DÉJÀ-VU: Bank Failures & Audit Quality Risks
For anyone who lived through the 2008 global financial crisis, the recent banking headlines feel like déjà-vu. As Shakespeare said, the past is prologue, and sure enough, we are seeing multiple banks like Signature Bank and Silicon Valley Bank (“SVB”) collapse. There will undoubtedly be robust root cause analyses and in-depth regulatory investigations, but the common issue facing banks right now is the significant increase in interest rates.
As interest rates rise, the value of fixed income securities tends to fall. Conceptually, a 15-year bond issued in 2020 when interest rates were rock bottom will lose value as interest rates rise. The reason being, in the current market, investors can purchase a 15-years bond with today’s higher interest rates, meaning, that the same bond issued in 2020 with lower interest rates is worth less today and would sell at a discount on the open market.
That’s great, but what does this have to do with banks? Well, banks take deposits from customers and invest the cash according to various risk considerations; many of these investments are in more stable fixed income securities. Even if a bank held US treasuries, arguably the most risk-averse investment, given the significant rise in interest rates over the past couple years, these fixed income portfolios have lost value. If the securities are held to maturity, the bank will receive 100% of the principal, so from a long-term perspective, the bank is fine. However, in the short term, if customers lose confidence in the bank and there is a run, the bank would ultimately become insolvent because it would not recover the face value of the lower-interest-rate bonds in today’s high-interest-rate market. Thus, as was the case with SVB, once there was a run on the bank, it had to shut down within hours.
There will be more detailed accounts to follow, but let’s take a moment and reflect on the rise in interest rates and the threat facing many banks. From the 1980’s through the 2008 global financial crisis and even further through the pandemic, we’ve been living in a declining interest-rate environment. For young auditors, this may be the first time they’ve seen rising interest rates. So, what are the relevant audit considerations for a bank engagement? And what are the possible audit concerns for all other companies and industries?
Banking Engagements
Going Concern
Financial statements are predicated on the concept of going concern, that an entity can continue operating for at least another twelve months from the date of auditor’s report. For context, SVB’s financial statements were issued on February 24, 2023. Two weeks later, on March 10, 2023, the bank was closed. There was no explanatory paragraph or emphasis of matter and no critical audit matter (CAM) disclosed in the auditor’s report, and yet, all it took was two weeks. In this case, one might conclude there was no going concern discussion either because the bank’s liquidity was strong, or the watch dog was too weak to bark.
As teams consider the going concern assumption, we encourage you to engage in dialogue with management and really challenge management’s assertions.
- Look at the bank’s liquidity. Look at the investment portfolio mix. Deposits, by their very nature, tend to be short-term liabilities. What is the bank’s mix of short-term and long-term bonds? Short term bonds (because they tie up money for less time) are impacted less by interest rate hikes compared to long term bonds.
- Review management’s asset and liability stress tests. What happens if there is a decrease in valuation of investments and an increased demand for deposits? If management doesn’t perform stress tests, first consider the impact on internal controls and then consider performing your own stress tests.
- Ask management how it intends to weather the current rising interest rate environment. Given higher borrowing costs, many customers will likely try to use cash, pulling from deposits, in lieu of borrowing. How is management hedging this risk? Because inquiry alone is never enough, corroborate management’s assertions.
- Consider analysts ratings and external information about the bank. While external information may be biased, it can have a significant impact on credibility and confidence in the bank. All banks have capital reserves and some liquid cash to offset returns of deposits, but a mass run on a bank (typically due to lack of confidence) can bankrupt the bank. Analysts have a lot of power over confidence in a company.
- Consider the bank’s exposure to any other banks and/or credit institutions.
Valuation
Rising interest rates also impact valuations. Let’s take a look at some of the more prevalent concerns:
- Investments – Equities and Fixed Income: As we’ve all seen, the equity market took a hit last year and has been slow to recover. As well, the rising interest rates have taken a hit on the value of fixed income securities. Essentially, investments are down right now. Audit teams will need to evaluate whether the decreased valuations are indicative of other-than-temporary-impairment (OTTI). Considering there is no current interest rate relief planned (in fact, the Fed continues to raise interest rates in light of bank failures), there are strong indicators of potential impairment. What seemingly used to be “just a disclosure”, OTTI related disclosures have now become very sensitive information used to assess how much of the bank’s investments are under-water and for how long. This begs a question that engagement teams should also consider: classification of investments as held-to-maturity. For many banks, this may no longer be an option; again, what are management’s intentions and more importantly can banks hold onto under-water investments long enough to withstand customers’ demands to withdraw cash?
