Auditing Estimates: An Update for Unprecedented Times

For anyone reading the headlines, it sometimes feels as if we are living in unprecedented times, but the reality is, Shakespeare was right: “the past is prologue.” We’ve been through wars before. We’ve experienced inflation. We’ve survived recessions. What’s perhaps unique however, is the confluence of so many uncertainties which feels like uncharted territory for many of the younger generations.

For instance, in March 2020, while typically a lagging indicator of economic health, we saw unemployment uncharacteristically lead the way for economic deterioration with the onset of the pandemic. While the markets tanked in the short term, by Q3 2020, the stock market had fully recovered and then went on to rally through Q4 2021. Though market performance does not equate to economic strength, certainly the pandemic seemed to de-correlate the two metrics. Fast forward to Q3 2022 and headlines are struggling to know what to call the current economic situation. Is it a recession or just a correction? Despite two quarters of negative economic growth, companies across many industries are still posting profits (albeit perhaps less than anticipated) and almost every company is struggling to hire sufficient resources. Supply chains are still disrupted, given the war in Ukraine and the reverse impact of sanctions, as well as the ongoing nature of the pandemic. And finally, we’re all aware of the red-hot inflation trend, leading the Fed to post several interest rate hikes in a very short time.

While we can all acknowledge the economic uncertainties, how do we incorporate these new realities into our audits? Specifically, how does management compensate for these uncertainties in its estimates and how do auditors test these assumptions given how new or different they are from the past economic cycles?

In our first article on Auditing Estimates, we provided various audit considerations for teams when evaluating subjective management assumptions. We stated (and many of our readers echoed their frustrations) that “auditing a management estimate can feel like trying to make concrete out of Jell-O.” Several years later, in its most recent inspection observations, the PCAOB still finds issues with estimates, stating:

“While we have observed improvements in auditing accounting estimates, deficiencies continue to occur, particularly in auditing the allowance for loan losses (ALL), estimates related to accounting for business combinations, investment securities, and long-lived assets.”

The most common deficiencies stemmed from audits where engagement teams:

Did not sufficiently evaluate the appropriateness of models used in valuations;
Did not sufficiently obtain audit evidence for assumptions used in valuations;
Did not sufficiently evaluate changes, or lack of changes, in recurring assumptions used in valuations (specifically for ALL); and
Did not sufficiently evaluate contradictory evidence when concluding on the reasonableness of assumptions.

Building on our previous article, below we expand on the common deficiencies and additional considerations to incorporate into audits of estimates, especially given current economic conditions.

Auditing Estimates Considerations

Valuation Models

While I have rarely seen inappropriate models used in valuations, I have often seen teams fail to sufficiently document its evaluation of the valuation models used in estimates. AS 2501.10 and 11 explicitly require the auditor to evaluate whether the method used by management is in accordance with the financial reporting framework and is appropriate for the specific account. In addition, all changes to models need to be considered. Regardless of the type of model used/applied, it must be evaluated. The more complex the model, the more there is a need for a qualified valuation specialist that can specifically evaluate the appropriateness of the model itself, whether at the macro level (i.e. use of an income approach) or at the micro level (i.e. the appropriate factors to incorporate in building a discount rate).

Support for Assumptions

This finding is arguably the most difficult for auditors to fulfil given the judgment involved in what defines “sufficiency” or “reasonableness.” While we can debate the definitions, the reality is that many teams are still failing to obtain solid evidence and support for assumptions embedded into valuations. I often see teams inquire with management to understand how management derived its assumptions while failing to perform further procedures to obtain actual support for the inputs. Below are some considerations for teams to incorporate into their evaluation of assumptions:

Availability of data / information: In the current economic environment, is there relevant historical or industry data that can support specific assumptions?

For instance, given supply chain disruptions, do the past two or three years of historical internal data support future projections? How long will supply chain disruptions last? What will be the impact on production and sales? What will be the impact on costs and margins?

For start-ups with less operating history or smaller companies with less internal information tracking/monitoring, or less controls around internally derived information, management and auditors may be forced to look to external sources of information to support specific assumptions.

Accuracy and completeness as well as relevance and reliability of information: Engagement teams need to evaluate the accuracy and completeness of any data used by management that is internally derived (i.e. company specific data). In addition, for all externally derived information, auditors need to evaluate the relevance and reliability of that information. Regardless the source of the data, AS 2501.14 specifically requires auditors to evaluate whether “the data is relevant to the measurement objective for the accounting estimate.” The current economic uncertainties will challenge the relevance of information given some of the current conditions have not been seen in 30 or 40 years (i.e. inflation).

