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Subscribe2024 PCAOB Small Business and Broker-Dealer Forum Board Member Thompson's Opening Remarks
Remarks as prepared for delivery
Good morning, everyone. I would like to welcome all our participants, both in-person and online, to the PCAOB’s fourth in-person forum of 2024 here in Jersey City. I am pleased to be back with this distinguished group of auditors and audit firms for my third year. In the past two years, I have greeted you virtually, so I am excited to be in-person this year.
First, let me say that the views I express here today are my own, and do not necessarily reflect the views of the PCAOB Board, individual Board Members, or any other members of the staff.
In 2024, the PCAOB expanded the reach and number of Small Business and Broker-Dealer Forums, from 1 virtual forum to 5 separate scheduled in-person events, in recognition of the vital role of firms that audit smaller businesses and broker-dealers in protecting investors. Each Board member has personally carved out time to speak at these events and meet with the firms and auditors of small businesses and broker-dealers. Many of the small businesses that you audit are critical to the economic infrastructure of our regional and local communities. Whether it is manufacturing companies, community banks, benefit plans, emerging growth companies, or small broker-dealers, these businesses steward significant contributions to the health and vibrancy of our economy. By serving as auditors of these businesses, you are serving in a public interest role focused on safeguarding the integrity of not just your local communities, but also of our broader U.S. capital markets. When audits are done right, audit firms build trust locally and globally.
Small audit firms are the backbone of many segments of our economy. As of September 30, 2024, there were over 1,500 firms registered with the PCAOB. Of which, 99 percent of these firms audit fewer than 100 issuers, are inspected triennially, and included in our non-affiliate firm inspection program. As noted in the Board’s strategic plan1, “regular and meaningful dialogue” with our stakeholders, including audit firms and individual auditors, helps us “learn about developments in auditing and the capital markets, advances in technology, the effects of our work on our stakeholders, and other topics.”
This Board has taken three key steps to have regular and meaningful dialogue in support of smaller firm and broker-dealer auditors: 1) expanded direct engagement, 2) increased delivery of useful guidance, and 3) incorporated scalability throughout the rule-making process.
1. First, we have expanded our direct engagement with firms of smaller issuers and broker-dealers in a number of ways.
One way we have accomplished that is ensuring that auditors of smaller issuers and broker-dealers are represented on our Standards and Emerging Issues Advisory Group (SEIAG). The SEIAG has held seven meetings over the past two years, including one just recently on November 12th. Topics covered in these meetings have included fraud considerations, firm and engagement metrics, review of certain oversight activities by various PCAOB divisions, post-implementation reviews, going concern, substantive analytical procedures, talent pipeline challenges, the role of artificial intelligence, auditing inventories, and more. The membership of this advisory group brings diverse perspectives that help inform our standard-setting and rulemaking initiatives.
In response to our increased standard-setting activity, we have also increased our outreach with various groups, including CAQ’s small firm task force, and added roundtable discussions for certain standard-setting projects.
Additionally, today’s hybrid forum is another example of our desire to engage with auditors of smaller public companies and broker-dealers. We have held these forums across the U.S. reaching auditors from coast to coast outside of the inspection process. For our triennially inspected firms, it may be two or three years since their most recent inspection, and these forums are a great way to share information regarding inspection trends and good practices. We encourage firms of all sizes to actively engage with us as these dialogues and encounters can contribute to improved audit quality.
2. Second, our staff has increased delivery of useful guidance. Through our regulatory activities, we have a unique horizontal view of the profession. Our staff has been diligently sharing insights from our inspections and outreach activities to help drive audit quality forward.
Through our staff’s Spotlight publications, we inform auditors regarding common deficiencies and good practices, and we communicate our staff inspection priorities. In 2023 and 2024, our staff issued 22 Spotlights. That level of guidance and insight is at a pace never seen in our history. This included a first-time spotlight specifically focused on insights into the PCAOB’s interim inspection program related to audits of broker-dealers. A key step in expanding our delivery of relevant and informative guidance specific to broker-dealer audits.
Additionally, earlier this month, the staff launched the Audit Focus series, in which publications are focused on auditors of smaller public companies. The common deficiencies and good practices in these documents are specifically derived from our smaller firm audit inspections.
In 2024, we have also issued four implementation guidance materials, including a webinar, related to topics such as Form AP and QC 1000 implementation. Modernizing our standards also comes with the responsibility of championing effective implementation to maintain high audit quality. As we modernize our standards, the importance of providing adequate and extensive support through the implementation process cannot be overstated. Effective and timely implementation of new standards supports our investor protection mission.
