Key Takeaways

  • The Public Company Accounting Oversight Board (PCAOB) warned auditors that poor oversight of specialists responsible for fair value assessments, physical asset valuations, and other estimates requiring professional skills could pose risks.
  • Financial reporting frameworks increasingly rely on fair value measurements and other estimates, the PCAOB said in a staff report on Tuesday, which "has led to a corresponding increase in the frequency and importance of the use of specialists' work."
  • The PCAOB noted: "Specialists' work is inherently highly technical and often not fully transparent to auditors, who may not have full access to the specialists' work or possess an equivalent level of knowledge and skills."

In-Depth Analysis

The PCAOB, a federal agency that oversees audit firms of public companies, said companies in many industries hire various specialists, including actuaries, appraisers, lawyers, and environmental engineers.

These specialists undertake tasks such as: assessing assets acquired and liabilities assumed in mergers and acquisitions, environmental remediation contingencies, goodwill impairment, intangible asset values, legal obligations, mineral reserve status, and residual values of property, plant, and equipment, the PCAOB said.

The PCAOB warned that without adequate supervision of specialists' work, "the risk that the auditor's work may be insufficient to detect material misstatements in the financial statements will increase."

Martin Mulyadi, an accounting professor at Shenandoah University's School of Business, believes that specialists using artificial intelligence pose an increasingly serious challenge to auditors and even the PCAOB.

Mulyadi said in an email reply on Thursday: "The PCAOB's 2025 priorities highlight key risks because audit work increasingly relies on specialists using generative AI and emerging technologies."

He said: "The biggest risk associated with this is that the rapid adoption of AI and emerging technologies may outpace updates to auditing standards and auditor training. This inevitably leaves gaps when auditors evaluate machine learning/AI/technology-generated models."

However, Mulyadi also noted that new technologies bring opportunities as well. Auditors and accountants can try to "bridge the gap and strive to master the application of generative AI, emerging technologies, and machine learning in accounting—frankly, this knowledge is still scarce."

The PCAOB said that when evaluating a company specialist's work, auditors need to test the accuracy of data and assess the relevance and reliability of data from outside the company.

The PCAOB also noted that auditors need to evaluate the assumptions used by company specialists, including those provided by management and those related to the company's ability to achieve specific goals.

The PCAOB said auditors do not need to repeat the specialist's work or ensure that the work complies with all technical details in the specialist's field.

The PCAOB stated: "Instead, the auditor's responsibility is to evaluate whether the company specialist's work provides sufficient, appropriate evidence to support the conclusions" and conforms to the financial reporting framework.

Lara Long, a managing director at business consulting firm Riveron, said in an email reply that company boards also play a role in ensuring the integrity of specialists' work.

She said: "When a company or its auditor engages specialists, the audit committee should ensure that the specialists hired have well-founded and appropriately provided qualifications."

Long said discussions among the company, auditors, and specialists help confirm the integrity of the audit. Such discussions "document the overall internal control environment surrounding the use of specialists."