Today the Commission will vote on amendments to existing Quality Control standards (“QC Amendments”) that the Public Company Accounting Oversight Board (“the Board”) adopted earlier this year.[1]
Quality control systems are embedded throughout our economy and across industry sectors. Consumers rely on quality control systems when they see the results of food and safety inspections posted in restaurant windows or the USDA ratings affixed to food at the grocery store.[2] Behind these ratings are processes subject to guidelines and review from regulators to ensure goods and services meet a certain quality standard. And when the basic quality requirement—the floor—is not met and food is unsafe for consumption, those products are generally kept out of the market until the producer or service provider remediates the problem.
Just as grocery store shoppers and restaurant diners can be confident that quality control systems are in place to mitigate the risk that food is unsafe, investors should be confident that audit firms have robust quality control systems in place. These systems are designed to facilitate consistent, reliable, and informative audit reports. The QC Amendments that the Board adopted provide that floor.
The QC Amendments require PCAOB-registered audit firms to design a quality control system subject to prescribed quality objectives and processes. Firms will have flexibility to tailor the design of the required processes to their specific risks and needs.[3] Further, the QC Amendments take a scaled approach. All PCAOB-registered firms are required to design a quality control system and think through how to ensure basic quality systems. This exercise would never strike me as pointless. I’d rather design controls for a fire evacuation, and not use it, then never plan it at all. And while they must think it through, only those firms that actually perform an audit under PCAOB standards must then operate their quality control system.[4] Of those firms, only a tiny subset[5] - firms that perform over 100 engagements per year - would be subject to the full suite of the QC Amendments, including the External Quality Control Function.[6] Finally, the QC Amendments require an annual evaluation of the effectiveness of applicable firm’s quality control systems.[7]
The QC Amendments are the result of years of work, outreach, and development that included robust public engagement with multiple points at which the public weighed in through notice and comment. The standard-setting process began in 2019, with a concept release that solicited feedback on many of the key elements contained in today’s QC Amendments – including whether there should be a person independent from the firm to oversee the quality control system.[8] Using feedback from the concept release, the Board issued a proposal in November of 2022 and received comments from firms, investors, academics, and others that informed the adopted QC Amendments.[9] The 2022 proposal also included a requirement to have an oversight function fulfilled by a person who is independent from the firm.[10]
Finally, the Commission received the QC Amendments from the Board earlier this summer, published them in the Federal Register, and then held our own comment period, which was extended.[11] The Commission reviewed and carefully weighed the information submitted to us by the Board and all the comments we received. We have considered the statutory authorities for the QC Amendments, the rationales developed by the Board, the impacts on efficiency and competition in the market for audit services, and, moreover, expanded upon the Board’s economic analysis with our own. At this point, we have an adequate basis to move forward with a vote on the QC Amendments. This has been a robust process and years in the making.
It is time for quality control systems in the audit industry to be subject to updated standards and oversight so that investors can rely upon a solid foundation – just as we all rely on quality control systems to ensure that we can go to the grocery store or a restaurant without really worrying about whether the food is safe to eat.
Thank you to Chair Williams, the members of the Board, and its staff. It is evident that you have been hard at work to ensure that public financial statement reporting is anchored by strong, meaningful, and independent audits.
And, of course, I want to give a loud and enthusiastic thank you to the staff of the Office of the Chief Accountant, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all of their work on this matter. I know that you have put in hours upon hours of hard work to help the Commission prepare for today’s vote. Thank you for you dedication and your public service, it certainly does not go unnoticed.
[1] See A Firm’s System of Quality Control and Other Amendments to PCAOB Standards, Rules, and Forms, PCAOB Release No. 2024-005 (May 13, 2024) (“Adopting Release”). Further, these amendments improve upon industry standards that were adopted on an interim basis during the early days of the Board over 20 years ago. It is crucial that the Board fulfill its mission as an independent regulator of the audit profession. See Cmmr. Crenshaw, Statement in Support of the New Standard on the General Responsibilities of the Auditor (Aug. 20, 2024).
[2] See, e.g., Agricultural Marketing Service, U.S. Dept. of Agriculture, Grades and Standards.
[3] See Adopting Release at § IV.
[4] See id at § III.C.
[5] Approximately 13 out of the 1,600 registered audit firms would cross the 100 audit engagement threshold today. See Securities Exchange Rel. No 34-100968, Order Granting Approval of QC 1000, A Firm’s System of Quality Control, and Related Amendments to PCAOB Standards, Rules, and Forms at 62 (Sept. 9, 2024) (“Approving Order”).
[6] The EQCF requires a firm that performed audits for more than 100 issuers in the previous year to establish a role fulfilled by a person, or persons, who is independent from the firm to evaluate the significant judgments and conclusions made by the firm in an annual evaluation of its quality control system. However, the audit firm has flexibility in structuring the role, whether it should be one person or a group of people, whether to vest the role with decision-making power, and how to write and design the procedures associated with the role. Adopting Release at § III.C.
[7] See Adopting Release at § IV.L.
[8] See Concept Release: Potential Approach to Revisions to PCAOB Quality Control Standards, PCAOB Rel. No. 2019-003 at 49 (Dec. 17, 2019).
[9] See A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms, PCAOB Rel. No. 2022-006 (Nov. 18, 2022).
[10] In fact, the independent oversight requirement in the proposal was broader than what was adopted. The independent role would have had oversight responsibilities related to the firm’s audit practice, rather than just the quality control system. See id at IV.E, Appendix 1.
[11] See Approving Order.
