SPOTLIGHT
Staff Update on Outreach
Activities Related to theIntegration of Generative
Artificial Intelligence in Audits
and Financial Reporting

July 2024

This document represents the views of PCAOB staff andnot necessarily those of the Board. It is not a rule, policy, orstatement of the Board.

Spotlight: Staff Update on Outreach Activities Related to theIntegration of Generative Artificial Intelligence in Audits andFinancial Reporting

CONTENTS
Overview

3

PCAOB Staff Outreach3

Observations From Staff Outreach

4

Observations Related to GenAI Integration in Audits

4

Observations Related to GenAI Integration in
Financial Reporting

5Next Steps – We Want To Hear From You

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Spotlight: Staff Update on Outreach Activities Related to theIntegration of Generative Artificial Intelligence in Audits andFinancial Reporting

OVERVIEW
Recent expansion in the development andcapabilities of artificial intelligence (AI) ischanging the business landscape. While
artificial intelligence has existed in different
forms for many years, generative AI (“GenAI”)
has emerged as a tool with significant potential
to affect the business environment, including
the way auditors plan and perform audits.
GenAI is a technology that can produce newcontent, including text, images, audio, or video,
when prompted by a user. Unlike traditional AI,
which focuses on solving specific tasks using
predefined rules or patterns in users’ data,
GenAI creates new content in response to user
instructions or queries using algorithms thatare trained using specified information, often
open-source information such as text andimages from the internet. These algorithms
use iterative training and feedback loops
enabling the generative models to create awide range of content.
In recent months, PCAOB staff conducted
limited outreach to several audit firms andcompanies to understand their perspectives on
the integration of GenAI in audits and financial
reporting. The purpose of this Spotlight is toprovide greater transparency regarding the useof GenAI in audits and financial reporting by
sharing observations from that outreach.

PCAOB STAFF
OUTREACH
The PCAOB’s standard-setting agenda
includes a research project to assess whether
there is a need for guidance, changes toPCAOB standards, or other regulatory
actions in light of the increased use oftechnology-based tools in the preparationand subsequent audit of financial statements.
The research includes evaluating the rolethat technology innovation plays in driving
audit quality1 through outreach with various
stakeholders, including the PCAOB’s
Standards and Emerging Issues Advisory
Group,2 and other activities.
In connection with this research, we
conducted outreach regarding the current
state of integration of GenAI tools in audits
and financial reporting. We spoke to auditors
mainly at larger firms3 and representatives
from several companies (i.e., preparers of thefinancial statements) about their current
use of GenAI and the direction in which they
expect GenAI will be integrated in audits
and financial reporting. As the use of GenAI
evolves, we plan to continue outreach withthese and other stakeholders and perform
other research activities to better understandthe effect of GenAI on planning andperforming the audit.

1

PCAOB Standard-Setting, Research, and Rulemaking Projects as of May 2024, available at: https://pcaobus.org/oversight/
standards/standard-setting-research-projects.

2See, e.g., the June 29, 2023, meeting of the SEIAG which discussed emerging issues in auditing, including artificial intelligence. An
archive of the meeting agenda, briefing papers, and webcast is available at https://pcaobus.org/news-events/events/event-details/
pcaob-standards-and-emerging-issues-advisory-group-meeting-june-2023.

3

Audit firms included in this staff outreach consist of the U.S. global network firms and several U.S. non-affiliated firms that audit
more than 100 issuers. Collectively, these firms audit the majority of the market capitalization for issuers.

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Spotlight: Staff Update on Outreach Activities Related to theIntegration of Generative Artificial Intelligence in Audits andFinancial Reporting

OBSERVATIONS FROMSTAFF OUTREACH
The integration of GenAI in audits and financial
reporting is in its early stages but rapidlyevolving. The observations below reflect
the use of GenAI discussed by auditors andpreparers at the time of our outreach. Audit
firms and preparers alike emphasized thatthey are continuing to explore various ways ofintegrating GenAI-enabled tools in auditing
and financial reporting.

Observations Related toGenAI Integration in Audits
Based on the information we obtained,
the current integration of GenAI in audits
conducted by the firms we spoke to appears
to be focused primarily on administrative andresearch activities. However, most audit firms
interviewed noted the potential for using GenAIin certain aspects of planning and performing
the audit. These firms indicated that PCAOB
auditing standards are not currently viewed asimpediments to the development and use ofGenAI in the audit. Key observations from ouroutreach with audit firms include:y Current Use of GenAI: Some firms statedthat their staff can use GenAI when
preparing certain administrative documents
or initial drafts of memos and presentations
related to the audit. Some firms also
indicated that they had developed anddeployed GenAI-enabled tools to assist staff
in researching internal accounting andauditing guidance. Generally, the global
network firms we spoke to are further alongin developing and deploying GenAI-enabled
tools than non-affiliated firms are.
y Investment in GenAI: Most firms indicatedthat they are continuing to invest in GenAI-enabled tools either by developing theminternally or by partnering with third parties.
These firms identified several potential areas
where such tools may assist engagement
teams in the future with planning andperforming audits. The areas could include
assisting with summarizing accounting
policy and legal documents, evaluating
the completeness of audit documentation
against relevant documentation
requirements, performing certain risk
assessment procedures, scoping the audit,
evaluating the completeness of financial
statement disclosures, and comparing
amounts in the financial statements ornotes to the financial statements withaudited amounts.
y Limitations on the Use of GenAI: Data
privacy and data security continue to beareas of focus for firms. Some firms describedsafeguards in place that address what
information can be uploaded to firms’ GenAIenabled tools in order to prevent confidential
information (e.g., data of companies underaudit) from becoming public. Further, somefirms also said that they have policies in placethat limit the extent to which staff can use
GenAI tools in an audit. Some firms currently
do not allow GenAI to be used when
performing audit or attest procedures due todata privacy concerns and other risks, such asreliability concerns related to GenAI output(discussed below).
y Supervision and Review of GenAI: Thefirms that are investing in GenAI-enabled
tools indicated that they expect GenAI
to augment, but not replace, humans inauditing or in financial reporting. In theirview, human involvement remains essential
for auditors and preparers and is needed toreview the output from GenAI. Some firms
noted that, despite the ongoing integrationof GenAI, their policies for the supervision

