Statement on Concept Release on Audit Quality Indicators

I would like to thank the PCAOB staff in our Office of Research and Analysis for undertaking this remarkable new project.

We have heard repeatedly that although knowledgeable people "know a quality audit when they see it", the elements that make up such an audit are too elusive to be defined. A consequence of this view is that the audit becomes a commodity where audit firms compete primarily on price rather than on the quality of their services. This leads to a view, unfortunately common among some audit committee members and financial managers, that it is sufficient to have an audit performed as cheaply as possible so long as it is done by a reputable auditor and that there is no added benefit to seeking an exceptional quality audit especially if it might cost more. This is associated with a view that shareholders do not benefit from a more extensive, intensive and expensive audit because the end product of the audit report is standardized and the quality of the audit is not really apparent to the public or even the audit committee in the absence of a catastrophic audit failure. One might have thought that twelve years of PCAOB inspections revealing widely differing audit quality among audits even within audit firms would have laid those arguments to rest, but the evidence is too often to the contrary.

I do not agree with this view that all audits are essentially the same and I believe there is a difference between a high quality audit and an adequate audit. To the extent measurable audit quality indicators can be identified, they may help to mitigate some of the downward price pressure that has emerged in an environment where audit is viewed as a fungible commodity.

It will be easier for those providing services to justify a fair price for the audit if they can also point to measures that show that the purchaser of the audit is receiving value for the additional cost. It is my hope that this will lead to competition on quality rather than price in the selection of auditors. Such competition may be our best hope to raise overall audit quality.

Much of what we do here at the PCAOB is focused on inspections, and the output of those inspections is identification and publication of information about points of failure within an audit. While this is a critical part of our statutory mandate, I also believe it is important to understand what leads to high quality audits as well as failed audits. I am enthusiastic about a project that will contribute to the push towards audit quality by identifying positive, as well as negative, markers and that may be able to encourage behavior that will lead to better audits by "rewarding" quality-focused efforts with quantitative recognition.

With this project, I hope that the old saw about recognizing a quality audit but not being able to define it is about to be put to rest, and I support the effort to come up with indicators that are quantitative and measurable over time. These audit quality indicators may not be the only ones, and may not yet be the right ones, but they will begin a discussion to put more precision around the quality of audits, auditors and audit firms. To the extent these can be developed, they will be of great use to audit committees, management, and other uses of financial statements and audit reports. They will allow comparison among firms and engagements.

Again, thanks to the Office of Research and Analysis, and the leaders on this project, Greg Jonas, Steve Kroll, George Wilfert, Jane Hutchens, Jung Nguyen, Helen Munter, Chris Mandaleris, Eugene Theron, Elizabeth Echternach, Andres Vinelli, Saad Siddiqui, Christian Leuz, Brandon Gipper, Eugene Theron, Marty Buamann, Keith Wilson, Jessica Watts, Lisa Calandriello, Jennifer Rahm, and Claudius Modesti. Thanks also to the SEC, members of our SAG, and members of IFIAR, among many others, for their input to this release.