Statement on Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit with Another Accounting Firm

I support today's proposal to strengthen the auditing standards for the lead auditor's performance when other auditors participate in an audit. When more than one audit firm is involved in an audit, it is important for investor protection that the lead auditor assures that the audit is performed in accordance with PCAOB standards and that sufficient appropriate evidence is obtained to support the audit opinion. As described in the proposing release before us today, the need for stronger standards in this area has become evident over the past few years.

In my view, the proposed requirements will help to enhance audit quality in this area of increasing audit risk and significance to the capital markets. As the proposing release describes, this has been an evolving and challenging area for audit regulators and auditors around the world.

Increasing numbers of audits, primarily multinational audits, involve the use of accounting firms and accountants (other auditors) outside the accounting firm that issues an audit report. In addition, the complexity and globalization of financial reporting and auditing has evolved over several decades.

When a lead auditor engages other auditors in (sometimes many) different countries, new challenges are injected into the audit. These challenges can be associated with different languages, business practices, cultural norms, and market conditions in different countries, as well as different quality control systems and professional training of staff in different audit firms. Meanwhile, the evolution of auditing standards and auditing practices that address the auditor's performance requirements and expectations under such circumstances has varied, increasing the risk of variability in audit quality.

Indeed, as the proposing release points out, PCAOB's oversight activities too frequently identify audit deficiencies in the work of other auditors that the lead auditor failed to prevent or detect in supervising the work and in preparing the resulting audit report. Such deficiencies can cause the lead auditor to lack sufficient appropriate evidence to support the audit opinion.

The proposed amendments related to the supervision of audits involving other auditors would address these risks by strengthening and making more uniform and risk-based the responsibilities of the lead auditor. In particular, the requirements for a lead auditor when assuming responsibility for the work of other auditors would be stronger in the areas of supervision, planning, review, and documentation. Also, the lead auditor would be required to follow stronger requirements when assessing the sufficiency of its participation in order to serve as the lead auditor.

The proposed standard on dividing responsibility for the audit with another accounting firm retains many of the existing requirements with modifications designed to improve communication between the lead auditor and referred-to auditors, and improve compliance with ethics, independence, and PCAOB registration requirements.

The amendments and new standard should reduce variability in audit performance, causing auditors to focus more consistently on the risks of material misstatement in the financial statements, thereby benefiting investors.

As described in the proposing release, the benefits and costs of the proposed amendments and new standard may depend upon a number of factors associated with each firms' current practices and the facts and circumstances of a particular audit. In addition, the release identifies several potential unintended consequences that we factored into our deliberations. I look forward to receiving comments on both the operational and likely economic impacts of the proposal.

Strong auditing performance or procedural requirements, when appropriately designed, are a key element of audit quality.[1] When auditors comply with and properly implement strong auditing standards in their work, investors benefit in that they should be able to form expectations about the audit.

I welcome input from commenters on key elements of this proposal, including suggestions for further refinement of the lead auditor requirements to achieve high quality audits that benefit investors.

I want to thank the staff of the Office of the Chief Auditor, the Center for Economic Analysis, and the Office of the General Counsel for the hard work put into this proposal.

[1] PCAOB, Release No. 2015-005, Concept Release on Audit Quality Indictors, pps. 10-11 (audit quality can be defined as, among other ways, "full compliance with professional auditing standards and applicable law"); see Public Oversight Board, The Panel on Audit Effectiveness: Report and Recommendations, Aug. 31, 2000, pg. x ("Definitive auditing standards form the starting point for promoting quality audits"); See also, Robert W. Knechel, "Do Auditing Standards Matter," Current Issues in Auditing, vol. 7:2 (2013) (interpreting theoretical and empirical research on the economic role of auditing standards and opining on the conditions under which they have a desirable effect).