Statement on Concept Release on Audit Quality Indicators

I am pleased that the Board today is issuing a concept release to seek public comment on the content and possible uses of a group of potential quantitative measures of audit quality, referred to as "audit quality indicators."

This has been a challenging project. The Board first announced in its 2012-2016 Strategic Plan the intention "to identify audit quality measures, with a longer-term goal of tracking such measures with respect to domestic global network firms and reporting collective measures over time."[1] Since then, Board members and staff have participated in discussions about this topic at a number of forums, including meetings of the PCAOB's Standing Advisory Group and Investor Advisory Group and a variety of other meetings and conferences. Our Office of Research and Analysis, which is leading this project, has spent countless hours studying potential indicators, and conducting outreach to investors, audit committee members, firms, academics and others.

With assistance from the staff of the SEC, we have carefully considered not just what indicators may provide helpful information but also whether and how relevant information could be obtained, whether it could be aggregated and measured, and whether there may be negative unintended consequences that could result. While we knew from many years of experience that developing measurable audit quality indicators would be challenging, it has turned out to be that and more. And though it took two and a half years to get to this point, and much important work has been done, today's concept release can probably best be characterized — if I may borrow the words of Winston S. Churchill — as "the end of the beginning."[2]

The concept release includes a list of 28 possible indicators on which the Board seeks comment. Some of these are relatively straightforward, and the information is currently available and often tracked by firms. Examples include staffing leverage, audit hours, workload, expertise and experience of auditors, independence information, inspection results and several others. Other indicators may require affirmative steps to produce data — such as the suggested survey of firm personnel to gauge tone at the top — and yet others raise difficult questions of how to measure audit quality, for example based on the auditors detection of fraud or financial reporting quality. Some of the indicators raise difficult practical questions, while others implicate legal issues including the larger disclosure framework under applicable securities laws. There is also variation in the degree to which the concept release defines the potential indicators — with some clearly laid out, while others are described only at a conceptual level.

We are seeking comment on the measures themselves, their potential usefulness, and how they may be used by firms, audit committees, investors, issuers, academics, and others. I believe that this project has great potential to provide the marketplace better tools to evaluate the quality of audits, to increase understanding about how good audits are performed, and to allow firms to compete on quality rather than price. My wish is that audit quality indicators will help us better understand long term trends in audit quality and contribute to the PCAOB's self-evaluation of the effectiveness of our regulatory activities.

The release describes our hope to narrow the list of indicators. The feedback from this concept release should help with that narrowing. We are also working on the challenging task of testing whether our list of indicators is correlated with our observations of high audit quality. I am sure we will get more ideas to add to the list. We may receive feedback that ranks the indicators against each other. All this will be helpful, but in the end, I hope we are able to demonstrate empirically which indicators have the strongest correlation with audit quality.

That said, as the release describes, this project will not result in a credit score-like measure for each firm or engagement team. Rather, measures will have to be considered collectively to provide a balanced picture of the quality of a particular firm or engagement team. In addition, audit quality is complex. A measure that may indicate good quality in one audit may not be relevant in another. Users of the measures therefore will need context to understand the measures and how and why they differ between firms, industries, audits or engagement teams. Whether, to whom and how that context will be available is one of the challenges that must be addressed as we move forward with this project.

Finally, an important consideration — and one on which I hope we receive comment — is how to strike an appropriate balance in the amount and type of information that constituents will find useful. Much of the focus in this concept release is on audit committees and their use of audit quality indicators. From our outreach, some audit committees told us they already incorporate elements of audit quality indicators in their discussions with and evaluation of their auditor. Many audit committees have observed that the amount of time it takes to discharge their responsibilities is increasing. We realize that any audit committee attention to audit quality indicators must be balanced with their other responsibilities and the background and skills of the committee members.

I have heard the concern that the last thing an audit committee needs is another checklist. Some have expressed concern that our recent communications targeted to audit committees are just that. It is not our intent to suggest that all audit committees should engage in a discussion with their auditor about all audit quality indicators or ask every question suggested by the PCAOB. Some audit committee members may find discussions about certain indicators or questions to be too detailed, not essential or not relevant to the particular audit. Rather, by providing a list of the indicators most correlated with high quality audits, we hope to equip audit committees with a comprehensive list of topics to consider exploring with their auditor, based on the individual circumstances and relevance to their auditor. I hope the discussion of audit quality indicators could become a natural part of the discussion about the overall audit strategy, including the timing of the audit, and the significant risks identified during the auditor's risk assessment procedures that is already required by Auditing Standard No. 16.[3] I also hope that over time, the discussions can be enhanced by the ability to compare indicators between firms and engagements.

Let me wrap up by thanking the staff for getting us to this point. Many individuals at the PCAOB contributed, but I would like to recognize in particular the leadership of the Director of the Office of Research and Analysis, Greg Jonas, without whose tenacity we would not be here today, the tireless work of Steve Kroll, and the helpful advice and contributions of Tim Gustafson, George Wilfert, Jane Hutchens, Jung Nguyen, Helen Munter, Chris Mandaleris, Eugene Theron, Elizabeth Echternach; Marty Bauman, Keith Wilson, Jessica Watts, Lisa Calandriello, Jennifer Rahm, Claudius Modesti, Andres Vinelli, Saad Siddiqui, Christian Leuz, and Brandon Gipper. Your work has only just begun.

As usual, we also received thorough and insightful input from our colleagues at the Securities and Exchange Commission, and we look forward to continuing our dialogue on this important project.

[1] PCAOB, Public Company Accounting Oversight Board Strategic Plan: Improving the Relevance and Quality of the Audit for the Protection and Benefit of Investors 2012-2016 (Nov. 30, 2012).

[2] Winston S. Churchill, A Speech at the Lord Mayor's Day Luncheon at the Mansion House, London (Nov. 10, 1942), available at

[3] Auditing Standard No. 16, Communications with Audit Committees