- Investments – Derivatives: Engagement teams should pay particular attention to the valuation of derivatives that incorporate interest rates. Bank failures and overall monetary tightening have introduced new credit risks which could impact the effectiveness of any number of derivatives. Wall Street has created derivatives for everything, so be sure to read the fine print in every contract and understand the inputs into the valuations. While the unrealized positions for derivatives may appear immaterial at times, don’t underestimate the notional value which can be many times the unrealized position and presents real risk if triggers linked to interest rates are met.
- Impairment – Goodwill and Intangibles: With increased interest rates comes increased discount rates which brings lower net present values for any discounted cash flow projection. Thus, the risk of impairment for goodwill and intangible assets has increased by default. Given the drastic increases in just over a year, large cushions enjoyed in recent years may easily disappear within a year (or less). Add in the uncertainty in the markets with high inflation rates and the “looming” recession expectations, engagement teams need to really dig into accounting estimates, understand the methods and changes from prior year, validate the data and challenge assumptions. Again, what is management doing to understand and evaluate the sensitivity of significant assumptions?
Allowance for Credit Losses
The most challenging part of any bank audit is the allowance for credit losses (ACL). This is commonly cited as a critical audit matter and is one of the most common findings on PCAOB inspections. While an interest rate increase does not directly correlate to an increase in the ACL, the general economic environment contributing to the increased rates has a direct impact.
In KPMG’s CAM on the ACL in SVB, one of its audit procedures included “evaluating the historical observation period, focusing on the relevance of the full economic cycle relative to the Company’s current portfolio.” What does “full economic cycle” mean in today’s environment? For context, it has been approximately 15 years since the last financial crisis. Interest rates dropped and though there was some recovery pre-pandemic, interest rates remained low and bottomed out during the pandemic. While banks use lookback reviews to develop models for the ACL, most models have no recent, relevant data for the current economic environment: high inflation, rising interest rates, quantitative tightening and significant economic uncertainty.
Though auditing an estimate doesn’t change in light of the economic environment, engagement teams should increase their professional skepticism and seek to understand (and challenge) how management identifies potential credit concerns amongst its loan portfolios. Dig into the assumptions and understand what has changed in the model year over year. Considering many models may not have the most relevant historical data, what adjustments have been made to qualitative factors to adjust for the current economic conditions? Or if there were no changes, is that appropriate?
Communication and Disclosures
As banks prepare financial statements, consider the sufficiency of risk disclosures. SVB had a significant concentration of customers in the venture capital industry. Are customer concentrations appropriately disclosed? Based on the disclosures, ask management how it hedges these risks?
In addition to disclosures, consider also the need for communication with the audit committee. If there is significant doubt about an entity’s ability to continue as a going concern, this should be discussed with the audit committee, and potentially, also be a CAM or included in an explanatory paragraph in the auditor’s report. And do not forget about communications from banking supervisors and regulators, both Federal and State. These regulatory findings may indicate potential troubles in bank’s liquidity management.
All Other Engagements
While banks are currently the most at-risk for rising interest rates, all companies are impacted by both the rise in interest rates as well as the potential bank failures.
Going Concern
Similar to banks, many other companies will need to consider the potential risk to going concern. For companies with large cash positions, what would be the impact on going concern if that cash was no longer available? Inflation, rising interest rates, and a looming recession will impact future revenue growth and increase borrowing costs. What is management doing to mitigate liquidity concerns? What do the stress tests demonstrate?
Valuation
Most companies will be impacted by many of the same considerations on valuation, as discussed above. However, certain industries will have greater risks and/or concerns. For instance, insurance companies use insurance premiums to invest in alternative funds; many of these funds are impacted by the rising interest rates and the depressed market. For any company with significant leases, rising interest rates mean rising incremental borrowing costs which will impact lease valuation.
