The Public Company Accounting Oversight Board (PCAOB) on November 21, 2024, adopted two separate but related rules intended to increase audit firm transparency.
One rule requires firms to disclose several standardized metrics intended to give some insight into the performance of audits, which reform and investor advocates have pushed the board to do since at least 2008.
The other rule requires firms to provide more disclosure, such as financial data and governance information in annual and special reporting forms filed with the PCAOB. This was also recommended by reform advocates in 2008.
Firm and Engagement Performance Metrics
The first rule comes out of an old project, which was originally called audit quality indicator (AQI). Previous PCAOB leaders published an AQI concept release in 2015 but set it aside almost a decade ago because of strong resistance by audit firms. But the project was revived and renamed as Firm and Engagement Performance Metrics under current Chair Erica Williams’ leadership.
The rebranding stems from potential confusion that the metrics could predict or guarantee a certain level of audit quality. Instead, the metrics are intended to give some data about how firms manage and conduct the audits.
The PCAOB believes the metrics will provide useful data to help investors make informed decision when ratifying the audit committee’s choice of external auditors. Audit committees would also be armed with a wealth of information when selecting auditors and monitoring their performance. Moreover, large firms voluntarily provide firm-level reports, but the standardized metrics will allow for easier analysis and comparison across engagements and firms.
“Sound and consistent information strengthens investor confidence and can drive audit quality,” said Williams. “The new requirements we are adopting today will make PCAOB oversight more effective and equip investors, audit committees, and others with clear, consistent, and actionable data related to audit firms and the engagements they perform.”
The board said that it made changes from its 2024 proposal following feedback. Instead of 11 metrics, now it covers eight areas:
- Partner and manager involvement
- Workload
- Training hours for audit personnel
- Experience of audit personnel
- Industry experience
- Retention of audit personnel (firm-level only)
- Allocation of audit hours
- Restatement history (firm-level only)
Auditors are required to report firm-level metrics on a new Form FM. The rule would apply to firms that work as the lead auditor for at least one accelerated or large accelerated filer.
The engagement-level metrics will be required on revised Form AP, which will be renamed Audit Participants and Metrics. This also applies to audits of accelerated and large accelerated filers.
While not required, auditors have the option to provide limited narrative disclosures. This is to address concerns that readers may not fully understand the metrics without context.
Firm Reporting
On increased firm reporting, the PCAOB is revising the information required on annual report form or Form 2 and the special reporting or Form 3. Much of the information will be public, but some will be confidential.
Firms will need to report additional fee information on Form 2. The largest firms will be required to submit financial statements confidentially to the PCAOB. But they do not need to conform to an applicable financial reporting framework, such as GAAP. They still need to abide by certain minimum financial statement reporting requirements.
Firms will also have to report additional information about their leadership, legal structure, ownership, and other governance information, including reporting on certain key quality control operational and oversight roles on Form 2. This will likely illuminate information such as private equity investments.
The PCAOB’s final rule also requires more detailed reporting of any network relationship. If it is in a network, the firm must describe the network’s structure, the registered entity’s access to resources such as audit methodologies and whether the firm shares information with the network regarding its audits.
For firms that audit more than 100 public companies, the PCAOB revised the special reporting requirement to include a new confidential reporting of “events material to a firm’s organization, operations, liquidity or financial resources, such that they affect the provision of audit services.”
Firms must also promptly report significant cybersecurity events confidentially to the PCAOB on Form 3. But publicly on Form 2, firms would need to periodically describe briefly any policies and procedures to identify and manage cybersecurity risks.
One Dissent
The vote on each rule was 4-1 with board member Christina Ho dissenting.
In particular, she criticized the regulatory action as midnight rulemaking. The administration will change on January 20, 2025.
The commission oversees the board, and the SEC must approve changes to PCAOB standards before they can become effective.
“Never in the history of the PCAOB has the board rushed to adopt new standards and rules in the middle of a historic transition to new SEC leadership, let alone adopt standards and rules that are not ready,” she said.
The proposals were issued on April 9. This sets the record of the fastest adopted standards. It took 226 days or about seven and a half months. But the average number of days from proposal to adoption for the five standards adopted by this board to date was 448 days or 15 months.
“Political expediency is not evidence-based policymaking,” she said. “Haste naturally harms work product quality, which will not escape any keen eyes.”
However, other board members said that the rules were studied for a long time for at least 15 years; thus, they are long overdue.
The adopting release for performance metrics is 2024-012; for firm reporting, it is 2024-013.
This article originally appeared in the November 22, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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