Driving Improvement in Understanding Elements of Audit Performance

Remarks as prepared for delivery

Thank you, Chair Williams.

Good morning. Today we are considering a staff recommendation that would require audit firms to report eight sets of metrics each year.

Under the rule, firms would report at both the firm and, more importantly, at the engagement level the following:

the involvement of partners and managers in the audit;

•  partner and manager workload;
•  training hours;
•  audit experience;
•  industry experience; and
•  allocation of audit hours prior to and after year-end.
  

Firms would also report at the firm level only metrics about the retention of audit personnel and number of restatements.

The rules would apply only to audits of SEC accelerated filers and large accelerated filers, and to firms that audit at least one such filer.

This rule is a groundbreaking advance.

For the first time, it requires the provision of core information that can help investors, audit committees, and the capital markets understand more about audit performance.

By mandating the disclosure of this information, the PCAOB will enable investors and other market participants to have a clearer and more comprehensive view of the operational practices of the registered firms that audit public companies and broker-dealers.

Both investors and audit committees have vitally important roles to perform in the audit governance process. 

But they often lack the information necessary to perform those roles effectively. 

That is because auditing is basically a credence good--its operation is hard to observe and its qualities hard to evaluate.

The information flow created by these new metrics will provide consistent and comparable information on auditors and audit engagements, on what auditors do and how they do it, to help with the credence good problem.

 It will not create a magic formula for assessing audit quality – especially the critical qualities of independence, due care, and professional skepticism.

However, it can help us understand the environment that fosters or harms those qualities.  

I hope that firms will use the comment space provided to deepen users’ understanding of the information.

Reported information will also inform our oversight activities, especially our inspection and standard-setting programs.

And for audit firms themselves, metrics will provide standardized information about their own firm and their peers that can be used in designing, implementing, monitoring, and remediating their systems of quality control.

For all this to occur, reporting must be at the engagement and firm level. 

Investors care about the companies they are invested in, companies in which they vote for the directors and ratify the appointment of the auditor. 

Audit committees oversee the audit engagement for a particular company.  Firm-wide information can help frame engagement information, but it cannot be a substitute for it.

By mandating the disclosure of this information, the PCAOB will enable investors and other market participants to have a clearer and more comprehensive view of the operational practices of the registered firms auditing public companies and broker-dealers.

This enhanced transparency will allow market participants to make more informed decisions, contributing to the integrity and reliability of both audit practices and financial reporting.

Again, if adopted, this disclosure rule can produce a fundamental change in the environment in which participants in the audit process operate.

I want to note that this is one of our longest-pending projects.

Its seeds were planted by the recommendations of the Treasury Advisory Committee on the Audit Profession in 2008.

The Board’s former Office of Research and Analysis prepared a Concept Release issued in 2015, which led to the issuance of our proposed metric rule in April of this year.

This rule represents the culmination of nearly ten years of work. 

Like QC 1000, it was the subject of concentrated effort, its content matured over time, and it was not brought to the Board until the work was done.

I would like to thank all the staff at the PCAOB who worked on this project. Specifically, I would like to recognize:

In the Office of the Chief Auditor, Jessica Watts, Stephanie Hunter, Karen Wiedemann, Clair Sever, Schuyler Simms, and Akiko Upchurch;

In the Office of Economic and Risk Analysis, Erik Durban, Nick Galunic, Eric Carlson, and Josh White; and

In the Office of General Counsel, Connor Raso, Katherine Kelly, Vince Meehan, and Marc Francis. 

I would like to recognize the support provided by staff from the Division of Registration and Inspections, the Division of Enforcement and Investigations, the Office of International Affairs, and the Office of Communications and Engagement. 

I also would like to thank the Securities and Exchange Commission’s staff, including the staff of the SEC’s Office of the Chief Accountant, for their support and assistance. 

Finally, I would like to recognize Greg Jonas, who as Director of the Office of Research and Analysis led the original effort that produced the 2015 Concept Release, and the three remaining PCAOB staff members who worked on that Release, Jane Hutchens, Steve Kroll, and George Wilfert.

I am pleased to support the staff recommendation.