Debt Covenants
Rising interest rates often impact balance sheets unexpectedly which in turn can trigger unforeseen non-compliance with debt covenants. Teams should be sure to fully understand all terms and conditions pertaining to debt covenants. If a covenant is breached, inquire with management how it is proceeding with the creditor and then corroborate it. If the bank agrees to waive non-compliance, what evidence is there from the bank to support this assertion? How long will the bank waive the non-compliance? A waiver for one quarter may mean the company is okay at year-end, but failure to indicate future waiver could directly jeopardize the going concern assumption, depending on the amount of debt. Considering that banks/creditors rarely provide waivers, what other means of survival does the entity have?
Communication and Disclosures
Similar to banks, non-banking companies need to review risk disclosures. Engagement teams should specifically consider various credit risk disclosures such as cash positions over the FDIC insurance limits and concentrations in banks. And similar to banks, consider any appropriate audit committee communications and potential CAMs to be included in the audit report.
SVB was unexpected and then shortly after, we had another episode of déjà-vu when Credit Suisse made headlines, being given a lifeline by the Swiss regulators before being bought by UBS. And despite the risks facing the banking industry, the Federal Reserve still increased rates in March, albeit only 25 basis points (bps), as opposed to the anticipated 50 bps. The point is, we’re not through the thick of it yet. The risks are real and as auditors who perform risk-based audits, we need to ensure we understand how the current environment is impacting our clients, their customers and their creditors. Everything is more interconnected than we might imagine, so take time to thoroughly evaluate the risks and design appropriate audit procedures to address those risks, which might also include expanding explanatory paragraphs or including an emphasis of matter in the auditors’ report.
Key Takeaways
- Going concern is key to financial statements. Thoroughly evaluate the going concern assertion. Understand management’s plans and intentions and corroborate the critical factors that support its assertion, including performing stress tests to identify potential risks.
- The current economic environment is uncertain. Higher interest rates directly impact fixed income securities as well as any fair value derived through discounted cash flows (i.e. impairment analyses, leases, etc.). The current economic uncertainty is also making it difficult to forecast cash flow projections; be sure to understand the method/model, validate the relevance and reliability and/or completeness and accuracy of data used and challenge (and obtain support for) the reasonableness of assumptions.
- The ACL is already difficult to audit, but with so much uncertainty and considering that most historical data does not reflect the current economic environment, engagement teams need to critically evaluate the current year assumptions and understand how qualitative factors are being adjusted to account for changes in the macro-economy.
- Communicate appropriately with the audit committee and management, as necessary and/or required under the auditing standards. This is an unprecedented time for many auditors and many in management, so talk it out and ensure collective understanding of the risks, the appropriate audit procedures, and any pertinent (or required) disclosures in the financial statements.
- It’s always a good time to remind teams about the importance of increased professional skepticism. Ask yourself: who is my client? A bank? Its investors? Deposit holders? And let’s keep our names out of the headlines; we don’t want to be the “watchdog that didn’t bark.”
Johnson Global Advisory is pleased to announce that Jackson Johnson, CPA, President, has been appointed to serve on the AICPA & NASBA International Qualifications Appraisal Board (IQAB). The IQAB is responsible for evaluating international accounting qualifications and facilitating mutual recognition agreements between the United States and other countries, helping to support global mobility and consistency in professional standards. “It’s an honor to serve on the IQAB and contribute to efforts that strengthen the global accounting profession,” said Johnson. “As the profession continues to evolve, collaboration across jurisdictions is critical to maintaining high standards and enabling greater mobility for accounting professionals worldwide.”