Qualitative inputs: Management often discusses qualitative factors that impact the valuations. Somehow, these qualitative inputs need to translate into quantitative figures used in the valuation model. Management is responsible for creating and supporting the quantitative assumptions, so auditors should not hesitate to challenge management on how it derived a specific assumption. I encourage teams to keep asking: “How? Why? Tell me more.” Be curious.

Changes in Recurring Assumptions

Given the changes in economic conditions, management and auditors need to consider changes (or the lack thereof) in recurring assumptions. Part of this evaluation should be built into retrospective reviews over management estimates (as required under AS 2401.63-65). Retrospective reviews will help audit teams evaluate how accurate previous management estimates were. To the extent management missed the mark in prior years, I would expect that current year assumptions would change to more accurately reflect the most recent information. In addition, to the extent economic conditions change, again, assumptions should also adjust year over year. For instance, although historical inflation assumptions typically ranged from 2-3%, I would expect current year inflation assumptions to reflect the higher trends being reported in the news.

Too often, auditors simply apply a “status quo” blanket expectation for all assumptions, but the challenge will always be:

If assumptions changed year over year, what supports the change in assumptions?
If assumptions remained static, should they have remained constant? Or should they have changed to reflect evolving macro-economic or company-specific factors?

These same concepts apply for analytics and fluctuation analyses where teams often just use a blanket “status-quo” expectation and investigate any changes greater than $X and/or X%. Well, why is the status quo the appropriate expectation to start? These are the auditor judgments that need to be documented to evidence the team’s considerations.

Contradictory Evidence

Auditors often review large sums of information. Invariably, there will be data that appears contradictory to management’s assumptions/assertions. It is critical for auditors to challenge this information and resolve any discrepancies that arise from contradictory evidence. Auditors should consider the following:

Obtain support from management to validate its assumption and ask management to speak to why the contradictory evidence is irrelevant or unreliable and should not be factored or weighted in the valuation.
Perform a sensitivity analysis to demonstrate how the contradictory evidence does not materially impact the valuation.
If contradictory evidence could materially impact the valuation, consider different scenarios and obtain additional support that further validates management’s assumption and/or invalidates the contradictory evidence. For instance, look at historical performance with the presence of the same contradictory evidence but that would still support management’s assumption.

The extent of additional procedures needed to resolve the contradictory evidence will depend on various factors, such as the risk assessment linked to the estimate, including the fraud risk assessment, the overall evaluation of management bias, the materiality of the valuation and the correlated contradictory evidence, etc. The key here is that auditors cannot simply ignore contradictory evidence. Teams need to document the evaluation.

Bank-Specific Considerations

While estimates for all companies are difficult to audit, it is perhaps even more complex for banks given the allowance for loan losses (or now the allowance for credit losses) has so much tied to economic conditions. How are banks incorporating new realities such as the interest rate volatility? Or supply chain disruptions that may impact borrowers’ abilities to service loans? What about conflicting economic conditions such as declining unemployment figures coupled with two quarters of negative economic growth? Do banks have sufficient historical data from previous time periods that mimicked the current economic conditions? Depending on the source of that information, is that information accurate and complete or relevant and reliable?

For banks, engagement teams should specifically consider the following:

Since the allowance is often predicated on historic loss data, how has the engagement team evaluated the accuracy and completeness of that information? Recurring audits will often use recent historical loss data pulling from systems and reports that have been tested in previous audits. However, what if the engagement team decides to look at information from the 2008 recession or from the inflationary decades such as the 1970s and 1980s? What procedures has management and/or the engagement team performed to validate the accuracy and completeness of that information?

How has the engagement team evaluated the relevance of information? For instance, a two or three-year historical loss lookback would not necessarily reflect the current economic conditions such as inflation, interest rates, unemployment rates, etc. Engagement teams should consider the relevant economic factors that are built into the allowance and evaluate how closely (or not) the historical loss data reflects the current economic conditions. To the extent the data is dissimilar, then management should be adjusting assumptions, such as qualitative factors (Q-factors), to incorporate these differences.

