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Concept Release on Quality Indicators Slated for Summer Publication

The PCAOB wants to publish a concept release on measures that could be used to assess audit quality in the next few months. The planned standard is one of three initiatives the board is working on to improve audit quality. The audit regulator’s staff is analyzing audit quality to seek improvements in firms’ overall policies and practices and considering whether the quality control standards should be amended.

The PCAOB’s staff is planning on recommending to the board that it issue a preliminary rulemaking document called a concept release on a set of measurements to assess the quality of an auditor’s work this summer.

The publication of the concept release has taken longer than expected. The PCAOB staff has been actively working on the project on audit quality indicators almost two years.

The board’s staff said the indicators will help board members develop policies and the board’s staff carry out inspections. Board officials are undecided about making the findings from the indicators public and available to investors.

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.

Measures of quality could also include the frequency and effect of financial statement restatement for errors; timely reporting of internal control weaknesses; reasonable warnings for going concern; material frauds discovered and reported; and trends in board and SEC enforcement proceedings.

During a meeting of the PCAOB’s Standing Advisory Group (SAG) at the end of June, Greg Jonas, the director of the PCAOB’s Office of Research and Analysis, said the staff is planning to recommend 25 to 30 measures for the concept release, which he said is intended to elicit a range of opinions.

Jonas said he expected about 10 to 15 indicators will end up being in the final standard.

“These things are a portfolio and operate as portfolio,” Jonas said. They are not some formula that a person can add up some numbers and put in a score card.

Jonas said the results from the portfolio won’t amount to a definitive answer about quality.

The planned standard is part of a broader overall effort to improve audit quality. The PCAOB’s staff is also analyzing audit quality to seek improvements in firms’ overall policies and practices. The staff in the chief auditor’s office is also looking to see if the board’s quality control standards should be upgraded.

Jonas said SAG members largely supported moving forward with the audit quality indicators project. However, there was less agreement on whether this would be useful to investors.

SAG members also couldn’t agree whether the indicators should be confidential or made public. In particular, auditors are concerned that the public might overreact without proper context.

Maureen McNichols, a professor of management and accounting at Stanford University, said the board should not underestimate investors’ ability to process data and encouraged the board to come up with workable compromises in disseminating the indicators for wider use.

Jeff Mahoney, general counsel of the Council for Institutional Investors, said the indicators would be useful to investors in making better decisions in connection with election of audit committee members and the annual vote on ratifying the company’s outside auditor.

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