Modernizing Rules for the Confirmation Process – We Want Your Input

To protect investors, the Public Company Accounting Oversight Board (PCAOB) has proposed updating an auditing standard that hasn’t changed substantially since 2003. The standard pertains to the confirmation process, and we welcome your perspective on our proposal. The deadline for public comments is February 20.

Confirmation is a process that can help auditors combat fraud.

As the name suggests, confirmation is about verifying that information regarding a particular item affecting the financial statements is accurate. It is the process auditors use to confirm certain information through independently obtained third-party evidence.

Audit procedures that involve the use of confirmation are part of nearly every audit, and an effective confirmation standard is critical to maintaining audit quality and keeping investors protected. Confirmation can be a vital tool to help auditors combat fraud, making an effective confirmation standard more important today than ever.

In the United States, the auditor’s use of confirmation has been a required audit procedure since 1939, when the American Institute of Accountants adopted Statement on Auditing Procedure No. 1 as a direct response to the McKesson & Robbins fraud case. That case involved fraudulently reported inventories and accounts receivable that the independent auditors failed to detect through procedures other than confirmation.

Since then, independently obtained third-party information continues to be an important source of evidence obtained as part of an audit of a company’s financial statements.

The PCAOB’s current confirmation standard is out of date.

The PCAOB has a confirmation standard, but it needs an update to modernize it for today’s capital markets and to ensure investors receive the protection they deserve. For example, the current confirmation standard still references “facsimile responses,” when confirmation requests and responses between the auditor and the confirming party today are often exchanged via email or through an intermediary that facilitates the direct electronic transmission.

The PCAOB attempted once before to update this standard but set aside that project for other priorities. Now we have a great opportunity to strengthen and modernize. Last December, we issued a proposal that would amend the confirmation standard with principles-based requirements that would apply to all methods of confirmation, including paper-based and electronic communications.

Give us your input on our proposed standard.

We are interested in your perspectives. Whether you are an investor, preparer, audit committee member, or otherwise, we want to hear from you. Review our proposal and tell us what you think by February 20. We look forward to receiving your input!

Erica Y. Williams is the Chair of the Public Company Accounting Oversight Board.