For banks that may not have relevant historical loss data sets, management may be forced to look for external sources to support their assumptions (i.e. look for other banks and their loss ratios). Engagement teams need to consider the relevance and reliability of this information when evaluating the assumptions. For instance, where were the loss ratios obtained? Which industries/segments were included? How similar are the loan portfolios?

Are inputs to qualitative factors auditable? What support is there for changes in qualitative factors? Do changes (or lack of changes) in qualitative factors correlate with macro-economic trends (i.e. did the bank adjust for unemployment and did that adjustment mirror current unemployment trends)? How did the bank determine the percentage change given the qualitative consideration? Often teams will need to look in aggregate at the impact of all changes to qualitative factors on the overall reserve.

In testing controls, are engagement teams considering all relevant controls that might provide comfort over accuracy and completeness of information used to derive assumptions or data used in the valuation? How precise are management review controls around the valuation and how much comfort can engagement teams leverage from the testing of these management review controls? For example, would an entity level credit committee review be sufficiently precise to detect material misstatements in estimation and calculation of allowance, or should the auditors identify and test more precise process level controls?

One tool we often recommend to our clients who perform bank audits is to perform an anchoring exercise, or a look-back analysis performed to locate historical periods with similar economic conditions/outlooks. This requires historical information about losses reported in a time period with similar risk characteristics (e.g. Y1 of recession). Then compare the loss reserves to actual charge-offs (of the loans existed at Y1 YE) that occurred in the periods subsequent to Y1. The difference would be a good indicator of how accurate the historical loss model was and what assumptions / inputs might need to be adjusted in estimation of relevant Q-factors to fully reserve for anticipated losses in the current year.

Key Takeaways

Auditing estimates is never easy. As with all things audit, the nature, timing, and extent of procedures are driven by the risk assessment. Given the confluence of numerous economic uncertainties, many of which are “new” compared to the last couple of decades, the risks surrounding subjective management judgments and assumptions used in valuations will increase the overall risk linked to an estimate, including the potential for fraud risk through management bias. As auditors plan and prepare for audits, consider the following:

Engagement teams must always evaluate the appropriateness of valuation models used in estimates. Some models may require a qualified valuation specialist to conclude.

Auditors need to continue to expand on testing the reasonableness of assumptions by obtaining support from management that is complete and accurate and relevant, or from other external sources (such as industry data) that is relevant and reliable. Given so many changes to economic conditions, relevance will be an important consideration for teams to document.

When the status quo is disrupted and the economy is in a period of significant uncertainty, auditors should consider all changes, or lack of changes, in assumptions and inputs. This is an important part of reviewing estimates for management bias from previous periods and for truly concluding on the reasonableness of current year estimates.

Contradictory evidence must always be considered and sufficiently documented and resolved to conclude on the overall reasonableness of accounting estimates.

Q-factors should be supported by reasonable estimates which are based on accurate, and relevant and reliable information, especially in times of significant uncertainties.

While we’ll never make concrete out of Jell-O, no matter the economy, we must continue to perform robust audit procedures and build in additional considerations to account for the economic changes and uncertainty we’re experiencing today. The hope is not to make concrete, but merely a Jell-O that holds it shape (and jiggles) despite a dynamic, changing environment.

Farkhod Ikramov, JGA Director , has over 25 years of public accounting and audit regulation experience. Most recently, Farkhod held a ten-year tenure as a PCAOB inspector. Throughout his experience there, he inspected a variety of industries, focusing the last four years on financial services, insurance and mining. His experience positions him as a passionate and practical advisor to public accounting firms, assisting leadership in the implementation of the right controls, policies and practices throughout the organization .

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JGA Makes First Contribution to The Daughters of The American Revolution

May 28, 2025

WASHINGTON, D.C.: Johnson Global is proud to announce our first charitable contribution in support of the daughters of the American Revolution (DAR) —a historic nonprofit organization founded in 1890 and dedicated to historic preservation, education, and patriotism. With over 130 years of tradition and more than one million members since its founding, the DAR continues to make a meaningful impact through local, national, and global initiatives. "We are honored to support an organization whose enduring mission aligns with our values and commitment to community" said Jackson Johnson, JGA President. "This partnership marks a significant milestone for Johnson Global Advisory as we expand our philanthropic efforts and invest in organizations creating lasting, positive change". "Thank you JGA for this impactful donation will allow our chapter to continue our mission" said Jill Mathieu, Regent of DAR. To explore more about the impact of DAR, visit: www.dar.org/discover About Johnson Global Advisory Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB and SEC staff, JGA professionals are passionate and practical in their support to firms in their audit quality journey. We accelerate the opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporate solutions which navigate those standards. JGA is committed to helping the profession in amplifying quality worldwide. Visit www.johnson-global.com to learn more about Johnson Global.

