PCAOB Adopts New Standard to Enhance Auditors' Use of Confirmation for Investor Protection

The Public Company Accounting Oversight Board (PCAOB) has taken a significant step in safeguarding investors by adopting a new standard that strengthens and modernizes the auditor's use of confirmation. The confirmation process involves verifying information related to financial statement assertions with third parties. The updated standard is a vital response to changes in technology, communication methods, and business practices since the interim standard's initial adoption by the PCAOB in 2003, following issuance by the AICPA in 1991.

This modernized standard is designed to better protect investors by reinforcing procedures that enhance auditors' capabilities to detect fraud under specific circumstances and elevate overall audit quality.

PCAOB Chair Erica Y. Williams underscored the importance of the new standard, stating, "The new standard will help auditors detect fraud and better protect investors. By replacing a confirmation standard that had not changed significantly since faxes were a regular form of communication, the Board has taken an important step in modernizing our standards to effectively protect investors in today's world."

The adoption of this new standard follows a meticulous notice-and-comment process, including the issuance of a concept release and two proposing releases. Input from various stakeholders contributed to the shaping of this crucial standard, which will significantly impact the audit process.

Key provisions of the new standard include:

1. Expansion of Confirmation Requirements: The new standard extends the principles-based requirements to all methods of confirmation, encompassing electronic and paper-based communications. This flexibility ensures that the standard remains pertinent as technology evolves.
2. Confirmation of Cash and Cash Equivalents: The standard introduces a new requirement related to confirming cash and cash equivalents held by third parties or obtaining relevant and reliable audit evidence by directly accessing information maintained by knowledgeable external sources.
3. Accounts Receivable Confirmation: While preserving the existing requirement regarding confirming accounts receivable, the standard addresses situations where it is not feasible for auditors to perform confirmation procedures or obtain relevant and reliable audit evidence by directly accessing information maintained by knowledgeable external sources.
4. Negative Confirmation Requests: The new standard emphasizes that the use of negative confirmation requests alone does not furnish sufficient appropriate audit evidence.
5. Auditor Responsibility: It underscores the auditor's duty to maintain control over the confirmation process, including selecting items to be confirmed, sending confirmation requests, and receiving confirmation responses.
6. Alternative Procedures: The standard identifies situations in which auditors should perform alternative procedures.

Pending approval by the Securities and Exchange Commission (SEC), the new standard is set to become effective for audits of financial statements for fiscal years ending on or after June 15, 2025. This initiative aligns with the PCAOB's ongoing commitment to enhancing audit quality and investor protection in an ever-evolving business landscape.