Few technologies have generated as much excitement—and as much promise—for accounting firms as artificial intelligence (“AI”). The potential to streamline audit execution, reduce hours, and enhance firm profitability is real and already being realized. However, AI does not simply change how audits are performed; it fundamentally alters how firms must think about oversight, responsibility, and quality management. As regulators sharpen their focus on AI‑enabled audits, firm leadership must move beyond adoption and address a more complex challenge: establishing clear and scalable AI governance. This article outlines why AI governance is now a strategic imperative for accounting firm leadership. As discussed in JGA’s article What Regulators Expect to See When AI is Used , inspectors do not evaluate AI tools in isolation. They evaluate whether the engagement team obtained sufficient appropriate audit evidence, exercised professional skepticism, and applied appropriate supervision and review when AI was used. Those expectations are grounded in existing auditing standards and apply regardless of whether AI was used for risk assessment, testing, or documentation support. Against that backdrop, AI governance is not simply about approving tools or managing technology risk. It is about ensuring the firm’s system of quality management supports consistent, supervised, and well-documented use of AI that aligns with audit objectives and withstands inspection scrutiny. When firms treat AI as an IT matter, governance discussions tend to center on 1) Data security, 2) System access, 3) Vendor due diligence, and 4) Infrastructure controls. Those topics matter—but they are only the baseline. Inspectors do not evaluate whether AI systems are well engineered; they evaluate whether AI enabled audit work complies with standards, supports professional judgment, and is governed within the firm’s system of quality management. In short, AI governance is a firmwide audit quality issue, not a back office technology function. Using AI does not change the auditor’s responsibilities. Requirements still apply when AI is used for 1) Audit evidence, 2) Professional skepticism, 3) Supervision and review, 4) Engagement partner accountability and 5) Firm level quality controls. From an inspection standpoint, AI introduces new audit quality risks, including: Over reliance on automated outputs Reduced professional skepticism (automation bias) Inconsistent application across engagements Insufficient documentation of judgment Lack of transparency around how conclusions were reached These are not IT risks—they are audit quality risks. AI Touches Nearly Every Component of a QC System Under modern quality management frameworks (including PCAOB QC 1000 , AICPA SQMS No. 1, IAASB ISQM 1), AI affects nearly every component of a firm’s QC system, not just technology or data governance.
Johnson Global Advisory ("JGA") is proud to announce that Joe Lynch, Shareholder, will be speaking on a panel at the 41st Midyear SEC Reporting & FASB Forum . Joe will deliver the PCAOB update on June 5, with attendance available both in person and virtually. This panel will summarize the activities of the PCAOB including: Recite new requirements for the lead auditor’s use of other auditors Anticipate the new standard, “The Auditor’s Use of Confirmation” Enumerate the new requirements of QC 1000, “A Firm’s System of Quality Control” Recall the guidance of the new auditing standard “General Responsibilities of the Auditor in Conducting an Audit” Understand the amendments addressing aspects of audit procedures that involve technology-assisted analysis of information in electronic form Learn about the proposal to replace existing auditing standards related to an auditor’s use of substantive analytical procedures Anticipate other Standard-Setting and Research Projects Summarize PCAOB inspection findings and enforcement activities Understand recent PCAOB publications, including: Spotlight Publications Audit Focus Publications Data Points Publications Click here to register and learn more. Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB 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.
Johnson Global Advisory (JGA) has submitted its response to the PCAOB’s request for input on its 2026–2030 strategic priorities. Drawing on extensive experience supporting firms subject to PCAOB oversight, JGA’s comments emphasize a more modern, risk-based approach to regulation focused on audit quality, scalability, and transparency. View JGA's comments here. Johnson Global partners with leadership of public accounting firms, driving change to achieve the highest level of audit quality. Led by former PCAOB 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.
In our work with firms, we have seen a clear shift in how monitoring and remediation are viewed under modern quality management frameworks. They are no longer treated as retrospective compliance exercises. Instead, engagement deficiencies are increasingly used as meaningful inputs into an ongoing, risk-based system designed to identify issues early, address them thoughtfully, and reduce the likelihood of recurrence. Regulatory messaging reinforces this evolution. Oversight bodies are signaling a shift in focus from isolated engagement outcomes and more on whether firms have a system of quality management that consistently detects quality risks, responds appropriately, and demonstrates that remediation is working in practice. Based on our experience, while individual engagement deficiencies remain important, the more critical question is becoming how firms analyze, respond to, and learn from those issues over time. Engagement Deficiencies Are Signals, Not Endpoints Engagement deficiencies can surface through many channels, including pre-issuance reviews, internal inspections, post-issuance reviews, peer reviews, and regulatory inspections. Regardless of source, firms benefit most when these findings are evaluated through a consistent quality management lens. In practice, we encourage firms to look beyond whether a single engagement fell short . The more meaningful consideration is whether the deficiency points to potential weaknesses in governance, methodology, training, supervision, resourcing, or monitoring activities. We often observe that when issues are quickly labeled as engagement-specific, without assessing whether they reflect broader quality risks, valuable insight is lost. Modern quality management frameworks are designed to use these signals to strengthen the system, not simply close individual findings. What Effective