Joe Lynch to speak at 40th Midyear SEC Reporting & FASB Forum

May 28, 2025

Johnson Global Advisory ("JGA") is proud to announce that Joe Lynch, Shareholder and Managing Director, will be speaking on a panel at the 40th Midyear SEC Reporting & FASB Forum . Joe will deliver the PCAOB update on June 6, with attendance available both in person and virtually. This panel will summarize the activities of the PCAOB including: • Understand the current regulatory landscape and emerging issues under new SEC leadership • Summarize rulemaking from the FASB’s technical agenda, including segment reporting and disaggregation of income statement expenses • Anticipate accounting and reporting issues incurred with income taxes, including ASU 2023-09 “Improvements to Income Tax Disclosures” • Identify changes from the FASB on accounting for financial instruments • Prepare for disclosure requirements on ESG and climate change, including the EU’s Corporate Sustainability Reporting Directive (CSRD), the requirements of California’s ESG disclosures legislation and the status of the SEC final rule • Recall recent developments and the most frequent comment areas in the SEC review process Click here to register and learn more. About Johnson Global Advisory Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB and SEC staff, JGA professionals are passionate and practical in their support to firms in their audit quality journey. We accelerate the opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporate solutions which navigate those standards. JGA is committed to helping the profession in amplifying quality worldwide. Visit www.johnson-global.com to learn more about Johnson Global.

