Big Four accounting firms in comment letters urged the Securities and Exchange Commission (SEC) to approve the Public Company Accounting Oversight Board’s (PCAOB) recent revisions to QC 1000, A Firm’s System of Quality Control, that responded to complaints – including concerns raised by the firms – that certain provisions of the standard adopted in 2024 under previous leadership are too burdensome without providing commensurate benefits.
Most notably, the PCAOB would rescind the requirement for firms that issued audit reports for more than 100 issuers in the prior calendar year to establish an External QC Function (EQCF). The EQCF requirement had called for an external oversight function to evaluate significant judgments and related conclusions made by a firm in evaluating and reporting on the effectiveness of its QC system. The requirement was a central point of disagreement in the rulemaking and implementation process.
The amendment would also eliminate the “design-only” requirement for firms that are registered but do not lead PCAOB engagements, play a substantial role in the preparation or furnishing of audit reports, or otherwise have current responsibilities under applicable professional and legal requirements for such work.
The PCAOB in September adopted the amendments, and the SEC shortly afterward published them for public comment.
As part of its oversight activities, the SEC must approve the PCAOB’s standards.
Comments were due October 9, 2026, and nine were submitted as of October 15.
“We believe the Amendments appropriately respond to implementation challenges identified since QC 1000 was adopted while preserving the standard’s core framework and investor-protection objectives,” Deloitte & Touche LLP wrote. The changes “reduce unnecessary cost and operational complexity without compromising the rigor of firms’ systems of quality control.”
In addition to Big Four firms, a consulting firm and two academics supported the changes as they believe it will reduce compliance burdens.
Mark Peecher, Arthur Wyatt Endowed Chair in Accounting at the University of Illinois, said the benefits of an EQCF are uncertain and difficult to measure. At the same time, he said there is a significant risk that it could send the wrong signal to investors.
“Some may reasonably conjecture that the new requirement is a signal that the audit profession is broken or that some ongoing market failure is generally undermining the baseline effectiveness of public company audits today,” he wrote. “I do not think that either of these messages aligns with recent audit deficiency trends or Big R restatement trends, despite some individual cases of rather sensational and costly alleged fraud.”
Investor opposition
However, two investor groups that wrote comment letters opposed the revisions.
The Council of Institutional Investors (CII) said the commission should institute proceedings to determine whether the amendments should be disapproved while the CFA Institute said the agency should not approve the revisions.
CII General Counsel Jeffrey Mahoney said that the board “acted inappropriately by failing to adopt” an alternative of keeping the EQCF requirement for firms that audit more than 500 issuers. This would apply to five firms.
Mahoney said the PCAOB gave two reasons for rejecting that alternative, incremental costs and limited benefits, and called both “less than compelling.”
The PCAOB’s June estimate put compensation for non-employee board directors at about $328,000 per year. Using that figure, CII said the annual EQCF cost would amount to about 0.006% of the average annual revenue of the five largest firms, citing Accounting Today data.
CII quoted a September 9 statement by PCAOB Board Member George Botic: “I am skeptical that costs and implementation concerns are significant with respect to the five firms that audit more than 500 issuers.”
Sandra Peters, senior head of corporate disclosure and information advocacy of the CFA Institute, listed the EQCF rescission as a “very high” priority to undo.
Peters said the SEC should at least require the EQCF for firms with more than 500 issuers. She said the board recalculated the five firms’ share of aggregate issuer market capitalization as 81.8%, compared with an earlier figure of 98%. According to the letter, the September figure excludes companies audited by the firms’ non-U.S. affiliates, while the June figure included them.
She also said that there “is no direct evidence on the effect of rescinding the External QC Function, as the Supplemental Request itself acknowledges.”
“The only cost information provided is compensation benchmarks for a role that the largest firms already staff (i.e., with individuals performing a similar function and whose compensation the firms already pay),” she wrote. “Many of the costs in establishing the EQCF or similar advisory functions have likely already been incurred, yet they are presented as though they are new, and the analysis never identifies what rescission of the EQCF requirement would actually save for each firm going forward.”
“Spread across the thousands of audits each of these firms performs the amount is likely immaterial,” she added. “And such EQCF represents the single clearest structural safeguard investors have over the firms auditing nearly all of U.S. public market capitalization.”
Both Peters and Mahoney are members of the PCAOB’s Investor Advisory Group and Standards and Emerging Issues Advisory Group.
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