Monitoring and Remediation Looks Like in Practice Firms that navigate this environment effectively tend to apply a disciplined and repeatable approach when deficiencies are identified. Based on our experience supporting firms across a range of practice areas, several elements consistently make a difference: Assess whether the issue may be systemic Recurring observations across engagements, service lines, or time periods often indicate system-level risk. Similar documentation gaps, inconsistent application of methodology, or supervision challenges rarely arise in isolation. Perform meaningful root cause analysis Effective root cause analysis typically moves beyond surface explanations. Firms benefit from evaluating whether policies and procedures were designed appropriately, implemented as intended, and supported by sufficient training, time, and resources. Design remediation that directly responds to the quality risk Remediation is most effective when it is clearly linked to the underlying risk. Depending on the circumstances, this may include enhancements to methodology, targeted training, revised review requirements, or changes to engagement acceptance, staffing, or oversight processes. Validate remediation through timely monitoring Implementing corrective actions is only part of the process. In our experience, firms are most successful when they also confirm that remediation operates as intended. Follow-up monitoring performed early enough to prevent recurrence is a critical component of this step. Failure to validate remediation remains one of the most common and consequential weaknesses we observe across firms. Case Study: When Remediation Is Not Validated In one situation we encountered, a firm identified engagement deficiencies through post-issuance reviews. The issues mirrored observations that had previously been noted during peer review and were communicated as having been addressed by the group responsible for report issuance. However, responsibility for validation was not clearly assigned, and no follow-up procedures were performed to evaluate whether the revised processes were effective. Subsequent post-issuance reviews, triggered by an organizational change, revealed that similar and additional deficiencies had re-emerged. From a quality management perspective, this was not an engagement execution failure. It reflected a breakdown in monitoring and remediation. The firm had information indicating quality risk but did not adjust its monitoring activities to confirm that remediation was working. Viewed through a system lens, this represents a system-level deficiency rather than an isolated engagement issue. Quality Management Applies Across All Engagement Types Modern quality management frameworks apply across a firm’s assurance and attestation practice, including private company audits, public company audits, SOC engagements, nonprofit audits, and other services. Deficiencies identified in any practice area may signal broader weaknesses in: Governance and leadership Methodology and training Monitoring activities Remediation processes In our experience, firms struggle to maintain an effective system of quality management when certain practices are treated as exempt from system-level evaluation. Key Takeaways Engagement deficiencies are inputs into the system, not endpoints. Recurring issues often indicate systemic quality risk. Remediation should be validated, not assumed. Monitoring activities should evolve as risks emerge. Quality management applies across all engagement types. Firms that treat monitoring and remediation as a continuous feedback loop, rather than a periodic exercise, are typically better positioned to improve engagement quality and respond to evolving regulatory expectations. Looking for an independent perspective on whether engagement deficiencies have been fully addressed? Based on our experience working with firms across assurance and attestation practices, Johnson Global Advisory supports clients by performing independent reviews, validating remediation efforts, and strengthening monitoring processes. If you would like support refining policies, training, workflows, or documentation standards, or would benefit from an objective assessment ahead of regulatory, peer, or internal inspections, contact your JGA audit quality advisor to discuss your needs.
Artificial intelligence (“AI”) is no longer experimental in public company audits. From risk assessment and scoping decisions to population testing, anomaly detection, and documentation support, AI enabled tools are increasingly embedded in audit execution and workflow. As use expands, the auditor’s core obligations do not shift to the technology, they remain with the engagement team. If AI is used to inform judgments, influence the nature, timing, or extent of procedures, or summarize and interpret information, auditors must still demonstrate that they obtained sufficient appropriate audit evidence and applied professional skepticism throughout. In practice, auditors must understand what the tool is doing, confirm that inputs are complete and accurate, and evaluate whether the outputs are reliable and fit for purpose in the specific audit context. While the auditing standard devoted solely to AI have not been issued, our experience is that inspectors have been increasingly direct—through staff publications, questions from inspectors in the field, and public remarks—about what they expect to see when AI is used. The expectations are grounded in existing standards and longstanding inspection focus areas: audit evidence, supervision and review, professional skepticism, and firm quality control (now quality management). In other words, AI does not create a “new” audit; it amplifies the need to show your work. Firms that treat AI as a “shortcut”, rely on outputs that cannot be explained or reproduced, or fail to govern and document how tools were selected, configured, and monitored are inviting new risks to support their audit conclusions. Conversely, firms that can clearly articulate the purpose of the tool, how it aligns to audit objectives, how inputs and outputs were validated, and how experienced personnel supervised and challenged the results will be far better positioned during inspection. The table below summarizes what inspectors typically expect to see documented when AI is used in a public company audit. Firms can use these themes to evaluate whether their engagement documentation tells a complete story that an experienced auditor (and an inspector) can follow from objective, to procedure, to results, to conclusion.