QC 1000 Implementation: Key Themes and Guidance from the PCAOB Workshop

May 28, 2025

On May 13th, 2025, the PCAOB held a QC 1000 workshop in Washington, DC, providing critical insights into the upcoming quality control standard. With the effective date of December 15th, 2025 , firms must proactively identify and manage quality risks by setting quality objectives, assessing risks, and implementing responses. Examples and case studies with breakout groups played a crucial role to help firms understand and apply each stage of the implementation process, from risk assessment to monitoring and remediation. Many attendees are still early in their understanding of the standard, highlighting the need for clear guidance and support. In a live poll, a significant portion of the workshop attendees indicated they have not yet started implementation. The inspection approach of QC 1000 has not been finalized. As such, they did not take any questions regarding how this would be inspected in its formative years. However, we did read between the lines from a different question around audit documentation, that it’s possible they may select components on a test basis during an inspection. Background of the Standard The QC 1000 standard emphasizes the integration of eight components: the risk assessment process, governance and leadership, ethics and independence, acceptance and continuance of engagements, engagement performance, resources, information & communication, and monitoring and remediation process. For more background information on QC 1000, please see these JGA resources: Applying the QC 1000 and Other Standards to Your Firm Understanding the Broader Benefits of ISQM 1 and SQMS 1 Applying the Benefits of ISQM 1 & SQMS 1 Across the Firm Key Topics from the Workshop Key terms such as applicable professional and legal requirements (APLR), firm personnel, other participants, and third-party providers were defined to clarify roles and responsibilities within the firm's QC system. The workshop included a walkthrough of Appendix A2 of the standard. The firm’s system must consider the APLRs that are applicable to the firm, which is unique to each firm. APLR is defined in the standard as: Professional standards, as defined in PCAOB Rule 1001(p)(vi); Rules of the PCAOB that are not professional standards; and To the extent related to the obligations and responsibilities of accountants or auditors in the conduct of engagements or in relation to the QC system, rules of the SEC, other provisions of U.S. federal securities law, ethics laws and regulations, and other applicable statutory, regulatory, and other legal requirements. It is important to be able to clearly identify the type of resource in your QC 1000 implementation journey. Paragraph .05 also discusses the terms firm personnel, other participants and third-party providers. These are defined in Appendix A.5 (firm personnel), A.7 (other participants) and A.13 (third -party providers). 1. Firm personnel include: EQR (inside the firm), Staff at shared service centers, secondees and leased staff, specialists employed by the firm. 2. Other participants include other auditors, EQR (outside the firm), internal auditors of the client that provide direct assistance to the auditors, specialists engaged by the firm, Networks, and external QC function. 3. Third-party providers include audit software providers, system security vendor, audit methodology provider, confirmation intermediary, pricing services, and broker-dealer monitoring systems. There are four distinct roles and responsibilities as described in paragraphs .11 -.17 of the QC standard. The first two roles are the certifiers of the Firm’s QC results: 1. The principal executive officer and 2. Individual responsible for the operational responsibility and accountability for the QC system as a whole. The principal executive officer (PEO) is ultimately responsible for the design, implementation, operation, and evaluation of the firm’s QC system. Only firm personnel are permitted to fill the roles required by QC 1000 . JGA Insights: 1. Not all “participants” of a firm’s structure must be included in a firm's quality control policies and procedures, which is especially important for shared service centers and outsourced staffing arrangements. These roles must be clearly defined and applied as the different levels of participants within an organization are considered differently by the standard. 2. PCAOB-registered firms of all sizes – regardless of whether the firm currently audits issuers – must adhere to these components, ensuring consistency with international quality control frameworks. 3. While it was expressed in the session by PCAOB Staff that firms are not expected to reengineer their process (e.g. more than 1 set of QC documentation), firms may need to align or “top-up” their processes with multiple standards to ensure comprehensive compliance. Keep in mind here that the top-up may not just be for QC 1000. In fact, a system in compliance with QC 1000 may need top-up considerations for SQMS 1 and/or ISQM 1. Risk Assessment Principles There were several examples and case studies to go through among table groups during the session. These activities helped illustrate the importance of getting risk assessment right, since this drives what the firm focuses on for an effective system. When it comes to implementing QC 1000, there are some key takeaways from the risk assessment process that can really guide firms in the right direction. JGA Insights: Here are a few important points to keep in mind as you work through identifying and assessing quality risks 1. The QC 1000 standard does not prescribe a specific method for identifying and assessing quality risks. This gives firms flexibility but also places responsibility on each firm individually based on their circumstances. It’s more work upfront from a “cookie-cutter” approach but ensures the design of a process that fits a firm’s unique context. 2. Quality risks should not be viewed as the opposite of quality objectives . Instead, they are factors that could potentially hinder the achievement of those objectives. 3. The threshold of “reasonable possibility of occurring” applies to all risks, including risks of intentional misconduct by firm personnel and other participants. This means that firms must consider the likelihood of risks occurring and their potential impact on the quality objectives. The PCAOB staff shared during the workshop that the concept of reasonably possible follows the same definition as used in FASB ASC Topic 450 on Contingencies. Ethics and Independence Considerations The QC 1000 standard does not alter existing ethics and independence requirements under PCAOB or SEC standards. Firms must continue to comply with those as currently written. Compared to other standards like ISQM 1 and SQMS 1, QC 1000 is more stringent in certain areas. For example, it requires: 1. Creating and maintaining a restricted entity list; 2. Periodic review of the list to ensure accuracy; 3. Appropriate certifications related to independence; and 4. Audit committee approvals where applicable. Register for the next workshop and get going on implementation To gain a deeper understanding of the QC 1000 standard and its implementation, we strongly encourage you to attend the PCAOB Smaller Firm Workshop on June 17, 2025, in Irving, Texas. This in-person-only session will provide valuable insights and practical guidance for firms navigating the new quality control standard. Register now to secure your spot. As always, reach out to your JGA Expert with any questions. About Johnson Global Advisory Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB and SEC staff, JGA professionals are passionate and practical in their support to firms in their audit quality journey. We accelerate the opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporate solutions which navigate those standards. JGA is committed to helping the profession in amplifying quality worldwide. Visit www.johnson-global.com to learn more about Johnson Global.

Joe Lynch, JGA Managing Director to Speak at AICPA® & CIMA® ENGAGE 25+

April 25, 2025

WASHINGTON, D.C.: Johnson Global is pleased to announce that Joe Lynch, JGA Managing Director will speak at the AICPA® & CIMA® ENGAGE+ 25 on May 15, 2025, and will be attending the full conference on June 9–12, 2025, at the ARIA Resort & Casino in Las Vegas, NV and live online. This CPE-eligible event is the premier annual event for accounting and finance professionals, bringing together thousands of peers, experts, and industry leaders for top-tier learning, networking, and career growth opportunities. Register by May 1, 2025, to take advantage of Early Bird rates— $1,995 for members ( regularly $2,095 ) and $2,445 for nonmembers ( regularly $2,545 ). *PCPS, Tax and PFP section members and CITP®, PFS™, CGMA® credential holders save an additional $150 . Discount reflected in section member/credential pricing during checkout. Register Today ! About Johnson Global Advisory Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB and SEC staff, JGA professionals are passionate and practical in their support to firms in their audit quality journey. We accelerate the opportunities to improve quality through policies, practices, and controls throughout the firm. This innovative approach harnesses technology to transform audit quality. Our team is designed to maintain a close pulse on regulatory environments around the world and incorporates solutions which navigates those standards. JGA is committed to helping the profession in amplifying quality worldwide. Visit www.johnson-global.com to learn more about Johnson Global.

