Statement in Support of Firm and Engagement Metrics Proposal

Remarks as prepared for delivery

Good afternoon and thank you, Chair Williams.

I am pleased to support the Firm and Engagement Metrics proposal before us today.

Today’s recommendation has been long in coming. I was a staff member in the Division of Registration and Inspections (DRI) in 2008, when the Treasury’s Advisory Committee on the Auditing Profession (or ACAP) report first recommended developing indicators of audit quality, and I remember distinctly the many conversations that ultimately led to our own 2015 concept release on the subject. More recently, our Investor Advisory Group and Standards and Emerging Issues Advisory Group, IAG and SEIAG, have discussed the topic at multiple meetings and provided valuable input and perspectives. That history, as acknowledged in the release, underscores how strongly investors and other stakeholders have sought this type of information.

There have also been developments outside the PCAOB over the years. In particular, as this release notes, other jurisdictions have introduced their own mandatory or voluntary reporting regimes. And, whether in reaction to such initiatives or for other reasons, some audit firms have been issuing reports that publicly disclose certain firm-level information for several years. Collectively, this history indicates there is not only clear demand for such information, but also, at least some supply is already being provided.

These developments may raise several questions: What is our goal in bringing this proposal today? What is the role these requirements play in this environment, and their value added?

To my mind, the main strengths of this proposal can be boiled down to one concept: a need for increased transparency into the audit process. This means transparency for investors, for audit committee members, and for other users of financial statements. This transparency, in turn, fuels trust in those financial statements, in their audits, in the auditor, and ultimately in the auditing profession.

The proposal identifies 11 metrics that aim to draw back the curtain and offer insights into the work of audit firms. They are designed to aid investors, audit committee members, issuers, and other stakeholders in their decision making. If adopted, the proposal would require certain audit firms to provide standardized, consistent, and comparable information to the public. Going back to my point a moment ago about demand and supply, this proposal brings structure, consistency, and a rigor to the efforts that precede it. That is what has been sought for over a decade, that is what cannot be guaranteed by the information currently available, and that is what this proposal endeavors to provide.

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Those who have followed this project will have noted that during its evolution, we have transitioned from the term “Audit Quality Indicators,” or AQIs, to Firm and Engagement Metrics. As the release explains, the new term is meant to “avoid[] the potential misimpression that any set of metrics can comprehensively measure audit quality and emphasize[] our goal of promoting informed decision making through robust disclosure requirements” (p.6).

I have emphasized before the importance of audit quality as a driving force in the PCAOB’s work, as well as its tantamount significance to the auditing profession as a whole. But, I agree that for all its obvious value, audit quality can be difficult to measure, and that no set of metrics, no matter how carefully articulated, could fully capture it.

This change in terminology does not reflect any departure from our commitment to driving audit quality. Rather, it acknowledges that these metrics’ potential benefits extend to other areas within our larger mission of investor protection and the public interest. Those benefits will evolve over time.

My consideration of this proposal has led me to believe that the ultimate value of many of the proposed metrics would likely be realized over a longer time horizon. Trends across and within both firms and engagements may emerge. Such trends could provide not only information for the acquirors of audit services and the users of financial statements, but also direction to the academic community about potential research areas, which in turn could provide further insights into the overall audit market and also assist our work.

I also have reflected on how these metrics could be used to inform our inspection work and other oversight activities. Reflecting on my time as an inspector and Director of DRI, this information would benefit and supplement our inspectors’ work in numerous ways, including suggesting questions to ask of firms, providing input for our audit file selections, and examining similarities and variability among comparably situated firms and audit engagements. I suspect the uses here will only increase over time.

Both levels of the metrics -- firm and engagement -- are important for these endeavors. The former are designed to provide insight into the manner in which firms manage and deploy resources, while the latter demonstrate the execution of those efforts on individual audits.

The metrics proposed strive to collect information in a meaningful and comparable form. However, as the release acknowledges, a number is only a single data point. I am pleased that the proposal includes a text box for each metric, to allow firms the opportunity to provide additional context should they believe it helpful.

Taken as a set, I am confident that this information would equip audit committee members to engage in robust discussions with their auditors about the execution of their specific audit and facilitate broader questions about the firm and its ability to perform high quality audits. Investors have already indicated that they value such information to inform their decision making.

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I welcome all comments on all aspects of the proposal. I note here several features of the proposal I would particularly appreciate hearing about.

• First, the proposal notes (in Sections III.E and IV.D.3) several metrics that were seriously considered for inclusion that ultimately were not included. To the extent commenters feel strongly about their inclusion, and have ideas on how such metrics could be structured to best provide useful information, please share those thoughts. I am particularly interested in commenters’ views on the inclusion of a training metric.
• Second, the proposal acknowledges that the task of reporting these metrics may weigh heavier on smaller firms. That is why, for instance, the proposal includes both a threshold for required reporting, limiting it to firms that audit accelerated or large accelerated filers, and a scaled approach to implementation, where firms that audit 100 or fewer issuers have an extra year before reporting would begin.

I ask all stakeholders to weigh in on these dimensions and whether they balance all relevant factors. And I encourage firms especially to share thoughts and possible challenges to complying with these new requirements if they are implemented, particularly if they perceive that different types or sizes of firms may face specific or unique challenges.

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Reaching this point has been an effort years in the making. I cannot name all the staff who have contributed to this project’s various permutations, but I would like to especially recognize Gregory Jonas, the former Director of our Office of Research and Analysis (now the Office of Economic and Risk Analysis), who led efforts in 2015 that culminated in the concept release.

Let me also acknowledge and thank those that have contributed or consulted directly on today’s proposal: From the Office of the Chief Auditor, Barb Vanich, Jessica Watts, Karen Wiedemann, Stephanie Hunter, Clair Sever, Akiko Upchurch, and Schuyler Simms; from the Office of Economic and Risk Analysis, Martin Schmalz, Nick Galunic, and Jonathan Fluharty-Jaidee; and from the Office of the General Counsel, Connor Raso, Katherine Kelly, Vince Meehan, and Marc Francis.