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Audit Quality Indicators’ Concept Release Nears Publication

PCAOB officials believe they are close to issuing a preliminary rulemaking document called a concept release to measure the quality of an auditor’s work.PCAOB officials are still trying to determine what measurements should be provided to the auditors on a client engagement, the client, the client’s audit committee, the audit firm, and investors before they publish the document.

After a prolonged delay, PCAOB officials believe they are close to issuing a preliminary rulemaking document called a concept release to measure the quality of an auditor’s work.

The regulatory board’s staff has been working on the project for more than two years and initially hoped to have the document out near the end of 2013.

“I am a little disappointed about the delay,” PCAOB member Jeanette Franzel told the board’s Investor Advisory Group (IAG) meeting in Washington on October 20, 2014. “I think we were hoping to have something out months ago on this. But it turns out that this is really a complex topic, and so the staff continue to delve into the complexity.And the firms at the same time are starting to delve in this.That’s good news.”

“It’s just complicated,” PCAOB Chairman James Doty toldAccounting & Compliance Alert.“Our Office of Research and Analysis and the people working on the concept release are looking at audit quality indicators from several standpoints, not just what’s useful to the audit committee, which is what the Center for Audit Quality (CAQ) did.”

Doty was referring to the CAQ’s outline of benchmark criteria published in April.The CAQ paper puts much of the responsibility for evaluating an auditor’s work in the hands of the audit committees.(Audit Center Publishes Its Approach to Quality Indicators in the April 28, 2014, edition ofAccounting & Compliance Alert.)

The debate about whether the indicators should be made public has been prompted by auditors’ concerns that the public might overreact without proper context.Investors want audit work to be reliable and credible enough to support their investment decisions.They want the PCAOB to take the lead in disseminating the indicators that provide useful information.

“We are trying to figure out what would be useful for the engagement team, the issuer, the audit firm itself, and the public as well as the audit committee,” Doty said.

“If we know what audit quality indicators areā€¦ we think we have some pattern, the audit firm as a whole, the engagement team at the engagement level and the issuer ought to know what those are,” Doty said. “If you start thinking of it as being a grid or a set of principles that has to have sufficient rigor that can be used by all those constituents, it gets to be more complicated.It’s like a Rubik’s cube.You are no longer doing audit quality indicators just for an audit committee.You are trying to figure out how you change them or how they differ in their weight if the use is being made by the public generally, by the board, and the issuer as a whole, by the audit firm, by the engagement team, and it gets complicated.”

The PCAOB said the indicators will help the regulatory board develop policies and the board’s staff carry out inspections.

According to presentation materials from the PCAOB’s Office of Research and Analysis, the indicators may include industry expertise, staffing, partner workload, staff utilization, and outsourcing.

The indicators could also include the audit firm’s management practices, PCAOB inspection results, and compensation policies related to audit quality for senior officers.

The quality measures could also include an auditor’s track record with client restatements, internal control weaknesses, and going concern warnings.Board officials are also considering how an audit firm’s history with discovering and reporting clients’ accounting frauds and PCAOB and SEC enforcement actions should factor into the indicators.

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