JGA to Sponsor 2025 ALI-CLE Accountants' Liability Conference

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) is proud to sponsor the Accountants' Liability Conference hosted by ALI-CLE. This two-day event will take place in Washington, D.C. and virtually on June 2nd and 3rd. This is an excellent opportunity to gain valuable insights into a wide range of critical issues. The 2025 conference will focus on audits and oversight, providing essential guidance to help you navigate the evolving landscape of regulatory compliance and better protect your firm and clients. “We are pleased to sponsor this conference for the last several years. This event brings together top law firms, internal counsel, and risk experts for dynamic discussions on trending topics such as accounting liability and other important issues affecting the profession,” said Jackson Johnson, JGA President. “I look forward to personally engaging with participants, presenters, and stakeholders at this conference.” This year’s program is still being finalized but planned topics include: Recent Trends in Accounting Litigation Living in a post- Jarkesy world The future of enforcement PCAOB inspection program update SEC perspectives on gatekeeper liability AI and emerging technologies in the accounting industry Accounting firms entering the legal space International firm considerations Alternative practice structures and AICPA independence rules Register by April 25 to attend in-person and use the code “ JGA ” to save $250 off . OR, for webcast attendance, use the code " JOHNSON " to save $125 off the tuition. Click here to register. About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff, JGA professionals are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

JGA Makes Third Annual Contribution to The Boys & Girls Club of Greater Kansas City

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) makes third annual contribution to the Boys & Girls Club of Greater Kansas City. The 29th Annual Kids Night Out is scheduled for Saturday, April 26, 2025, and promises to be an unforgettable evening, bringing together over 1,500 guests to support the children served by Boys & Girls Clubs of Greater Kansas City. “We’re thrilled to continue our support for the Boys & Girls Club of Greater Kansas City. This marks our third year backing this chapter, and I know that many of our JGA employees have personally benefited from the programs the Boys & Girls Clubs offer nationwide,” said Jackson Johnson, JGA President. “Kids Night Out is Boys & Girls Clubs of Greater Kansas City’s biggest fundraiser each year– and all dollars raised stay right here in Kansas City”, said Andy Burczyk, Board Member and Chair of Kids Night Out. “This organization is doing extraordinary things, and it is because we as a community invest in their impact.” For over 100 years, Boys & Girls Clubs of Greater Kansas City has provided a safe, supportive environment for youth. Serving over 8,000 kids and teens annually across 11 locations, the organization helps young people achieve their full potential through programs that promote academic success, healthy lifestyles, and character development. Through mentoring and leadership training, they equip members with the skills needed for success now and in the To learn more information on the Boys & Girls Club of Greater Kansas City and their work with the youth, please visit www.bgc-gkc.org . About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff, as well as JGA professionals, are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

Johnson Global Advisory Supports Sustainable Harvest International

March 21, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) is proud to provide a financial contribution to Sustainable Harvest International (“SHI”). SHI is a nonprofit helping Central American farmers adopt sustainable farming practices for over 27 years. Their mission is to address the destruction of tropical forests caused by slash-and-burn farming and logging. SHI’s mission benefits both current and future generations by equipping farmers with the knowledge to farm sustainably. “We’re proud to partner with Sustainable Harvest International in their important work,” said Jackson Johnson, JGA President. “This collaboration helps drive lasting, positive changes and by backing such vital organizations, we stay true to our mission of giving back and making a real difference. JGA’s philanthropic efforts focus on supporting organizations that are important to our people. I appreciate Vernon sharing his experience as a board member and we are grateful to work with him to amplify this organization.” Vernon Johnson, JGA Director, is a Board Member and Treasurer for SHI. He is actively involved in this organization. "My nonprofit work has helped me maintain perspective in both life and at work,” said Vernon. “It’s taught me to stay calm during challenges and focus on the bigger picture. This experience has improved my relationships and made me more resilient in stressful situations. My advice to busy professionals is to step back, appreciate the simple things, and not sweat the small stuff—being thankful and present can make a big difference." To learn more about SHI, visit www.sustainableharvest.org/donate . About Johnson Global Advisory JGA is dedicated to helping public accounting firms around the globe achieve the highest level of audit quality. All CPAs and former PCAOB inspection staff and JGA professionals are passionate and practical about working alongside firm leadership to ensure the right controls, policies, and practices are implemented throughout the organization. Visit www.johnson-global.com to learn more about Johnson Global.

