By HIMANSHU V. KISHNADWALA
Chartered Accountant
Audit
Report and Critical Audit Matters paragraph in financial statements of Public
Company Accounting Oversight Board (PCAOB), United States
Compiler’s
Note
The PCAOB is a non-profit
corporation established by Congress to oversee the audits of public companies
in order to protect investors and the public interest by promoting informative,
accurate and independent audit reports. The PCAOB also oversees the audits of
brokers and dealers, including compliance reports filed pursuant to Federal
securities laws, to promote investor protection.
The five members of the PCAOB
Board, including the Chairman, are appointed to staggered five-year terms by
the U.S. Securities and Exchange Commission (SEC), after consultation with the
Chair of the Board of Governors of the Federal Reserve System and the Secretary
of the Treasury. The SEC has oversight authority over the PCAOB, including the
approval of the Board’s rules, standards and budget.
The mission of PCAOB is to
oversee the audits of public companies and SEC-registered brokers and dealers
in order to protect investors and further the public interest in the
preparation of informative, accurate and independent audit reports.
The vision of PCAOB is to be a
trusted leader that promotes high quality auditing through forward-looking,
responsive and innovative oversight. At all times we will act with integrity,
pursue excellence, operate with effectiveness, embrace collaboration and demand
accountability.
Given below is the audit report
of PCAOB for 31st December, 2019.
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have audited the accompanying
statements of financial position of the Public Company Accounting Oversight
Board (PCAOB) as of 31st December, 2019 and 2018, and the related
statements of activities and cash flows for each of the years in the two-year
period ended 31st December, 2019 and the related notes (collectively
referred to as the financial statements). We have also audited the PCAOB’s
internal control over financial reporting as of 31st December, 2019
based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organisations of the Treadway Commission
(COSO).
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
financial position of the PCAOB as of 31st December, 2019 and 2018
and the results of its operations and its cash flows for each of the years in
the two-year period ended 31st December, 2019 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the PCAOB maintained, in all material respects, effective
internal control over financial reporting as of 31st December, 2019,
based on criteria established in Internal Control – Integrated Framework (2013)
issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the
financial statements, during the year ended 31st December, 2019
PCAOB adopted Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606) and Accounting Standards Update No.
2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and
Accounting Guidance for Contributions Received and Contributions Made. Our
opinion is not modified with respect to these matters.
Basis for Opinion
The PCAOB’s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Financial Reporting Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the PCAOB’s financial
statements and an opinion on the PCAOB’s internal control over financial
reporting based on our audits. We are required to be independent with respect
to the PCAOB in accordance with the relevant ethical requirements relating to
our audit.
We conducted our audits in
accordance with the auditing standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the financial
statements included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. Our audit of
internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition and limitations of internal control over financial
reporting
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. PCAOB’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the PCAOB; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the PCAOB are
being made only in accordance with authorisations of management and directors
of the PCAOB; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorised acquisition, use or disposition of the PCAOB’s
assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Critical audit matter
The critical audit matter
communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the board of
directors (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing
separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Description of the matter
As disclosed
in Note 2, the PCAOB adopted ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) (ASU 2014-09) during its fiscal year ended 31st December,
2019. The core principle of this standard is that revenue should be recognised
to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in
exchange for those goods and services. Historically, the PCAOB has recognised
revenue related to support and annual fees in the year in which they are
assessed, registration fees in the year the application is submitted and
monetary penalties in the year the sanctions are effective. Management
evaluated its historical revenue recognition practices against the requirements
of ASU 2014-09 as part of its adoption of the standard.
Auditing the PCAOB’s adoption of
ASU 2014-09 required complex auditor judgment due to the nature and
characteristics of the PCAOB’s revenues.
How we addressed the matter in our audit
As part of its
consideration of ASU 2014-09, the PCAOB prepared an analysis of its revenue
sources against the concepts included within the standard. This analysis
included the following considerations:
- The PCAOB’s revenues are derived from
issuers, broker dealers and public accounting firms. PCAOB does not have a
contract with any of these parties.
- The amounts assessed to these parties by the
PCAOB have not been negotiated and these parties are not the direct
beneficiaries of the PCAOB’s services.
- The assets transferred to the PCAOB by
issuers, broker dealers and public accounting firms are not transferred on a
voluntary basis.
Based upon its analysis, the
PCAOB concluded the majority of its revenue sources do not meet the criteria
specified to be specifically accounted for under ASU 2014-09. As a practical
alternative, PCAOB looked via analogy to the guidance of ASC 958 for when the
revenue amounts are determinable, they have a right to bill and collect such
amounts, and the amounts are realisable. Based on this analysis, PCAOB
concluded that its revenue should be recognised at the point of billing and, as
a result, recognition policies should remain consistent with historical
practice. In our audit of this conclusion, we performed the following:
- We analysed applicable accounting guidance in
ASC 606 and ASC 958 based upon the specific facts and circumstances of the
PCAOB’s revenue types.
- We analysed the realisability considerations
for each of the PCAOB’s revenue types.
- We analysed applicable issuer, broker dealer
and public accounting firm appeal rights for each of the PCAOB’s revenue types.
- We tested controls over the PCAOB’s revenue
recognition process.
In addition to the engagement
team personnel, we consulted with our firm’s revenue recognition subject matter
expert on the adoption of ASU 2014-09 based on the PCAOB’s specific fact
pattern. In addition, we evaluated the PCAOB’s disclosure included in Note 2 in
relation to this matter.
We
have served as the PCAOB’s auditor since 2006.
