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

Mr. Chairman, as I explained in my April 2016 statement on the proposed amendments on audits involving other auditors, I view this project as an important step forward in addressing the audit quality concerns that have been brought to our attention by our Inspections Division. I believe this project will improve investor protection because it will increase the accountability of the lead auditor in overseeing the work of the other auditors involved in the audit.

As the supplemental request notes, the work of other auditors accounts for a significant share of the audit in many instances.

Under the Board's transparency rules adopted in December 2015,^[1] information about other participants taking part in the audit along with the percentage, or range thereof, of work performed by them is now available to investors in Form APs filed by audit firms.^[2]

As of September 20, 2017, approximately 114 Form APs that include information about other participants were filed with the PCAOB. Information about other auditors conveyed in those Form APs indicates that:

• While the reported number of other participants taking part in the audit varied, for one audit, 24 other participants are reported as taking part in the audit and in another 23 other participants.
• In a number of audits, the aggregate percentage of participation by the other participants was in the 60 to 70 percentage range and in one audit, the percentage of participation by the other auditors totaled 97 percent.
• A number of the other participants identified on the Form APs are not registered with the PCAOB and therefore not subject to regular PCAOB inspection. As a result, investors have no insight into these firms' audit quality. The percentage of participation for some of these other participants was as high as 83 percent.

This information clearly shows the extensive use of other auditors and the significant role other auditors play in audits today. It also demonstrates the need for greater supervision by the lead auditor who is the one signing the audit report. This proposal provides for that additional supervision.

As public companies expand their global footprints, auditors will increasingly rely on other auditors to help them complete their work. As I noted in 2016, based on PCAOB staff analysis of inspections data, about 80 percent of Fortune 500 audits performed by the top six U.S. firms involved other auditors, many of which are foreign affiliates of the firm signing the audit report.^[3]

The increased use of foreign affiliated firms raises certain audit quality concerns for investors. For example, our inspectors have observed a higher rate of deficiencies for foreign affiliate firms than their U.S. counterparts from 2011 to 2013.

As noted by Claudius Modesti, the Board's Director of the Division of Enforcement and Investigations, cross border audits that involve the use of other auditors are a high priority for our Enforcement Division.^[4] A number of our recent enforcement actions against foreign affiliate firms involve not only audit failures but also improper alteration of documents.^[5]

I continue to believe there is a clear need for PCAOB standard setting in this area. I believe the Board's proposed amendments issued in April 2016 calling for increased lead auditor involvement in, and evaluation of, the work of other auditors presents an appropriate risk-based and scalable approach to improving the quality of audits involving other auditors.^[6]

Commenters were generally supportive of the approach in the 2016 proposal. The supplemental request for comment before us today proposes certain clarifications and provides explanations to address some commenters' concerns.

The Board has been examining this topic since 2010.^[7] While I appreciate the Board engaging in another comment round on this project, my preference would have been for the Board to adopt final amendments at today's meeting.

Having said that, I support today's supplemental call for comment and look forward to the Board taking final action on this proposal in the near future after carefully considering the comments received.

I join you, Mr. Chairman, and my fellow Board members in thanking the staff that contributed to this project. In particular, I would like to thank Marty Baumann and his team, Keith Wilson, Dima Andriyenko, Stephanie Hunter, and Hunter Jones, from our Chief Auditor's office, Andres Vinelli, John Powers and Joon-Suk Lee from our Office of Economic and Risk Analysis, and Gordon Seymour and Matt Goldin from our Office of General Counsel. I also want to thank the SEC staff for their contribution and support.