ISQM 1, SQMS 1: Influencing the Firm on the Benefits Beyond Compliance (Part II)

February 26, 2025

The implementation of the System of Quality Management (SQM) is not just a compliance requirement but an opportunity to drive significant business value. By aligning firm-wide goals, improving internal processes, and optimizing controls, firms can streamline their operations, reduce inefficiencies, and improve overall performance. The process also provides an opportunity for firms to gain valuable insights through key metrics, enabling data-driven decisions which provide strategic business insights, enhances audit quality, and promotes employee retention. In addition, early adopters who focus on the business value from the outset see improvements that reach across different practices within the firm, making the SQM implementation a strategic investment that benefits the whole firm long-term. We have seen that our work in this area results in meaningful improvements to the way the business of audit and assurance is conducted, and many of these improvements will have benefits that reach across other practices of the firm. This is part II of a series on the benefits of SQM implementation. This article builds on our insights from 2022 in Part I of this series . Compliance as a Driver Compliance is the main driver of the new System of Quality Management (for all standard-setters, referred to as “SQM”) standards issued by the IAASB, AICPA, and the PCAOB. There is no disputing that. However, for the early adopters, what we are finding is immense business value that come out of this process; more so if you start the process with business value in mind. Our ability to anticipate the benefits of executing ISQM 1 years ago is a key strength. Some firms have already implemented ISQM 1 at some level (partial adoption for group audits, for example). For SQMS 1 and QC 1000, since firms are all in various stages preparing for the December 15, 2025, go-live date, now is the time to lay out the strategic value drivers from this compliance exercise. Related: See a breakdown of the various implementation dates here . SQM implementation requires firms to take a closer look at their internal process; every process that touches the value chain of getting an audit done. To demonstrate how this requirement goes beyond the confines of the “audit practice”, consider these examples: Employee onboarding, training, and retention; Software tools and technology used to monitor internal aspects like independence; Tools used by engagement teams, for example, to test 100 percent of smart contracts or select journal entries to examine for fraud; Archiving of binders on time, and in compliance with audit documentation requirements; or Monitoring programs that identify and fix deficiencies in both audit performance and the underlying functions supporting the audit. Getting Buy-In, Aligning Goals, and Engaging Personnel We have seen firm quality leaders struggling to get the buy-in needed from stakeholders across the business (IT, HR, Tax, Advisory) for effective SQM implementation. And we have heard leadership from firms around the world ask: “What’s in it for us?” “All this investment just for a compliance exercise?” “Why do I need to be involved in something the audit group has to do?” But the best question we’ve heard is: “How can the system of quality management implementation improve our business?” When everyone is working toward the same objectives and goals, implementation becomes a cohesive and streamlined process. It’s important to have goals that are aligned throughout the organization, with them tailored to the component and roles within those areas. This includes: Getting the invested support from the partnership board down to process owners; Having goals that are specific and measurable (e.g. documenting the current process and eventually operating controls consistently and timely); Aligning the firm’s tone-at-the-top helps get everyone in sync; and Reinforcing management’s responsibility to establish a culture of quality and its importance in all the services performed by the firm. Management should: Lay out the long-term benefits of improved business performance, reduced risks, more timely and accurate data created which leads to insightful decisions; Emphasize the benefits of overall reduced costs related to non-compliance with network, firm, peer review, and regulators requirements; and Evaluate the potential for lower costs of insurance upon implementation and overtime. Understanding Current Processes Conducting interviews, gathering data, and documenting the processes within the firm’s system of quality management allows visibility of how these processes currently work (or don’t work). When SQM implementation project leaders invite personnel involved in a process together into one room and facilitates an open discussion, a clear picture of how each process really works materializes, and this strengthens cross-functional teaming. For instance, these meetings often result in the realization that two (or more) people are doing the same tasks (inefficiency) or discovering that no one is performing an important review check (gap). Formalizing and Optimizing Processes Once the current process is understood (“As-Is”) and with the right people in the room, the identification of areas where procedures can be more uniform, streamlined or simplified emerges. We often find that processes can be improved without adding more controls. This optimization effort incorporates standardization and normalization across the firm’s services and business functions providing benefit beyond the compliance exercise of the audit practice. Gaining Business Insights A sound system of quality management will bring new business insights and transparency to make confident decisions with reliable data. The optimization process will identify the key information used in the system of quality management (a similar concept to the work auditors performs with their companies as described here). This information provides new insights to help process owners and firm leaders make decisions. A firm can develop key quality metrics that are used to measure and improve the operation of the firm and audit quality which results in a modernized competitive firm. When a firm establishes a system to monitor the SQM environment, these insights allow for timely monitoring which enables leaders to quickly make decisions that address anomalies or negative trends as they arise. Getting Started Early Getting started early begins with: Firm leadership embracing the need for a consistent and well-monitored SQM to improve the business; Aligning objectives and goals for all firm personnel based on their role within the SQM; Disseminating to all firm personnel the importance of how their role contributes to the SQM; and Incentivizing all firm personnel to commit to their SQM objectives and goals which contributes to the benefits of these modern practices that lead to competitiveness. While compliance may be the hand forcing you forward, the upside to this “exercise” is that undoubtedly you will be a stronger, more efficient firm when executed correctly. We see firms that begin with such a mindset have more success internally and in the marketplace. Conclusion The journey of implementing a quality management system is transformative. Beyond compliance, it reveals deep insights and benefits, positioning firms at an advantage in our profession. For more information, reach out to your JGA audit quality expert. Jackson Johnson , JGA President and Founder, is a seasoned expert in audit quality and technical accounting matters. With nearly six years of experience at the PCAOB, he has worked with small and medium-sized accounting firms globally, focusing on firm quality control and ICFR audits. Jackson advises firms in PCAOB and SEC investigations related to cryptocurrency audits and has served on the Enforcement Advisory Committee of the California Board of Accountancy. Before his tenure at the PCAOB, he worked with public and private clients at Grant Thornton LLP in Boston, Los Angeles, and Hong Kong. Jackson is also a frequent speaker on quality control and enforcement issues in the accounting industry. Joe Lynch , JGA Managing Director and Shareholder, and a member of the AICPA Quality Management Implementation Task Force. Joe works with mid-market public accounting firms worldwide to implement quality management programs that integrate technology and process to improve the delivery of audits. Joe spent more than six years as an Inspection Leader at the PCAOB, he conducted inspections of quality control and global issuer audits at large firms in the US as well as foreign affiliate firms, focusing on examining quality control and the design and implementation of audit work. Joe also has experience supporting financial service industry audit teams at a Big Four firm. In addition, his experience includes active-duty service in the US Air Force and supporting companies with IT strategic initiatives such as designing the IT framework for technology departments as well as leading implementations of ERPs and systems.

