risk assessment approaches, and the global financial environment.
- Greater Good: Remember, whether it's an AICPA or a PCAOB audit, the end goal is to foster trust and transparency in financial reporting. Each plays a vital role in maintaining the integrity of our financial systems.
What exactly does all of that mean, you ask? Well, there's a heightened sensitivity in a PCAOB audit relative to its AICPA counterpart due to the lower materiality that impacts every aspect of the audit. Similarly, PCAOB involves a far more in-depth, evasive role for the concurring partner, along with the possibility of an audit review from the PCAOB.
That last point, while rarely spoken of and even then strictly in hushed tones, is a key difference between an AICPA and PCAOB audit – the consequences when things go south for an auditor are dramatically higher for a PCAOB audit.
Aside from the PCAOB itself looming over the auditor like a shadow, audit firms also have extensive review processes in place, where a committee looks over every filing before issuance for consistency across the entire firm. This required consultation only exists for PCAOB audits, not AICPA. Obviously, along with inherently higher standards, a PCAOB audit is more stringent, meticulous, and casts a wider net due to the lower materiality, all with an accelerated timeline.
A Final Word from Embark
We're not so bold to say audit reports are nothing to sweat. In fact, an auditor's report plays a critical role in the industry and creates balance and trust within our financial systems. However, as we've detailed, not all audits are created equally, so take the differences between an AICPA and PCAOB audit to heart. Know what you're up against, the level of scrutiny to expect, and never forget that, like it or not, the audit process is in place for the greater good.
Of course, knowing is only half the battle. Actually preparing for and going through an audit, no matter AICPA or PCAOB, is an entirely different animal. Therefore, build on today's insights with our more thorough look at preparing for an audit, and when the time is right, don't be afraid to reach out to our team of advisors to carry you over the finish line. You'll be thanking us later.
