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Advisers Push PCAOB to Complete Work on Developing Audit Quality Indicators

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

Several members of the PCAOB’s reconstituted Investor Advisory Group (IAG) urged the audit regulator to finish an old project to develop a set of measurements to assess the quality of an auditor’s work.

This comes as the PCAOB set aside Release No. 2015-005Concept Release on Audit Quality Indicators, which solicited views on developing a set of AQIs. Shortly after the board issued the preliminary rulemaking document in July 2015, the board shifted to monitoring audit firms’ voluntary actions in the area because of opposition in the auditing industry, to the disappointment of investor advocates.

Investors believe that the project on audit quality indicators (AQIs) will help improve audit quality and over the years have recommended the PCAOB to work on it—to no avail.

Now with new board members who have stressed the importance of meeting investor needs, IAG members want this to be a priority of the PCAOB, which has recently set an ambitious standard-setting agenda that reflects the views of the investors.

Further, the board has only one mission: to protect investors and promote the public’s interest in the audit of public company financial statements.

Where’s AQI?

“I was surprised that the AQIs were not on there at all,” former SEC chief accountant Lynn Turner said at the IAG meeting on June 8, 2022. “That seemed to have been the single thing that investors had focused on the most in the past. To not even see it on there did surprise me because, again, I think the agenda has to be evaluated against the mission that SOX created for the board. It’s right there in Section 101 of SOX. And are you fulfilling that mission?”

SOX—short for Sarbanes-Oxley Act of 2002—established the PCAOB two decades ago to supervise audit firms in response to massive accounting frauds at companies like Enron and WorldCom.

Other IAG members, including Jack Ciesielski, Sandra Peters, and Jeffrey Mahoney, said they need more relevant information to be able to assess audit quality.

In the view of Ciesielski, president of R.G. Associates, Inc., the PCAOB has not engaged with investors as much in the past and must change that. And the best way for the board to engage with investors is by providing useful data. But today, he said there is not that much relevant information that investors could use: “They won’t engage unless you give data to work with.”

For example, the PCAOB inspection report results on audit firms are largely binary, whether PCAOB inspectors found deficiencies or not. “We don’t get color on inspections quite the way we would with AQI,” said Ciesielski, who is also a member of the Financial Accounting Standard Board’s Emerging Issues Task Force. “So, I think we need to get those indicators out there in a machine-readable form so that they can actually start to manipulate the data, ask questions of the audit committees on the companies they invest in, really start to be a little bit more active in the audit process themselves.”

Peters, senior head for global advocacy of the CFA Institute, agreed that investors must be given information so that they could more effectively engage with relevant stakeholders. She said that investors today get critical audit matters (CAMs) but need more.

“We get very little from the audit committee, we get very little from the auditor, and we get very little from regulator. We need more information,” said Peters, who is also a member of the Investor Advisory Committee of the SEC, which oversees the PCAOB.

Among other things, “the lack of holding [company] management accountable really has presented a problem that everybody beats on the auditor,” she continued. “It all starts with management… [which] owns the financial reporting process, and we need some feedback from all stakeholders to the process… To me, audit quality indicators seem to be a prime opportunity for the U.S. market and for globally to make headway on that.”

In a related matter, Jeffrey Mahoney, general counsel of the Council of Institutional Investors, pointed out that CAMs are not as useful as they could be.

Key Audit Matters, which were developed by the International Auditing and Assurance Standards Board, have provided investors more useful information compared to CAMs, which were established by the PCAOB.

“With respect to CAM, I would like to see a study of why we’re getting better disclosure in U.K. more in line with what investors asked for U.S., which is rather information about what auditors did,” Mahoney said. “Investors want more information about what the auditor found. Though permitted or optional in the U.S. standard, no one that I am aware of provides it. We ought to figure out why that’s the case and figure out a way to correct that.”

History of AQI Project

It is unclear what the current PCAOB leaders will do with the AQI project.

In the past, the PCAOB put a brake on the project after auditors—and audit committees to a lesser extent—never fully supported the initiative. The comment letters by the audit firms tended to question why the indicators were needed through a regulatory initiative if accountants could address them through firm-wide policies. In their view, indicators should be tailored and customized to particular audits to be useful. In particular, they said quantitative measures mean little without qualitative discussions of a particular audit.

They also said some indicators, in particular the measures that deal with specific audit engagements, should not be mandated or made public.

Auditors and audit committees were concerned that the public might overreact to the information without the proper context.

But Investors said they are fully capable of evaluating the measures. They also viewed the indicators as an important piece of a more far-reaching plan to use regulations to strengthen auditors’ independence from their clients. Some large investor groups believe the indicators could give them meaningful information when considering their votes to ratify the external auditor and elect the chair of the audit committee.

Release No. 2015-005 lays out 28 indicators, covering three broad categories dealing with audit professionalism, process, and results.

Some indicators are straightforward and sometimes measured or described by audit firms. They include employee workload, length of time spent examining a client’s books, staff expertise and experience, independence, and inspection results. Others may be more difficult to gauge, such as tone at the top, which tends to apply to a firm’s management practices and integrity, leadership, fraud detection, and financial reporting quality.

 

This article originally appeared in the June 14, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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