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PCAOB Schedules Meeting to Consider Proposing Set of Audit Quality Metrics

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The Public Company Accounting Oversight Board (PCAOB) has scheduled a public meeting for April 9, 2024, to consider issuing a proposal on key audit quality indicators (AQIs), a set of measurements that is intended to give some insight into how well audits are performed—something investor advocates year after year pushed the board to do so at least since 2008.

The PCAOB did issue a preliminary rulemaking document about a decade ago but set it aside because of strong resistance from auditors.

But the AQI project—renamed as Firm and Engagement Performance Metrics—was revived in the fall of 2022 in part after some members of the Investor Advisory Group asked the current leaders of the PCAOB to complete the project.

Erica Williams, who became chair of the PCAOB in January 2022, has been much more responsive to investor needs than her immediate predecessor, and the project was first put on the research agenda and then was moved to the standard-setting agenda in May 2023. Williams has been pursuing tougher enforcement actions and inspections as well as timely and ambitious standard-setting activities.

The PCAOB has a single mission to protect investors, and to them, AQIs are important. They often say that what is not measured cannot be managed. And AQI was one of the several recommendations in a report issued by the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP) in 2008. The PCAOB has implemented some other recommended reforms from the report, such as expanded auditor’s report, but others such as AQIs and fraud prevention, have had little progress until recently.

The PCAOB issued Release No. 2015-005, Concept Release on Audit Quality Indicators in July 2015 but shifted to monitoring mode, citing audit firms’ voluntary actions in the area.

In reality, the PCAOB at the time paused 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 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 laid out 28 indicators, covering three broad categories dealing with audit professionalism, process, and results.

In a January 2023 comment letter to the PCAOB on a different project–quality control– the IAG recommended a minimum of eight AQIs, which were drawn from the 2015 concept release: staffing leverage; partner workload; manager and staff workload; audit hours and risk areas; quality ratings and compensation; audit fees, effort, and client risk; audit firms’ internal quality review results; and PCAOB audit inspection results.

The IAG prefers a more comprehensive set of indicators but believes that the eight are a good starting point.

It is unclear what the proposal will entail, but the open meeting notice says that the it would apply to “certain PCAOB-registered” firms “to publicly report specified metrics relating to some of their audit engagements and their audit practices.”

It is unclear what “certain” means, but accounting firms that audit financial statements of publicly-listed companies must register with the PCAOB. There are smaller firms that have just a few public company clients or only participate in a public company audit—the engagement partner would be from another, usually a larger, firm. Moreover, the board also supervises auditors of broker-dealers that are regulated by the SEC.

Firm Reporting Proposal

During the meeting next week, the PCAOB will also consider issuing a proposal to revise the PCAOB annual and special reporting requirements “to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms.” It is unclear what the PCAOB will propose, but some advisory group members in the past have said that audit firms should provide their financial statements.


This article originally appeared in the April 5, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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