In a previous article, Back to Basics: Audit Documentation Failures Have Become Dangerous Low Hanging Fruit , we highlighted how audit documentation had quietly re-emerged as a source of regulatory risk after years of relative deprioritization. While PCAOB Auditing Standard 1215, Audit Documentation (AS 1215), has historically been cited less frequently than other standards, our direct experience from recent inspection activity, enforcement actions, and internal inspection results, demonstrate that documentation failures are increasingly treated as indicators of deeper execution, supervision, and quality management breakdowns. In today’s environment, audit documentation is no longer merely a record of work performed. It is the primary evidence inspectors rely on to evaluate whether an engagement was properly planned, executed, and supported at the time the auditor’s report was issued. What has been low-hanging fruit now requires firms to close these gaps and transform them into a load-bearing foundation for audit quality. From Rare Enforcement to Systemic Inspection Risk AS 1215 establishes clear requirements regarding what must be documented, when documentation must be completed, and how engagement files must be assembled and retained. As discussed in our prior article, failures to comply with these requirements were historically viewed as technical or secondary issues, often resulting in inspection comments rather than enforcement action. That distinction is no longer meaningful. Recent enforcement actions involving backdating, improper (both intentionally, and inadvertent) modification of workpapers, and failure to timely assemble a complete audit file reflect an evolving regulatory view. Documentation failures do not simply violate procedural requirements; they call into question the credibility of the audit opinion itself. More importantly, beyond enforcement, documentation deficiencies are increasingly cited as core inspection findings. Inspectors are challenging situations where engagement teams assert that work was performed but cannot demonstrate that work within the archived file. In these cases, the absence of timely, complete, and clear documentation is no longer treated as a formality. It is treated as evidence that the engagement may not have been properly executed, supervised, or supported in accordance with PCAOB standards. This represents a fundamental shift. Documentation is no longer “low-hanging fruit.” It is a systemic inspection risk that cuts across execution, supervision, and firm-level quality management. From Misconduct to Execution Failures Pervasive documentation failures that do not involve intentional misconduct but still result in non-compliance are increasingly observed. For example, reviewer signoffs occurring near the documentation completion date, rather than contemporaneously with the performance of audit procedures, raise questions about whether effective supervision occurred during the audit or was deferred to meeting archiving deadlines. Similarly, engagement teams may assert that key judgments can be explained verbally, even when those judgments are not clearly documented in the audit file. In today’s environment, the distinction between “we can explain it” and “it is clearly documented” is critical. If procedures, judgments, and conclusions are not evident in the documentation itself, inspectors increasingly conclude that the work was not performed in accordance with PCAOB standards. The issue is not whether the engagement team can explain what they did after the fact. The issue is whether the archived documentation allows an experienced auditor, with no prior connection to the engagement, to understand the procedures performed, evidence obtained, and conclusions reached at the time of the auditor’s report. When documentation fails to reach that standard, inspectors are increasingly concluding that the audit itself was not properly executed, regardless of intent. This reflects an important shift. Documentation failures are no longer viewed primarily as misconduct. They are viewed as symptoms of execution breakdowns, including delayed supervision, compressed review cycles, and audit workflows that defer documentation until the end of the engagement. As a result, AS 1215 has become a direct proxy for how audits are actually performed in practice. How the 14-Day Documentation Completion Requirement Changes the Risk Profile The execution risks are further amplified by the PCAOB’s shortened documentation completion timeline. Recent amendments to AS 1215 reduce the timeframe to assemble a complete and final audit file from 45 days to 14 days after the report release date. While this change may appear procedural, its implications are operational. Under this accelerated timeline, engagement teams no longer have a meaningful post-issuance window to resolve review notes, complete documentation, or finalize supervisory evidence. What were once viewed as “clean-up” activities are now more likely to result in timing violations and non-compliance. This shift places increased emphasis on: Contemporaneous documentation Real-time supervision Realistic workload and staffing models Audit Documentation as a Cornerstone of Audit Quality Audit documentation has long been described as low-hanging fruit in the inspection process. That characterization no longer reflects its role in today’s regulatory environment. Documentation now serves as the primary lens through which regulators assess whether an engagement was properly executed, supervised, and supported. With shortened timelines, expanded quality management expectations, and increased regulatory scrutiny, firms can no longer treat documentation as a downstream activity. It must be embedded into how engagements are planned, staffed, reviewed, and completed. In an environment where inspection conclusions are driven by what is, and what is not, in the audit file, strong documentation is not merely defensive. It is foundational to audit quality. At Johnson Global Advisory , we support firms in selecting, implementing, and optimizing these tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®. For more information, please contact your JGA audit quality expert .