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Spotlight: Staff Update on Outreach Activities Related to theIntegration of Generative Artificial Intelligence in Audits andFinancial Reporting

and review of audits have not changed.
These firms indicated that an engagement
team member who uses a GenAI-enabled
tool is still responsible for the results anddocumentation of the work. Likewise, thesefirms indicated that supervisors who review
work performed with the assistance of
GenAI are expected to apply the same levelof diligence as when reviewing work where
GenAI was not involved.
y Risks Related to GenAI Input andOutput: Some audit firms emphasized theimportance of the auditability of both theunderlying source data (whether from public
sources or confidential company information)
and GenAI-created content when GenAIenabled tools are used. For example, somefirms are designing their GenAI tools todocument the relevant underlying source
data used. Further, some firms noted that
GenAI output may not always be reliablebecause GenAI may sometimes generate
new content that is false or misleading (socalled “hallucinations”) or may be skewed orbiased. To mitigate these risks, some firms
are developing more specific instructionsor queries for users that are intended to
improve the consistency and accuracy ofresponses provided by GenAI. Some firms
also pointed to risks related to the data usedin GenAI tools (e.g., using source data inlarge language models that is incomplete orcompromised).
y Other Risks Related to the Use of GenAI:
Some firms indicated that the use of GenAI
by preparers could amplify certain existing
information technology risks (e.g., risks
related to the segregation of duties), or
potentially create new risks that previously
did not exist. Firms indicated that identifying
and assessing new and emerging risks
remain top of mind as GenAI-enabled tools
are developed and integrated in audits.

y Firm Policies Related to GenAI: Firms
emphasized the importance of policies
and procedures, internal controls, andtraining related to the use of GenAI. Somefirms said the development of policies,procedures, and controls for GenAI tools
was similar to the development for othertechnology solutions. For example, thesefirms develop resources and training for staff
on the appropriate use of technology tools,including GenAI.

Observations Related
to GenAI Integration in
Financial Reporting
Our outreach indicated that preparers are
exploring how GenAI can be used throughout
their operations. While some preparers are
exploring opportunities to incorporate GenAI inaccounting and financial reporting processes,
integrating GenAI in these processes appears tobe secondary to integrating GenAI in operationaland customer-facing areas. Key observations
from our outreach to preparers include:y Current Use of GenAI: Some preparers
noted that their personnel use GenAI increating initial drafts of internal documents(e.g., summaries of accounting standards
and interpretations, presentations, andbenchmarking of company information
with publicly available information fromcompetitors). In addition, some preparers
also use GenAI to assist in the performanceof less complex and repetitive processes,
such as preparing account reconciliations or
to assist with identifying reconciling items.
y Supervision and Review of GenAI:
Preparers emphasized that while GenAI
has the potential to improve the efficiency
of certain financial reporting processes,
human involvement in supervising theJuly 2024 | 5

Spotlight: Staff Update on Outreach Activities Related to theIntegration of Generative Artificial Intelligence in Audits andFinancial Reportinguse of GenAI and reviewing GenAI output
continues to be important.
y Governance of GenAI: Some preparers
said the development and integration ofGenAI was similar to the development ofprocesses and governance for other typesof technology (e.g., running technology in aparallel environment prior to deployment).
Other preparers indicated that they areestablishing new policies and procedures
to ensure appropriate oversight of thedevelopment, integration, and use of GenAItools. Some preparers also emphasized theimportance of establishing controls over
the reliability and accuracy of the data usedto train GenAI models and acknowledgedthat there may be challenges in establishingthese controls for GenAI models that aredeveloped or trained by third parties.
y Consistency of GenAI Created Content:
Preparers noted certain challenges in thebroader use of GenAI within the financial
reporting process. They include the “blackbox” nature of some GenAI tools and thelack of consistent output produced byGenAI, which raise questions around theauditability of certain GenAI-created output.
Some preparers are testing individual use
cases to understand the extent of controlsthat would be needed before GenAI is more
widely integrated in the financial reporting
processes.

Tell Us What You Think
Was this Spotlight helpful to you? In
fulfilling our mission to serve investors
and the public, the PCAOB wants to know
how we can improve our communicationand provide information that is timely,relevant, and accessible. We welcomecomments on this publication or othermatters. You can fill out our short readersurvey or email us at info@pcaobus.org.

NEXT STEPS – WE WANTTO HEAR FROM YOU
We are eager to hear from auditors about how
they are integrating GenAI in the audit andhow the use of this technology is affected by
the requirements in PCAOB standards. We arealso eager to hear from preparers about how
GenAI is used in financial reporting, and fromother stakeholders – including audit committee
members, investors, and academics – about
how GenAI may be used in the audit or financial
reporting. We encourage you to share yourexperiences with the topics discussed in thisSpotlight or other related areas. Please reachout to us at TechnologyOutreach@pcaobus.org.

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