The Public Company Accounting Oversight Board (PCAOB) is seeking public comment on 28 quantitative factors for evaluating audit quality. The PCAOB views the proposal of the potential “audit quality indicators” as furthering the goal of “improv[ing] the ability of persons to evaluate the quality of audits in which they are involved or on which they rely and to enhance discussions among interested parties; use of the indicatory may also stimulate competition by audit firms based on quality.” PCAOB Release No. 2015-005, July 1, 2015, at 4. The PCAOB envisions that potential users of the quantitative information include audit committees, which are responsible for hiring and interacting with audit firms; investors, who make investment decisions based on audited financial statements and are sometimes asked to ratify the choice of an outside auditor; and regulators, who are responsible for enforcement and policy-making. The PCAOB anticipates that such quantitative data will provide a tool to evaluate the strengths and weaknesses of an audit process, help distinguish auditors from one another, and recognize and reward audit quality when it is present.
The 28 proposed audit quality indicators focus on audit professionals, audit process, and audit results. The information for 19 of the factors will come from audit firms themselves, while public sources or audit committee member surveys will provide the information for nine of the factors.
The proposed audit quality indicators are:
- Staffing Leverage
- Partner Workload
- Manager and Staff Workload
- Technical Accounting and Auditing Resources
- Persons with Specialized Skill and Knowledge
- Experience of Audit Personnel
- Industry Expertise of Audit Personnel
- Turnover of Audit Personnel
- Amount of Audit Work Centralized at Service Centers
- Training Hours per Audit Professional
- Audit Hours and Risk Areas
- Allocation of Audit Hours to Phases of the Audit
- Results of Independent Survey of Firm Personnel
- Quality Ratings and Compensation
- Audit Fees, Effort, and Client Risk
- Compliance with Independence Requirements
- Investment in Infrastructure Supporting Audit Quality
- Audit Firms’ Internal Quality Review Results
- PCAOB Inspection Results
- Technical Competency Testing
- Frequency and Impact of Financial Statement Restatements for Errors
- Fraud and other Financial Reporting Misconduct
- Inferring Audit Quality from Measures of Financial Reporting Quality
- Timely Reporting of Internal Control Weaknesses
- Timely Reporting of Going Concern Issues
- Results of Independent Surveys of Audit Committee Members
- Trends in PCAOB and SEC Enforcement Proceedings
- Trends in Private Litigation
The list of audit quality indicators raises a number of questions on which audit firms or audit committees might wish to comment. For example, is the list comprehensive, duplicative, or over-inclusive? How are the various indicators to be calculated? Should the same list of indicators be used for both larger and smaller firms, and can it be adapted to evaluate global audits involving more than one auditor? To what extent is the data called for by the indicators already broken out in audit firms’ operating systems? For data that is engagement-based, how should the “engagement” be defined? How, when, and to whom should the information about the indicators be delivered? Can a single set of indicators be tailored to a company’s unique circumstances, and does evaluating this data risk spreading audit committees’ attention too thin?
The PCAOB’s release (No. 2015-005) regarding the proposed audit-quality indicators includes some of these questions, and many others, as well as more detailed explanations regarding the potential use and calculation of the quantitative data.
The PCAOB seeks comments by 5 p.m. Eastern time on September 29, 2015. Written comments should be sent to the Office of the Secretary, Public Company Accounting Oversight Board, 1666 K Street, N.W., Washington, D.C. 20006-2803, or by email to comments@pcaobus.org or through the board’s website at www.pcaobus.org. Comments should refer to PCAOB Rulemaking Docket Matter No. 041 in the subject or reference line.
— Dylan Black, Bradley Arant Boult Cummings LLP, Birmingham, AL