Statement in Support of the Proposal Release for Public Comment for A Firm’s System of Quality Control (QC) and Other Proposed Amendments to PCAOB Standards, Rules, and Forms
Remarks as prepared for delivery
Thank you, Chair Williams. I am proud to be a part of this pivotal moment in PCAOB history. Today, we release for public comment the proposal on “A Firm’s System of Quality Control (QC) and Other Proposed Amendments to PCAOB Standards, Rules, and Forms.” This proposal is long overdue and if adopted, would be one of the most consequential standards in improving audit quality.
The quality movement's history can be traced back to the 13th century in Europe with a focus on craftmanship and then later in manufacturing due to the industrial revolution. The United States broke from European tradition in the late 19th century and started its own approach to increase productivity without increasing the number of skilled craftsmen. Although this approach led to a significant increase in productivity, quality declined. As a result, quality became the focus in the early 20th century. Today, quality control is an integral part of manufacturing and other industries involving product development. Quality is a necessity because consumers demand it. Likewise, we could view audits of public companies as products. Consumers of audits are primarily investors because they have no control over the process and are the bearers of grave consequences of poor audit quality.
In a recent speech, I highlighted the Part I.A deficiency trends for the U.S. Global Network Firms (GNFs) and Non-U.S. GNFs from the inception of our inspections program. The deficiency rate for U.S. GNF’s were 18% in 2004 which trended downward through 2007 to about 10%, rising to over 40% at the peak in 2013, then settled back down to about 16% in 2020. Similarly, the Non-U.S. GNFs had a deficiency rate of 25% in 2005, it went slightly down to below 25% in 2008, up again to nearly 50% in 2013, then landing at about 33% in 2020. We have also seen an increase in comment forms in more recent inspections. These trends highlighted that sustaining audit quality is challenging and requires a foundational and continuous approach.
This proposal is intended to be principles based and scalable for firms to tailor their approach based on their specific circumstances. The proposal is responsive to the many comments we received previously on the concept release. It reflects our staff’s careful consideration in balancing the need for alignment with other international standards in the interest of optimizing quality and the unique requirements of U.S. laws and regulations. There are two areas that I am particularly interested in reading about what commenters will say.
Impact to the small and medium registered firms: I want to understand further the burdens that these proposed requirements may have on smaller firms and whether they are proportionate to the value we are expecting. Facilitating and promoting fair competition in the public accounting industry mitigates the systemic risk of being “too big to fail” and is a crucial component of investor protection. The lack of robust competition is a well-known dilemma of the public accounting industry. According to Audit Analytics in 2021, over 90% of the large accelerated filers are audited by the Big Four firms, over 70% of the accelerated filers are audited by Big Four plus the two next largest firms, together known as the GNFs. Smaller firms’ ability to remain competitive in the public company and broker-dealer audit marketplace is a key factor in the health of our capital market ecosystem. Specifically, I look forward to reading what commenters have to say regarding the following three requirements:
the proposed design only mandate for firms that do not audit issuers or broker-dealers which represent about 45% of our total registered firms as of the end of October 2022;
the proposed “in-process” engagements monitoring requirement which would impact about eight medium size U.S. registered firms in addition to the six U.S. GNFs. I am also interested in the preparers’ views on the impact of the “in-process” monitoring to their financial reporting process;
the clarity of the proposed QC system evaluation framework for firms to evaluate its QC effectiveness on an annual basis. I am interested in commenters’ views on whether the framework facilitates fairness to smaller firms.
Collection and Sharing of New QC Data: In the past few months, I have heard from many members of our two advisory groups about the availability and accessibility of our data. As someone who led the implementation of the first federal open data law (the Digital Accountability and Transparency Act of 2014), I am a passionate data transparency advocate. Providing more quality data to investors for informed decision-making is crucial. One proposed requirement incremental to the other QC standards is firms reporting their assessment and other quality control data annually to the PCAOB. Efficient and effective use of data for value creation requires data to be standardized, accessible, and reusable. I am keenly interested in perspectives on innovative machine-readable formats that we may be able to implement in conjunction with the collection of Form QC information. In addition, I am interested in commenters’ perspectives on the utility of the new QC data and options to making them publicly accessible within legal constraints.
I support the release of this QC proposal for public comment, and I share my sincere thanks to the PCAOB staff – only a few of whom I will mention here - Barbara Vanich, Jessica Watts, Ekaterina Dizna, Linnette Klinedinst, Schuyler Simms, Karen Wiedemann, Michael Gurbutt, Nick Galunic, Drew Dropkin, and Jennifer Williams, among others, for their work in drafting and refining this QC proposal. I know that it has been a long journey, and I appreciate their professionalism and collaboration throughout this process.
.9/15/22 Speech “Technology and Talent – Audit Quality Challenges in the 21st Century”