The Securities and Exchange Commission (SEC) has extended the deadline for the public to submit comment letters by 14 additional days on two of the Public Company Accounting Oversight Board’s (PCAOB) recently approved standards. One is Quality Control (QC) 1000 standard; the other is general responsibilities of auditor in Auditing Standard (AS) 1000.
The new deadline is July 16, according to Release No. 34-100451, Extension of Comment and Approval Periods for Proposed Rules on General Responsibilities of the Auditor in Conducting an Audit and Amendments to PCAOB Standards and A Firm’s System of Quality Control and Related Amendments to PCAOB Standards, published on July 1, 2024.
The extension is to “provide additional time for public comment on the proposed rules and the issues raised therein,” the SEC Office of the Chief Accountant said, writing for the commission in Release No. 34-100451.
The PCAOB adopted both QC 1000 and AS 1000 on May 13.
The commission oversees the board, and its standards must be first approved by the SEC before they can become effective. The market regulator first published the two PCAOB standards for comment on June 5.
The SEC has 45 days to act after publishing the board’s rules for public comment in the Federal Register under Section 19(b)(2)(A) of the Securities Exchange Act of 1934.
The provision allows the SEC to extend the period for up to additional 45 days if the agency determines that a longer period is appropriate.
The extension means that the SEC will also take longer to either approve or disapprove the PCAOB’s standards or institute proceedings to determine whether to reject the standards.
Originally, the 45th day after publication of the notice of the PCAOB’s rules was July 26. The new date for the SEC to act is August 25. The agency is taking up to 30 days extra to make a decision.
While the SEC release only notes that the extension is needed to provide more time for comments on the standards and the issues raised of the proposed changes, the decision to grant extra time also comes as the Center for Audit Quality (CAQ) asked the PCAOB to delay sending QC 1000 and AS 1000 to the SEC by 45 days so it could “review and consider the complex proposals and standards.”
This was an unusual request by the CAQ, which represents accounting firms that audit public companies, and the PCAOB did not wait 45 days, sending it 11 days after adopting the standards.
Former PCAOB member Daniel Goelzer had speculated that the CAQ’s request was “just a kind of back-door way of getting a longer SEC comment period.”
Among the various QC requirements, PCAOB Release No. 2024-005, A Firm’s System of Quality Control, requires firms to identify risks that are specific to their audit practice. At the same time, the standard also mandates certain requirements that are intended to make sure that firms’ QC systems are designed, implemented, and operated “with an appropriate level of rigor.”
PCAOB Release No. 2024-004, General Responsibilities of the Auditor in Conducting an Audit, requires auditors to put together the final set of audit documentation within 14 calendar days, rather than the current 45 days, after the auditor’s report is released.
This is part of a larger effort to update AS 1000 series that were adopted on an interim basis when the board was established following passage of the Sarbanes-Oxley Act of 2002 two decades ago. The new standard consolidates a series of standards that address the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, competence, and professional judgment.
The auditing profession has been concerned about the pace and volume of the PCAOB’s standard-setting activities under the leadership of Erica Williams. After she became chair, the PCAOB has been pursuing the most ambitious standard-setting agenda in history, sometimes adopting or proposing two or three rules on the same day.
“Given the complexity and significance of the proposals and simultaneous standard-setting activities,” the CAQ said that the board needs to provide longer comment periods, suggesting 120 days rather than 60 days.
In the meantime, CAQ and several others have submitted their comment letters to the SEC, meeting the original July 2 deadline. It is unclear if they will follow-up with additional comments.
Dennis McGowan, a vice president with the CAQ, wrote that the organization supports the PCAOB’s AS 1000 as it would streamline and clarify general principles and responsibilities and “provide a more logical presentation, which would enhance the useability of the standards by making them easier to read, understand and apply.”
CAQ to SEC: Disapprove PCAOB QC 1000
However, the CAQ said the SEC should not approve QC 1000, especially because of the new External Quality Control Function (EQCF) that would apply to larger firms. The CAQ believes it requires further considerations by the PCAOB.
The EQCF, among other things, is required to evaluate significant judgments and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.
To approve a PCAOB rule, the SEC must find that the rule is consistent with the requirements in Sarbanes-Oxley and the securities laws; or is necessary or appropriate in the public interest or for investor protection. And the CAQ said that the EQCF requirement fails to meet that test.
“Our primary concern related to the EQCF requirement is that it was not exposed for public comment, and, as a result, stakeholders did not have the opportunity to provide input or pose clarifying questions that would have ultimately strengthened and clarified the requirement to be included in the Final Standard,” McGowan wrote.
The PCAOB proposal required that a firm have an independent oversight function for the audit practice that would be in a position to exercise independent judgment on QC matters. The proposal said it “would not specify how the firm would establish its governance structure or assign authority.”
But the CAQ said that the scope of this oversight function in the final standard was changed, “requiring the EQCF to have responsibilities for evaluating the judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its quality control system.”
“This is contrary to what was included in the proposal which was intended to provide firms with flexibility to establish their own governance structures,” McGowan wrote.
But members of the PCAOB’s Investor Advisory Group (IAG), told the SEC that both CQ 1000 and AS 1000 will “significantly improve upon the previous PCAOB interim standards.”
“Those interim standards had not been updated in many instances for decades, and had been written by the American Institute of Certified Public Accountants Auditing Standards Board long before the U.S. Congress created the PCAOB in the Sarbanes-Oxley Act of 2002,” the IAG wrote. If approved by the SEC, the revised standards “would provide enhanced protections for investors, consistent with the mandate set forth in SOX.”
This article originally appeared in the July 5, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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