Statement in Support of the Adoption of General Responsibilities of the Auditor in Conducting an Audit and Amendments to PCAOB Standards

Remarks as prepared for delivery

Thank you, Chair Williams. 

In the Board’s current Strategic Plan, modernizing our standards is identified as Goal 1.¹ This standard-setting project advances that goal.  As such, Chair Williams, I fully support the adoption of AS 1000 and related amendments to PCAOB standards.

This standard-setting project required a comprehensive look at standards that are foundational to the role of the auditor; standards that comprise core pillars of a quality audit, including standards relating to independence, competence, and professional judgement. Some of the provisions we reviewed have not been updated since they were adopted by the Board on an interim basis in 2003. Through this project, we intend to:  one, clarify the auditor’s fundamental responsibilities; two, increase alignment of such responsibilities with current PCAOB rules and standards; and three, account for efficiencies of modern technological audit tools. 

As AS 1000 reflects, we have retained existing fundamental principles but sought to modernize, strengthen, and consolidate them under one standard to increase auditor understanding and drive improved performance. We have considered how the profession has changed in the past twenty years – from how work papers are prepared and stored to how audits procedures are executed as a result of growing use of technology and hybrid work environments. We are seeking to ensure that our standards remain relevant and appropriate in current practice. 

Our standard-setting approach has been deliberative and measured. We issued a proposal about thirteen months ago and solicited public comment. We received input from investors, firms, state boards of accountancy, academics, and other engaged stakeholders. The standard and amendments that we vote on today are informed by such stakeholder input and reflect the value of such input.

I think we can agree that adherence to certain foundational principles drives quality audits. I’d like to use my time to emphasize three components of the standard and amendments that we will vote on today, namely: one, independence; two, the engagement partner’s application of due professional care; and three, earlier archiving of audit work papers. 

First, AS 1000 sets forth certain auditor independence principles. Specifically, paragraphs .04 through .06 outline auditor independence and ethics requirements. The standard makes clear that, pursuant to PCAOB rules and standards, and federal securities laws, an auditor must be independent of the company under audit for the duration of an audit engagement. 

Auditors must consider what a reasonable investor would conclude about their objectivity and judgement. As such, independence both in fact and in appearance is critical in conducting an audit. Independence undergirds the entire audit process and promotes investor confidence in the reliability of the audit. 

This Board has increased investor focus on independence matters through its inspections and enforcement programs. For example, about one year ago, the Board announced that inspection reports would include a new section on auditor independence.² That section, Part I.C., is in the public portion of inspection reports and pertains to a firm’s noncompliance with PCAOB rules and/or potential non-compliance with SEC independence requirements. 

Additionally, through our enforcement program, this Board has imposed significant sanctions on firms and associated persons who fail to comply with applicable independence requirements, including improper business relationships and auditor rotation failures.

As a Board, we must continue to beat the drum that an auditor’s independence must not be compromised. 

In that vein, our inspections staff is continuing to sharpen its focus on independence matters. In a December 2023 Spotlight publication, the staff announced that in 2024 it would continue to apply expanded inspection procedures to independence matters, along with certain other audit areas.³  This attention to independence in our inspections program makes clear that this Board remains concerned about the sanctity and objectivity of the audit. 

I am hopeful that the plain clear language of paragraphs four through six of AS 1000 will underscore and clarify the auditor’s responsibility to preserve and maintain its independence. 

Second, AS 1000 clarifies the scope of due professional care for engagement partners. In a separate paragraph, paragraph .10, we have outlined specific responsibilities for engagement partners, including requirements:  to evaluate whether significant findings or issues have been or are being appropriately addressed; and to determine that there is sufficient appropriate audit evidence to support significant judgements and conclusions that form the basis for the audit report.

As emphasized in the adopting release, the engagement partner on an audit has primary responsibility for how the audit is conducted. Through our oversight activities, we have seen instances where engagement partners have failed to exercise the appropriate level of due professional care and professional skepticism, including: failing to evaluate inconsistent audit evidence; failing to adequately understand and evaluate the reasonableness of significant management estimates; and failing to design and implement appropriate audit procedures in an audit. When an engagement partner fails in these ways, it impacts the quality and reliability of an audit; material misstatements, whether due to error or fraud, could be missed; investor confidence becomes eroded. 

I am hopeful that AS 1000 will provide engagement partners with critical guidance regarding the scope and importance of their role. 

Third, AS 1000 accelerates the time for archiving audit documentation. Since the beginning of our time, our standards have required that auditors assemble audit documentation in forty-five days. Given the prevalence of electronic tools, firms are commonly able to assemble work papers more expeditiously. After considering the capabilities of different types of audit firms, we determined that fourteen days was sufficient time to archive audit documentation. We are cognizant that all firms do not have the same capabilities. In that regard, firms that audit 100 or fewer issuers will have more time to establish appropriate processes and procedures to meet this new timeline. 

I am hopeful that earlier archiving of audit work papers will indeed accelerate our ability to inspect completed audits and to issue inspection reports, two aspects of our regulatory activities that are critical to our mission. 

As outlined in the Sarbanes-Oxley Act, the PCAOB’s mission is to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. In my view, AS 1000 and the related amendments before us today advances that mission by modernizing and strengthening principles that are foundational to the audit. As such, I reiterate my support for adoption of AS 1000 and related amendments to certain PCAOB standards. 

In closing, I would like to extend sincere appreciation to our incredible staff who contributed to this project and got it to the finish line. Specifically, from the Office of the Chief Auditor, my thanks to Barbara Vanich, Dominika Taraszkiewicz, Ekaterina Dizna, Hunter Jones, Cheryl Henning, and Akiko Upchurch. From the Office of Economic and Risk Analysis, my thanks to Martin Schmalz, Michael Gurbutt, and Dylan Rassier. From the Office of the General Counsel, my thanks to Connor Raso, Vince Meehan, and Katie Reilly. In addition, I would like to thank my fellow Board members and my staff for their efforts on this project. And, lastly, my thanks to the staff in the SEC’s Office of the Chief Accountant for their assistance with this project.