Building Transparency about Factors Influencing Audit Performance: Proposal to Require Reporting of Firm and Engagement Metrics

Remarks as prepared for delivery

Today we are considering a proposal to require certain audit firms to report 11 categories of performance metrics related to their audits and audit practices. This is a crucial step in a process that began almost 16 years ago. More importantly, it is a crucial step in increasing transparency for investors, audit committees, and the capital markets overall.

In October 2008, the U.S. Treasury Department’s Advisory Committee on the Auditing Profession (known as ACAP), recommended in its final report that the PCAOB, working with its primary stakeholders should:

“[d]etermine the feasibility of developing key indicators of audit quality and effectiveness and requiring audit firms to publicly disclose those indicators.”

The Committee explained that:

“[a] key issue in the public company audit market is what drives competition for audit clients and whether audit quality is the most significant driver. Currently, there is minimal publicly available information regarding indicators of audit quality at individual accounting firms.” 

The ACAP’s recommendations first led to several years of study by the PCAOB staff. The ACAP also suggested that the PCAOB work with its stakeholders. This resulted in the PCAOB engaging with its Investor Advisory Group in a meeting in 2013 to discuss quality indicators.

In July 2015, the PCAOB issued its Concept Release on Audit Quality Indicators. The Concept Release suggested 28 possible indicators, divided into three sections: audit professionals, audit process, and audit results. Shortly after its publication, in November 2015, the PCAOB’s Standing Advisory Group held a two-day public roundtable on the Concept Release.

Ultimately, the staff received and analyzed 50 comment letters on the Release. Our new Investor Advisory Group, and Standards and Emerging Risks Group, have also held discussions on this topic. All that effort was foundational to the proposal before the Board today.

Today’s recommendation from the staff rests on the premise that the proposed metrics will:

• provide information that will strengthen investor protection,
• promote better informed decisions in the oversight of auditors by their clients,
• increase auditor accountability, and
• enhance confidence in our public capital markets.

There is a simple reason.

It is often said that auditing is a “credence good,” that is, its operation and qualities are hard to observe. This is because investors and other stakeholders lack the information available to auditors, and the companies they audit, about what auditors do and how they do it.

That is why the promise of these metrics in generating insights into the ways audits are conducted, both within and between audit firms, is substantial. However, it is important to understand what the proposed performance metrics are, and what they are not.

They can provide accurate, standardized, and decision-relevant information that measures aspects of firm and engagement performance. They can aid in assessing an audit firm’s readiness and execution, making possible comparisons not only between firms but also between engagement teams within the same firm.

Still, as the release makes clear, the metrics do not purport to create a magic formula for assessing audit quality, and for good reason. A sound audit depends first and foremost on some intangible qualities - such as each auditor's independence, due care, and professional skepticism. The metrics can illuminate the environment that helps foster those critical qualities, but the qualities themselves are hard to measure.

The 11 categories of metrics – eight at both the firm and engagement level, one only at the engagement level, and two only at the firm level – should provide much greater transparency about what audit firms do and how they do it. And transparency should benefit everyone.

As the release points out, a data-driven understanding of the conditions for auditing can benefit audit firms, no less than investors and audit committees. It will put everyone on a more equal footing in exercising their responsibilities and understanding the audit environment.

I look forward to receiving comments on today’s proposal. I am particularly interested in the public’s views on Questions 19 and 20, about the engagement partner metric and whether the time the engagement partner spends on a particular audit should be disclosed. I also hope we will receive thoughtful comments about other potential metrics discussed in the Release, such as training, access to technical resources, and investment in audit infrastructure. Given the digital transformation of the audit industry, these are increasingly important subjects.

Finally, I cannot close without acknowledging and thanking the entire team that put this project together: Jessica Watts, Karen Wiedemann, Stephanie Hunter, Clair Sever, Akiko Upchurch, and Schuyler Simms from the Office of the Chief Auditor; Nick Galunic and Jonathan Fluharty-Jaidee from the Office of Economic and Risk Analysis; and Connor Raso, Katherine Kelly, Vince Meehan, and Marc Francis from the Office of the General Counsel. I would also like to acknowledge the work of the staff of the Board’s former Office of Research and Analysis on the Concept Release in 2014 to 2015 and thereafter.

Thanks to all of you for your hard work on this release. I look forward to receiving public comment on this thoughtful proposal.