Mergers and acquisitions within the accounting firm industry continue to accelerate, driven by succession planning needs, technology investment, talent constraints, geographic expansion, and the pursuit of new service lines. The pace and volume of transactions is being fueled, in large part, by private equity investment in the accounting firm space. Yet as deal activity accelerates, so does a critical reality: the long term success of an acquisition is determined well before the transaction closes—and long after the announcement is made. Experience across the profession shows that insufficient due diligence and poorly executed post acquisition integration are the most common sources of value erosion in accounting firm transactions. What the Regulator is saying and How JGA sees it At the AICPA December 2025 conference on Current SEC and PCAOB Developments, common topics were the presence of private equity in the accounting firm space and the opportunities and challenges that come with this investment. As it relates to private equity, then-acting PCAOB Chair George Botic noted that while these investments have the potential to enhance audit quality by increasing firm capacity and modernizing audit tools with advanced technologies, the presence of private equity presents a risk that firms shift incentives to prioritize profitability over audit quality. Mr. Botic stated, “Both AI and private equity investments in accounting firms carry the potential to truly reshape the profession. Yet these opportunities come with clear challenges to ensure that overreliance on AI and the pressures of private equity do not jeopardize audit quality.” At JGA, we expect the PCAOB to increase its inspection focus on a firm’s system of quality management. To the extent that acquisitions present quality risks to a firm, we expect increased attention from the PCAOB in terms of how firms are managing these risks. Due Diligence: Looking Beyond the Numbers Financial performance, partner buy ins, and deal structure naturally receive significant attention during an acquisition. However, professional services firms—particularly those providing audit and assurance services—certain of the greatest risks often reside outside the financial statements. Effective accounting firm due diligence must assess not only what the target firm has earned, but how it has earned it—and whether that performance is sustainable. This includes gaining a deep understanding of: Audit quality history, including inspection and peer review results, Independence, ethics, and regulatory compliance practices, Industries served, industry concentration and related expertise, Client concentration, retention trends, and engagement risk profiles, Partner governance, compensation alignment, and succession readiness, Technology platforms, data security, and scalability, and Firm culture, leadership dynamics, and decision making processes. When these areas are not rigorously evaluated, issues frequently surface after the transaction closing—when remediation is more disruptive, more expensive, and far more visible to regulators, clients, and staff. The Risks of Inadequate Due Diligence Inadequate diligence often leads to unanticipated post transaction challenges, including: Regulatory findings related to legacy engagements, Independence violations requiring retroactive remediation, Client attrition driven by service disruption or cultural misalignment, Talent loss stemming from unclear expectations or compensation inequities, and Technology incompatibilities that impair efficiency and data integrity. Deficiencies inherited through acquisition can affect inspection outcomes, firm reputation, and overall audit quality long after the transaction closes. Integration: Where Value Is Created—or Lost Even when due diligence is performed thoughtfully, post acquisition integration remains the most common point of failure. Integration is often underestimated, treated as an operational exercise rather than a strategic initiative requiring sustained leadership attention. Successful integration goes far beyond combining systems or standardizing branding. It requires deliberate alignment across how the firm operates, governs itself, and delivers quality—particularly in areas such as: Audit methodology and documentation standards Quality management systems and monitoring processes Partner roles, authority, and accountability Talent development, evaluation, and retention Communication with clients, regulators, and staff Absent a structured integration plan, firms risk operating as a collection of semi independent practices rather than a cohesive organization. This fragmentation can undermine consistency, weaken accountability, and complicate regulatory compliance. A Strategic Imperative in a Changing Profession As consolidation continues and regulatory scrutiny intensifies, rigorous due diligence and disciplined integration are no longer optional. They are essential to managing risk, sustaining quality, and realizing the full value of a transaction. For accounting firm leaders, the message is clear: growth through acquisition can be a powerful strategy—but only when supported by a comprehensive understanding of what is being acquired and a deliberate plan for how the combined firm will operate as one. Firms that treat diligence and integration as leadership imperatives—rather than transactional steps—are better positioned to protect audit quality, retain talent, and preserve client trust while achieving growth objectives. JGA’s Role Guiding Firms through these Opportunities For firms seeking to grow through acquisition without sacrificing quality, control, or visibility, JGA is a solution. JGA is uniquely qualified with deep experience working with accounting firms on quality management, governance, and operational transformation. We have proven due-diligence tools built that are designed to be practical, adaptable, and immediately usable—while also supporting long term consistency as firms pursue multiple acquisitions over time. Ready to get started or need help refining your acquisition activities? Contact your JGA audit quality expert today to schedule a consultation and ensure acquisition activities are tailored to your firm’s needs.
