Statement on Adoption of Amendments to QC 1000, A Firm’s System of Quality Control, with Specific Comments on the Recission of the Requirement for an External Quality Control Function

Remarks as prepared for delivery 

Good morning and thank you, Chairman Logothetis.

In a slight departure from my normal custom, I want to begin my remarks, rather than end them, by expressing my appreciation to all the PCAOB staff who have seen this project through with the same dedication, professionalism, depth of expertise, and grace under pressure that I have consistently seen from them throughout my time at the PCAOB. I want to start by recognizing the tremendous contribution of our former Chief Auditor, Barb Vanich, who served with distinction on the PCAOB staff for many years before, unfortunately for us, leaving in July for a new opportunity. I also want to thank Dominika Taraszkiewicz, Jessica Watts, Karen Wiedemann, Ekaterina Dizna, Linnette Klinedinst, Schuyler Simms, Carla Del Monico and Kevin Lombardi from the Office of the Chief Auditor; Ying Compton, Erik Durbin, Nick Galunic, and Zoey Xie from the Office of Economic and Risk Analysis; and George Kostolampros, Drew Dropkin, and Jennifer Gurzenski from the Office of the General Counsel. I very much appreciate you, and I thank you for your responsiveness to questions and suggestions from my team and me along the way. Although I will be discussing a reservation that I have about an element of the recommendation, that reservation does not in any way relate to the quality of your work, for which I thank you.

I want also to thank the Chairman and my other fellow Board members, and their staff, for their constructive engagement with my team and me throughout this process, and with particular thanks in this case to Board Member Calabria and his staff.

Turning to the substance of the recommendation, I can see, with one significant exception, that there are good reasons for the proposed amendments to QC 1000. The exception is the complete rescission of the requirement for an engagement quality control function, or EQCF.

The existing EQCF requirement applies to firms that audit more than 100 issuers, but the Supplemental Request for Comment described that the Board was considering the alternative of applying the requirement only to firms that audit more than 500 issuers. That would currently be a universe of five firms – five firms that audit issuers whose collective market cap approximates 82% of total U.S. market cap.¹

I am very disappointed that the recommended amendments do not include even that alternative. While I recognize that, as noted in the release, our post-adoption support and outreach revealed implementation concerns, I am not persuaded by the release’s statement that “the implementation concerns apply equally to all firms.”² I am skeptical that costs and implementation concerns are significant with respect to the five firms that audit more than 500 issuers.

More generally, with respect to the EQCF requirement as adopted, I am not persuaded that economic analysis can be expected clearly to compel one conclusion or another. The possible costs and contemplated benefits are such that they perhaps cannot be quantified with a meaningful degree of confidence. Indeed, in its 2024 adopting release, the Board did not pretend that economic analysis of costs and benefits made an incontrovertible case for the requirement. Similarly, in my view at least, the recommended release before us today cannot be viewed as making an obvious case for rescission. That is even more emphatically the case if the focus is narrowed to firms that audit more than 500 issuers.

A decision about whether to impose the EQCF requirement poses a policy question that requires a judgment about the likely consequences of imposing the requirement and the desirability of those consequences. At the open meeting to adopt QC 1000 in 2024, my remarks highlighted my judgment in support of the EQCF requirement. My judgment remains the same as it was then.

All of that said, I am not presented with the option of voting in favor of some of the amendments and against the EQCF rescission. I must vote on the amendments as a package. I intend to vote in favor of the package, but I want to emphasize that I do not view the recommendation as a death knell for the possibility of some form of a requirement that, for certain categories of firms, mandates meaningful independent input as part of the firm’s quality management. I do not understand the release as categorically rejecting the concept but, rather, as essentially resting on doubt about the potential benefit of the existing requirement “[a]s designed.”³ I intend to be an active voice in favor of continuing public dialogue, study, and debate about how best to design a requirement that avoids some of the concerns that have been raised about the existing requirement.

In that spirit, I want to close with the following two points. 

First, although I believe that applying the existing EQCF requirement to the five very largest firms would be better than not doing so, I take seriously the possibility that the specifics of a requirement could benefit from additional and more focused public debate and dialogue. More focused deliberation could well result in a framework with greater clarity and specificity and even a degree of transparency, as some commenters have called for. 

Second, commenters on the Supplemental Request for Comment have made an important point that the Board did not identify for focused consideration in the 2024 process or in the Supplemental Request for Comment. They argue that the Board should consider an EQCF-type requirement specifically for firms that have accepted any form of outside investment other than traditional debt financing and that operate through an alternative practice structure, because of the unique way that those circumstances can affect firm priorities, compensation approaches, and strategic thinking.⁴ I believe that point merits our further consideration. 

Thank you.