Statement on Proposal to Modernize PCAOB Standards Addressing Core Auditing Principles and Responsibilities

Late last year, my fellow Board members and I issued our Strategic Plan. One of the Board’s key goals included in our plan is modernizing our professional standards. Our capital markets never stop evolving, and it is important for PCAOB standards to keep up so that investors are protected. The proposal before us today would update our standards to do just that.

As explained by our staff, the new proposed standard, AS 1000, would replace a group of standards originally developed by the American Institute of Certified Public Accountants (AICPA) and adopted on an interim basis by the PCAOB in 2003. Those standards address reasonable assurance, due professional care, professional skepticism, independence, competence, and professional judgment—collectively, what we refer to as the “foundational standards.” Merging these foundational standards into one standard, would reaffirm the general principles and responsibilities of the auditor and solidify the foundation of every audit; leading to investor protection and informative, accurate, and independent audit reports.

While the proposed standard and related amendments advance investor protection in many ways, I want to specifically highlight three aspects of today’s proposal.

First, the proposed standard specifically recognizes auditors’ fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor’s reports, and makes clear that obligation governs the auditor’s work under the standards of the PCAOB.

Second, the proposal also makes clear that, due to the importance of the role of the engagement partner, it is essential that the engagement partner is actively involved throughout the audit. As noted in today’s standards, the engagement partner is responsible for the engagement and its performance.1 Hence, it is the engagement partner’s responsibility to provide informative, accurate, and independent audit reports. This is why we are proposing to clarify what is expected of the engagement partner when planning, supervising, reviewing, and documenting engagement activities.

Third, we are proposing to modernize aspects of the audit documentation standard. Specifically, we are proposing to shorten the time to assemble the final audit documentation from no more than 45 days to 14 days. An auditor’s documentation provides the evidence to support whether the engagement complied with PCAOB standards.

Our audit documentation standard, AS 1215, was adopted by the PCAOB in 2004. Part of that standard, which remains in effect today, requires a complete and final set of audit documentation to be assembled for retention no more than 45 days after the report release date, known as the documentation completion date. Since 2004, like our capital markets, audits have continued to evolve. Back in 2004, many firms documented at least part of their procedures using paper-based systems. As we have observed through our oversight activities, today most, if not all, of the documentation is now occurring electronically. Because of this, it takes firms significantly less time to compile a complete and final set of audit documentation compared to when AS 1215 became effective.

It is critical that the documentation is completed as close in time as possible to the completion of the audit. The PCAOB cannot begin an inspection until a complete and final set of audit documentation is assembled. Proposing to advance the documentation completion date from 45 to 14 days, would enable the PCAOB to potentially begin our inspection process sooner. This would lead to a “waterfall effect” that ultimately would provide the opportunity for us to get our inspection reports to investors sooner; enhancing their protection.

I look forward to learning commenters’ views on the proposed standard and related amendments as we work to ensure our standards advance our investor protection mandate and are fit to meet today’s challenges. I encourage all to comment.

I would like to thank the individuals that have devoted significant effort on this proposal. Specifically, I would like to thank in the Office of the Chief Auditor, Barb Vanich, Jessica Watts, Dominika Taraszkiewicz, Ekaterina Dizna, Akiko Upchurch, and Hunter Jones; in the Office of Economic and Risk Analysis, Mike Gurbutt, Dylan Rassier, and John Cook; and in the Office of General Counsel, Connor Raso, Vince Meehan, and Katie Reilly.

In addition, I would like to express my gratitude to my fellow Board members and their staff for their contributions to this proposal. I would also like to recognize the support provided by staff from the Division of Registration and Inspections, the Division of Enforcement and Investigations, and the Office of Communications and Engagement.

Finally, I would like to thank the Securities and Exchange Commission’s (SEC) staff, including the staff of the SEC’s Office of the Chief Accountant for their support and assistance.

1  See paragraph .03 of AS 1201, Supervision of the Audit Engagement.