WASHINGTON, D.C.: — Johnson Global Advisory (JGA) is proud to sponsor the ALI’s Accountants’ Liability 2026 conference hosted by the American Law Institute (ALI). The two‑day program will take place May 14–15, 2026, in Washington, D.C., with a live webcast option available for remote attendees. This annual conference is a premier forum for accounting firm leaders, in‑house counsel, litigators, and regulators to examine the evolving landscape of accountants’ liability, enforcement priorities, and risk management. The 2026 program will explore how recent regulatory, litigation, and technological developments are reshaping the profession and what firms can do to proactively respond. “We are pleased to once again sponsor the ALI Accountants’ Liability Conference,” said Jackson Johnson, President of Johnson Global Advisory. “This event consistently brings together leading regulators, practitioners, and risk professionals to discuss the most pressing liability and oversight issues facing accounting firms today. We value the opportunity to engage with participants and contribute to these important conversations.” The program will feature nationally recognized panels of practitioners, general counsel, industry professionals, and government officials. Planned discussions will address current and emerging challenges facing accounting firms, including: Regulatory and enforcement priorities impacting the accounting profession Recent trends in accounting‑related litigation PCAOB and SEC perspectives on audits, inspections, and gatekeeper liability The impact of AI, cryptocurrency, and emerging technologies on audit quality and firm risk Best practices for navigating an evolving and uncertain regulatory environment Register by April 13, 2026, to attend in-person and use the code “ JGA2026 ” to save $250 off . OR, for webcast attendance, use the code " JOHNSON " to save $125 off the tuition. Click here to register. To learn more about how Johnson Global partners with in-house and outside counsel to support public accounting firms, we invite you to explore our latest brochure. This resource outlines our approach to independent monitoring and consulting, including how we assist firms in navigating PCAOB and SEC investigations, implementing quality control improvements, and responding to regulatory findings. Download the brochure below to see how our experienced team can help your firm meet today’s compliance challenges and build a stronger foundation for the future. Get a copy of our brochure here . 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.
We’re pleased to share that Joe Lynch , JGA Shareholder, will be presenting in a series of AICPA & CIMA webcasts focused on practical considerations for Quality Management. These sessions are designed to provide guidance in your QM journey. They support key elements such as engagement quality reviews, root cause analysis, and ongoing monitoring and remediation. Register for Upcoming Sessions Session 1 — Quality Management: Engagement Quality Reviews What you’ll learn: Practical considerations for your firm's responsibilities for engagement quality reviews and the reviewers requirements when executing engagement quality reviews under the updated quality management standards, including how to make EQRs scalable and effective. Register for this session here . Session 2 — Quality Management: Performing a Root Cause Analysis What you’ll learn: How root cause analysis supports remediation by identifying underlying drivers of the findings and deficiencies; supporting the design of corrective actions that prevent recurrence. Register for this session here . Session 3 — Quality Management: My System is Set Up — Now What? What you’ll learn: Post-implementation requirements of SQMS No. 1, which include monitoring activities, evaluating findings and deficiencies, remediation, and the annual evaluation process—so your system stays responsive and effective. Register for this session here . These sessions are included with a current Webcast Pass. At Johnson Global Advisory , we support firms in selecting, implementing, and optimizing these tools to meet their unique needs. For more insights, visit our blog or contact us to learn how we can help your firm AmplifyQuality®.
