A recent flood of regulatory activity from the Public Company Accounting Oversight Board (PCAOB) has put immense pressure on auditing firms to deliver far more than ever before. This includes greater responsibilities in their approach to client cyber risk and fraud or other illegal activities. These potential regulations may severely compound the workforce difficulties firms have faced since COVID-19. To rise to the challenge, firms must adopt not only a risk-based audit approach, but also a new talent strategy, tapping into fractional specialists with the experience to plan and execute more robust audit processes on demand.
New Fraud Detection Requirements and Reporting Metrics
The PCAOB has recently proposed two significant changes that will impact audit firms. First, they have proposed amendments to strengthen auditing standards related to the auditor’s responsibilities for fraud detection. These amendments aim to enhance requirements for identifying and assessing risks of material misstatement due to fraud, and for performing audit procedures to respond to those risks.
Second, the PCAOB has proposed requiring audit firms to disclose several new metrics, including auditor turnover, partner involvement, workload and work experience. These metrics would need to be provided at both the engagement and firm level for audit firms that audit public companies meeting certain criteria. The goal is to provide greater transparency and insight into audit firm operations and audit quality.
New Regulations Require a New Approach
“Many years ago, there was an industry saying: ‘I’m not a frauditor; I’m an auditor,’” explains auditor Chuck O. “What we’re seeing with this new guidance is an attempt to not only get firms on board with very real fraud and IT risks, but also to identify the true risks of an organization and take the next step to say, ‘What are we going to do about these risks? How are we going to change what we’re looking at and how the audit is done?’”
The cookie-cutter approach that most firms use will no longer suffice in this new regulatory landscape. Auditors must think creatively and with greater skepticism, drawing upon rich experience and industry knowledge to redesign processes and get ahead of risk.
“Historically, auditors aren’t creative—it’s even considered a dirty word at times,” Chuck says. “But with a truly risk-based audit approach, no two audits should ever be the same.”
With a limited bullpen of expertise, that expanded scope is increasingly harder for small and medium-size firms to cover.
A Bigger Burden for Smaller Firms
The new regulatory proposals are also driven by investors looking for more transparency around who is working on their audits, how much and on which particular issues. These are all matters of talent that continue to plague small and medium-sized firms who face challenges around the following:
- Lack of expertise: While the Big Four have money and personnel to address the new requirements, smaller firms that are often small family businesses have fewer people on hand with the financial savvy and background to spot risks and impress investors.
- Lack of capacity: Unless audit planning and execution is razor sharp and driven by experienced auditors, these new reporting obligations will likely increase workloads significantly—putting smaller firms with limited resources further behind.
- Lack of technology: Larger firms are using data and analytics to identify and mitigate risk, analyzing trends in pricing, usage, sales agreements, AR/AP, etc. Smaller firms, however, have been slow to adopt analytics due to the comparatively lower monthly transaction rates of their client base.
“Smaller firms see data and analytics as a way to reduce audit hours, but it’s not just efficiency—it’s really delivering knowledge and insight value to their clients,” says Chuck.
With these regulations, delivering that level of insight and control isn’t just a value-add—it’s an obligation.
Satisfying Requirements Through Fractional Talent
Accounting more so than other professions is feeling the pain of finding and keeping good people. Fractional auditing talent has emerged as a way to keep up with workloads and requirements while boosting profitability in the process.
Maintain Quality With Auditors Who Possess Special Skill Sets
Included in the numerous reporting metrics the PCAOB is proposing are subject matter and industry experience of the auditing personnel. Fractional experts bring a wealth of knowledge across industries and skillsets, making them well-positioned to identify and anticipate risk in even the most niche categories.
Scale and Sustain Your Business
With fewer entrants and more people leaving the industry, partners are stepping in to do lower level auditing work “just to get it out the door” when they should be focusing on growth and client acquisition. Not only is that not profitable and unsustainable in the face of new requirements—it’s unappealing to investors who want to monitor partner billing more closely.
It’s also a cyclical trap: What happens in three to five years when the staff you’ve failed to teach is no further along in their development?
Bringing on a team of fractional auditors gives firms flexibility to manage the increased workload caused by the new PCAOB requirements while also freeing up partners to develop their staff alongside experts with Big Four and Fortune 500 experience to share.
Improve Your Audit Cybersecurity Acumen
As cybersecurity is one of the greatest risks to business today, regulators are demanding more financial reporting around it. Firms now need a strong center of influence in connection with cybersecurity in order to conduct a proper fraud audit.
“You don’t have to talk the talk,” clarifies Chuck, “but you do need to make sure you have experts in your bullpen you can call on to resolve those real-time issues with your clients or your clients’ clients.”
Boost Your Technological Capabilities
Another trend in the auditing world, and perhaps a response to increasing regulatory pressure, is the emergence of specialized auditing software, such as programs with manufacturing or oil and gas audit templates. Whether it’s harnessing AI, data analytics or specialized software, bringing on expertise with knowledge in specialized software can help you detect risk at a new level.
Act Now, Ahead of the Busy Season
In a volatile global business climate, investor and regulator scrutiny is not going away. It’s now mission critical for firms to adopt a new risk-based audit approach and talent strategies that enable them to navigate evolving regulatory requirements.
By leveraging the expertise of specialized auditors and finance experts on an as-needed basis, firms can overcome resource constraints, enhance their capabilities and deliver high-quality, tailored risk assessments for clients.
Given the amount of extra help and specialization needed to meet the pending PCAOB requirements, take the time now to learn about Paro’s top-tier staff augmentation services and secure your team across audit surge seasons. Paro fractional experts have experience in more than 60 industries and 250 skill sets, so you can find the industry, software or technical knowledge to increase capacity at your firm. Get the solutions you need to increase efficiency, capacity and analytics at your organization.
