Statement in Support of Releasing the PCAOB’s Proposed New Quality Control Standard for Public Comment
Remarks as prepared for delivery
Well designed and effectively operating firm quality control systems are fundamental to ensuring audits are consistently performed at a high level of quality. Today’s proposed new standard promises to drive substantial improvements in firm quality control systems, thereby advancing our mission of protecting investors and furthering the public interest.
Since we adopted our existing quality control standards, the financial reporting and auditing environments have changed significantly, with expanded and more complex accounting and disclosure requirements, strengthened audit standards and significant technological innovations.
Audit firm structures and service delivery models have also changed, and across all industries corporate governance, enterprise-risk, internal control and quality management concepts and frameworks have evolved.
Today’s proposal is responsive to these developments.
Of note, consistent with what was envisioned in our 2019 quality control concept release, the proposal calls for an integrated, risk-based and scalable approach to firm quality control; similar to COSO’s Internal Control - Integrated Framework which most companies use under the Sarbanes-Oxley Act for their internal controls over financial reporting (ICFR).
Under this approach, firms would systematically identify and assess risks to audit quality, and put in place well-defined quality controls (i.e., quality responses) to mitigate such risks.
The scalable approach would allow firms to tailor the design of their quality control systems based on the characteristics and risks of their specific practices.
Importantly, the proposal promotes continuous improvement by strengthening requirements for an ongoing feedback loop of monitoring activities and remediation of identified deficiencies.
Other proposed improvements I believe are of particular importance include:
- The assignment of ultimate responsibility and accountability for a firm’s quality control system as a whole to the firm’s principal executive officer;
- An emphasis on firm governance and on leadership’s tone demonstrating commitment to the firm’s role in protecting investors and the public interest through high quality audits;
- Quality objectives to better ensure firm compliance with ethics and independence requirements;
- Consideration of the evolving use of firm network and other third-party resources and of technology in conducting audits; and
- Expanded requirements to respond to identified engagement deficiencies.
The proposal also requires firms to formally evaluate the effectiveness of their quality control systems annually. Firms would be required to report the results of their evaluations to the PCAOB, as well as to Audit Committees to help them more effectively execute their audit oversight responsibilities.
Finally, I am pleased that consistent with the 2019 concept release, the proposal does not contemplate unnecessary differences from the international quality management system standard; which I believe could detract from audit quality by diverting firm focus and increasing execution risk.
Taken collectively, the changes proposed today represent a significant strengthening of our quality control requirements that I believe will drive a substantial step-change improvement in audit quality.
I am interested to learn whether our stakeholders agree. I encourage all stakeholders to consider our proposal and provide us with your feedback.
I am particularly interested on views as to the clarity and operability of the proposed framework for firms to identify and evaluate QC Findings, QC Deficiencies and Major QC Deficiencies. By design, the process is qualitative in nature and, unlike with ICFR, there is no concept of quantitative materiality. I welcome feedback on how the final standard can best ensure effective and consistent execution over time and across firms.
This effort has been a major undertaking involving many individuals over several years. I would like to recognize and thank all those currently or formerly at the PCAOB who have contributed, including current project team members from the Offices of the Chief Auditor, Economic and Risk Analysis, and General Counsel including Barbara Vanich, Jessica Watts, Ekaterina Dizna, Linnette Klinedinst, Schuyler Simms, Karen Wiedemann, Michael Gurbutt, Nick Galunic, Dylan Rassier, Ken Lench, Jennifer Williams, Drew Dropkin, Connor Raso, and Jayme Herschkopf. I also want to recognize and thank my present and former Board and Board staff colleagues, the SEC staff, and my amazing team—Brent Simer, Katie Driscoll, and Lucia Carromba—for their idea sharing, collaboration and support.