Additionally, last month, the staff issued a supplement to its remediation guidance.2 The most recent remediation staff guidance published was in 2013. Under the Sarbanes-Oxley Act, a firm has 12 months to remediate, to the satisfaction of the Board, any quality control deficiencies identified in an inspection report. During that time, a firm can seek feedback from our staff and provide multiple submissions regarding remedial steps it is taking or plans to take. We suggest that firms engage early and often in the remediation process. Let’s share what early and often looks like. The supplemental remediation guidance recently issued pertains to:
- taking advantage of the full remediation period;
- planning ahead in order to get the benefit of inspections staff feedback;
- implementing actions early enough to be able to monitor their operation and include in the submission evidence that they are effective;
- considering whether certain quality control criticisms persist due to the influence of non-technical factors, such as a firm’s culture; and
- understanding the limits of acceptable supplemental submissions after the submission deadline.”
Supplemental guidance, such as this, increases transparency about our process and lends additional support to auditors. I encourage all auditors to include consumption of and training on our staff guidance as part of their efforts to improve audit quality.
3. Third, where appropriate, we are making our standards and rules scalable, to address the facts and circumstances pertaining to smaller firms. Since 2022, the Board has adopted five standards or amendments to standards and two rulemaking projects. Further, tomorrow the Board is scheduled to have an open meeting to vote on two additional rulemaking projects, Firm and Engagement Metrics and Firm Reporting. This Board set out to modernize the interim audit standards and has consistently delivered.
Scalability has been part of that rulemaking process every step of the way. It has been an area that I have focused on and encouraged staff to be mindful of throughout our oversight process. After considering commenter perspectives and engaging in rigorous economic analysis, we have made adjustments to our proposed rules and standards, where appropriate.
With the adoption of QC 1000, Quality Control, this Board accomplished a revolutionary change in quality control standards in response to the evolution of audit firms. It was no small feat. When this board arrived, we did not start with a blank piece of paper. This standard was under development for over 14 years. It was contemplated in at least three separate advisory group meetings in 2010, 2014, and 2018, the Board issued a concept release in 2019, released a proposal in 2022, and adopted the final standard in 2024. The timeline for this project allowed our staff to thoughtfully consider comments received, including 79 comment letters in the aggregate on the concept release and the 2022 proposal. I would highlight that approximately 20 percent of the comment letters were received from non-affiliate firms. The final adopting release was built on a foundation of prior staff work, including input through the comment letter process. It includes an evaluation of the impact on the profession.
As a result, we landed with a risk-based framework, which includes consideration of risks associated with the size of the firm. As I said in my statement in support of this standard3, “Building in a risk-based framework to the nucleus of this standard is critical to reflect the ever-changing environment, and associated risks, in which registered firms operate.” The staff further scaled the requirements such that firms with five or fewer engagements are not required to perform monitoring of a PCAOB engagement every year. Additionally, certain incremental requirements under QC 1000 are only required for larger firms, including the required monitoring of in-process engagements. This reduces the burden for smaller firms with less complex systems of quality control.
For all our rule-making projects, auditors of all sizes can submit comment letters, which are evaluated by PCAOB staff. These engagements can directly impact our rulemaking process.
Our focus on getting it right in our standards, including scalability, supports the vital contributions of small audit firms, ensuring that they remain a cornerstone of economic stability and prosperity. I continue to encourage our staff to incorporate scalability into our process.
These three key steps support our objective to have “regular and meaningful dialogue” with the auditors of smaller public companies and broker-dealers, one of our important stakeholders. At the outset of our strategic planning process, I was clear that our Strategic Plan would not sit on a shelf and collect dust; But that it would tangibly drive our daily operations and decisions to support our mission of investor protection. By expanding direct engagement, increasing delivery of useful guidance, and incorporating scalability throughout the rule-making process, we recognize the importance of the auditors across the U.S. capital markets.
Audit firms of small public companies and broker-dealers are more than service providers – they are catalysts for growth, guardians of financial integrity, and champions of local economies. By supporting small businesses, driving competition, and promoting transparency, these firms are essential to the health and vibrancy of the U.S. capital markets.
I would like to thank you all for joining us today and to thank the PCAOB staff who have contributed to this year’s Small Business and Broker-Dealer Forum, including Kent Bonham and the staff of the Office of Communication and Engagement.
I am looking forward to today’s engagement. In addition to the illustrative examples that our Inspections staff will walk through, you will receive an update from our Office of the Chief Auditor and the Division of Enforcement and Investigations. We look forward to hearing from the SEC and FINRA who will also update us on recent matters within their purview. Today will be a rich discussion focused on improving audit quality.