PCAOB Withdraws Firm & Engagement Metrics Rule from SEC Approval Process

February 25, 2025

The Public Company Accounting Oversight Board (PCAOB) recently decided to withdraw proposed rules that would have required registered firms to report a significant new set of firms and engagement metrics. It was also set to mandate that large accounting firms submit financial statements to the U.S. Regulator, as part of a wider effort to enhance oversight. This decision came after criticisms from a variety of stakeholders from both the PCAOB and SEC comment process. For example, the American Institute of CPAs (AICPA) expressed concerns that these requirements could harm U.S. capital markets and negatively impact small and midsized audit firms, potentially driving them out of the public company auditing practice. The PCAOB's decision to withdraw the rules was seen as a positive move by the AICPA, which had urged the Securities and Exchange Commission (SEC) to refrain from approving the rules due to the significant challenges they posed. JGA commented to the SEC on the proposal; you can read our position on the proposal here .

Johnson Global Advisory Releases Updated 2025 Guide to Help PCAOB-Registered Firms Navigate the Inspection Process

January 17, 2025

WASHINGTON, D.C.: Johnson Global Advisory (JGA) has published a new third edition guide examining the key considerations faced by public company auditors during their PCAOB inspections. Drawing experience as audit and audit regulation experts and advisors to firms worldwide on all aspects of audit quality improvement, the JGA team has authored NAVIGATING PCAOB INSPECTIONS: Understanding the Inspection Process from Start to Finish.