Statement on Concept Release on Audit Quality Indicators

The Concept Release on Audit Quality Indicators before us today represents an important step forward in addressing the issue of assessing and analyzing audit quality. Improving audit quality is of paramount importance to the PCAOB's mission of protecting investors and furthering the public interest in the preparation of informative, accurate and independent audit reports.

PCAOB inspections and enforcement activities have identified a disturbing number of serious audit deficiencies and violations of professional standards over the years. At the same time, many stakeholders and members of the profession have told the Board that they believe audit quality has improved, and I agree with them. Yet, we don't have the means to assess this empirically and on a consistent basis, and in a way that is useful to most stakeholders. And the lack of such an assessment system poses potential risks to investors generally.

As today's Concept Release makes clear, there has been no generally accepted framework and statement of objectives for assessing audit quality.[1] This condition contributed to the U.S. Department of the Treasury's Advisory Committee on the Auditing Profession to recommend in 2008 that the PCAOB consider developing key indicators of audit quality.[2]

Today's Concept Release responds by outlining a potential conceptual framework for audit quality indicators that could potentially achieve objectives similar to those identified by the Committee. The framework could potentially:

  • provide new insights about how to evaluate the quality of audits and how high quality audits are achieved;
  • inform discussions about audit quality among those concerned with the financial reporting and auditing process, for example among audit committees and audit firms that, in turn, may strengthen audit planning, execution, and communication; and,
  • stimulate competition among audit firms focused on the quality of the firms' work and thereby increase audit quality overall.[3]

The Board hopes through this project to contribute to a clearer view of auditing by identifying a portfolio of key variables, in the form of "Audit Quality Indicators," that can inform discussions and assessments of audit quality.

Audit committees, investors, and others who regularly interact with or rely on the work of auditors at each public company may benefit from additional information and transparency about the audit.

The potential framework and portfolio of audit quality indicators presented in the Concept Release reflects significant and substantial research and analysis of PCAOB staff, principally of the Office of Research and Analysis, who also conducted extensive outreach to stakeholders. The framework presents a portfolio of 28 potential measures related to three components of an audit: audit professionals; audit process; and audit results.

It is premised on a broad definition of audit quality that takes into account varying perspectives that have been articulated over the decades by academics, other regulatory bodies, and the auditing profession.

The Concept Release seeks input on some fundamental questions about this framework and the potential uses of audit quality indicators. The questions, articulated in detail throughout the Release, include:

  • whether the potential framework of audit quality indicators would achieve the objectives I articulated earlier;
  • whether the specific indicators identified in the Release (or any mix of them) are feasible and useful to different stakeholders;
  • whether we have appropriately identified and assessed the interests of stakeholders in the framework;
  • whether any of the indicators can and should be made available to each set of users to achieve the stated objectives; and,
  • what should be the next steps in the Board's Audit Quality Indicators project?

How a system of audit quality indicators might be used in the future is not clear. Some of the ideas in this Concept Release are provocative and are intended to drive positive change.

I strongly encourage members of audit committees, investors, auditors, academics, and other interested parties to submit views to the Board on the merits of the various indicators presented and options for proceeding with implementing a system of audit quality indicators. The details of how to implement such a system need to be deliberated.

The Board needs your feedback to advance the dialogue over the potential ways to assess, influence, and act on assessments of audit quality. Today's Concept Release is the first step in an iterative process that, in my view, should be centered on a constructive dialogue among participants in our capital markets.

I want to emphasize the significant achievement that this Concept Release represents. The ability to measure and monitor audit quality on a consistent basis over time has been unattainable for the profession and academics despite decades of research and various rounds of audit crises in which investors and the public were seriously harmed.

I look forward to a constructive and thought-provoking roundtable this year to advance the debate over the use of a system of audit quality indicators.

Finally, I would like to thank the staff of the Office of Research and Analysis for their excellent work on this project, along with staff from other divisions and offices within the PCAOB.

[1] As noted in a recent review of academic literature, "Audit quality is much debated but little understood. Despite more than two decades of research, there remains little consensus about how to define, let alone measure, audit quality." W. Robert Knechel, Gopal V. Krishnan, Mikhail Pevzner, Lori B. Shefchik, and Uma K. Velury, Audit Quality: Insights from the Academic Literature. AUDITING: A Journal of Practice & Theory: 2013, Vol. 32, No. Supplement 1, pp. 385-421.

[2] United States Department of the Treasury, Final Report of the Advisory Committee on the Auditing Profession (Final Report), Chapter VIII, Recommendation 3, at VIII:14-15 (2008), http://www.treasury.gov/about/organizational-structure/offices/documents/final-report.pdf. As discussed in today's Concept Release, other international regulatory bodies also initiated similar efforts to enhance ways to assess audit quality, including the development of audit quality indicators or frameworks.

[3] See Concept Release on Audit Quality Indicators, PCAOB Release No. 2015-005, page 1 (June 30, 2015).