Statement in Support of Firm and Engagement Metrics

Remarks as prepared for delivery

Thank you, Chair Williams.

With this adopting release, we take a pivotal step towards increasing audit transparency in the interest of investor protection.

I would be remiss if I did not take the opportunity to tie this achievement to our Strategic Plan.¹ We set out to “adopt standards that meaningfully improve audit quality” and to increase transparency. This project achieves both goals.

I’d like to reflect on how this adopting release answers three questions:

1. Why are metrics important?
2. Can metrics be understood by investors?
3. Was enough time devoted to this project?
   

Why Are Metrics Important?

Quantitative metrics about the audit are important for transparency and trust, cornerstones to our capital markets. Metrics are more than just numbers – these metrics will provide insights into relevant aspects of the audit, such as involvement by those in charge of supervision and review, workload, training hours, career experience, industry expertise, retention, the phasing of the audit, and restatement history. 

Public accounting firms operate in a highly dynamic and competitive environment where trust, transparency, and accuracy form the foundation of their audits. Understanding and leveraging key metrics can further enhance investor trust by pulling back the curtain on the inputs to and results of an audit, particularly with the way that the firm staffs the audit. Much of this information is already captured by large firms who publish firm-level metrics. With mandatory reporting, it drives consistency in definition and calculation across relevant firms. What is particularly defining with this release is that six of the eight metrics are required at the engagement level. This is a level of transparency into the audit rarely provided before to investors. As one investor told me, anything more than zero metrics [at the engagement-level] is more than we have today. With these metrics, investors will now receive consistent information which builds trust. And the ability to compare metric trends over time will further increase the power of the metrics, especially when paired with the optional narrative disclosure that firms are permitted to include in the new and revised form reporting. In short, firm and engagement metrics will revolutionize the transparency of the audit and deepen the trust within our capital markets. 

Can Metrics Be Understood by Investors?

Investors have been clear – they want additional insight into the audit, and they are not confused by metrics. Informed investors can improve the efficiency of capital allocation decisions in our U.S. capital markets. Through our advisory groups and comment letters received, I would summarize that investors absorb complex information and data sets regularly for proxy voting and capital allocation decisions. This includes intricate financial statements, forecasts, macroeconomic indicators, industry trends, risk factors, and more. Currently, they receive little to no information regarding key aspects of the audit. Outside of CAMs, which are 1 or 2 on average per engagement, the audit process is rather opaque for investors. Collection of quantitative data to inform capital allocation decisions is important to investors, in particular institutional investors. Including additional information, in the form of metrics, into their analysis seems appropriate and aligned with current infrastructures. To suggest they may be confused diminishes their existing skill set for extensive analysis on already publicly available information.

Was Enough Time Devoted to this Project?

In other forums, I have reflected on the length of our standards-setting and rulemaking projects. For this project in particular, it seems appropriate to reflect on the extensive work and stakeholder input. This Board did not start with a blank piece of paper. This adopting release reflects more than a decade of work and input from various stakeholders in providing investors more insight into the audit. As mentioned in the release and by my fellow Board members, this journey began 16 years ago with the U.S. Department of Treasury’s Advisory Committee on the Auditing Profession, referred to as ACAP, including the October 6, 2008 ACAP Final Report. This final adopting release reflects deliberations and input from the following:

• our prior Standing Advisory Group meetings between 2013 and 2017,
• 50 comment letters on our Concept Release on Audit Quality Indicators² issued in 2015;
• voluntary reporting of firm-level metrics by some firms;
• recommendations from the PCAOB’s Investor Advisory Group (“IAG”) between 2017 and 2024;
• extensive research activities both internally and externally;
• the initiatives of international regulators; and
• 46 comments on our proposing release issued in April of this year.

This adopting release was derived from current and prior staff work. It reflects more than a decade of extensive outreach, research, and evaluation of stakeholder views. The public had multiple opportunities to provide input and perspectives, even after comment periods ended. This adopting release was improved by the various perspectives shared. In particular,

• the scope of metrics was appropriately narrowed to the measurement of eight relevant areas, with two metrics only required at the firm level,
• the optional narrative disclosure was expanded from 500 to 1,000 characters, and
• phased-in reporting is permitted for smaller audit firms.

Our standards-setting process for this project was deliberate, highly-researched, extensive, and evaluative of the last 16 years. 

Through this adopting release we advance transparency and trust in the audit, recognize and validate investors needs for additional information, and demonstrate our commitment to evaluating diverse stakeholder perspectives.

I would like to thank the individuals involved in today’s adopting release including in the Office of the Chief Auditor, Barbara Vanich, Jessica Watts, Stephanie Hunter, Karen Wiedemann, Clair Sever, Akiko Upchurch, and Schuyler Sims; In the Office of Economic and Risk Analysis, Martin Schmalz, and Nick Galunic, and in the Office of General Counsel, Connor Raso, Katherine Kelly, Vince Meehan, and Marc Francis.

I would also like to express my gratitude to all PCAOB staff who have contributed to this project over the past 16 years, including those who contributed to the AQI concept release, preparations for prior advisory group meetings, research prepared by PCAOB academic fellows, and the proposing release.

Lastly, thank you to the staff of the SEC Office of the Chief Accountant, my fellow Board Members and their Staff, and my staff.