Staff Guidance Concerning the Remediation Process
November 18, 2013
The staff of the Division of Registration and Inspections ("inspections staff") has prepared this document to provide information for firms that receive a final inspection report that includes any criticism of the firm's system of quality control. Such criticisms reflect concerns about the design or operating effectiveness of a firm's system of quality control based on the requirements set out in the Board's quality control standards. As described in Part III of the report, any such criticism is nonpublic when the report is issued, but it will remain nonpublic only if the firm addresses the criticism to the Board's satisfaction no later than 12 months from the date of the report. This document describes certain considerations that the inspections staff has identified as relevant to its recommendations to the Board concerning the sufficiency of firms' remediation efforts. These considerations are consistent with the inspections staff's practices for assessing firms' remedial actions. The inspections staff encourages firms to review the information included in this document and to design and implement their particular remediation efforts with these points in mind.
In 2006, the Board issued a release, The Process for Board Determinations Regarding Firms' Efforts to Address Quality Control Criticisms in Inspection Reports, PCAOB Release 104-2006-077 (March 21, 2006) (the "Release"), to provide information about the Board's process for determining whether a firm has addressed quality control criticisms to the satisfaction of the Board for purposes of Section 104(g)(2) of the Sarbanes-Oxley Act of 2002. In the Release, the Board explained that a favorable remediation determination reflects the Board's assessment that the firm has "demonstrated substantial, good faith progress toward achieving the relevant quality control objectives, sufficient to merit the result that the criticisms remain nonpublic."
As explained in the Release, the Board's approach to making that determination is based on a view that each firm is best suited to determine, in light of its particular structure and operations, how to address particular quality control weaknesses. For this reason, the Board generally avoids prescribing specific remediation approaches. Ultimately, the recommendation that the inspections staff makes to the Board about whether a firm's efforts to remediate a particular criticism are satisfactory depends upon the inspections staff's evaluation of whether the firm has identified steps suited to the particular quality control objective and its evaluation of the nature and extent of the firm's efforts to implement those steps.
In addition, just as the Board's quality control standards recognize that the nature, extent, and formality of the quality control policies and procedures appropriate for any particular firm may vary depending on such factors as the size of the firm and the nature and complexity of its practice, the evaluation of firms' remediation efforts under Rule 4009 also takes those factors into account. Thus, the inspections staff's evaluation recognizes that firms of differing sizes and complexity may achieve the same quality control objective using differing approaches.
All firms are strongly encouraged to initiate a dialogue with the inspections staff early in the 12-month remediation period, develop draft remediation plans that describe how a firm intends to address the quality control criticisms, and share those plans with the inspections staff. The Board provides the opportunity for a dialogue between the inspections staff and the firm so that a firm can receive timely, constructive feedback regarding its proposed efforts for each quality control criticism before the 12-month deadline. The Board's experience has shown that, the earlier in the 12-month period that the firm initiates such a dialogue, the better it will be able, based on inspections staff feedback, to adjust its approach, if necessary, to achieve a positive staff recommendation.
The Criteria Used to Assess a Firm's Remedial Actions
In assessing a firm's remediation efforts, the inspections staff applies the five criteria discussed below:
- Change: Does the remedial step represent a change to the firm's system of quality control that was in effect at the time of the conduct that resulted in the quality control criticism? Depending upon the circumstances, relevant change may involve supplementing or replacing previous guidance, policies, or procedures or taking steps to increase the technical competence and proficiency of the firm's personnel.
- Relevance: Is the remedial step responsive to and does it specifically address the quality control criticism described in the inspection report; and, does it help satisfy compliance with the Board's quality control standards? If the root cause of the underlying quality control criticism is unclear, did the firm perform an appropriate root cause analysis in developing the remedial action?
- Design: Is the remedial step appropriately designed (either individually or in combination with other actions) to remediate the quality control criticism?
- Implementation: To what extent was the remedial step put in operation by the close of the 12-month remediation period? If not fully implemented, has the firm demonstrated an appropriate level of diligence and reasonable progress in addressing the criticism during the 12-month period?
- Execution and Effectiveness: Has the remedial step achieved (or, if sufficient time has not passed to measure results, is it expected to achieve) the proposed effect that it was designed to achieve? If available, what do the subsequent firm monitoring procedures and external inspection results suggest about the effectiveness of the remedial step?
Additional Information on the Application of the Criteria
The criteria guide an evaluation process that is scalable to the particular circumstances and to different types of remedial actions. The following are examples of how the inspections staff has applied the criteria in connection with certain types of issues that recur with some frequency.
Repeated or Persistent Criticisms Require a New or Enhanced Response
Repeated or persistent criticisms include those that have appeared in inspection reports for multiple years. For these types of criticisms, the inspections staff's evaluation of current remediation efforts takes into account whether those efforts reflect change. In other words, do the current efforts differ meaningfully from the types of efforts the firm has described in previous remediation submissions but that ultimately do not appear to have sufficiently addressed the deficiency? Even if a particular type of remediation step was considered satisfactory in a previous determination, the same type of step, without some meaningful enhancement, will not necessarily be viewed as satisfactory again if the particular problem has persisted after there has been sufficient time for the previous efforts to effect improvement. In the inspections staff's evaluation of a firm's remedial efforts, the actual implementation, execution, and tangible results of a firm's remedial steps take on increasing importance with repeated or persistent criticisms.
A Firm Should Monitor the Effectiveness of its Remedial Actions
The inspections staff's evaluation considers the extent to which a firm's approach includes ongoing firm monitoring of the effectiveness of remedial actions and implementation of further adjustments, when appropriate. If a firm's initial remediation effort appears not to be sufficiently designed, implemented, or executed, the presence of this type of self-monitoring and self-correcting approach can weigh favorably in the inspections staff's recommendation about a firm's remediation determination. In addition, if a firm's remediation effort is, by its nature, an effort that cannot be completely implemented within the 12-month period, establishing reasonable interim and long-term milestones coupled with firm monitoring of its performance against those milestones and making timely adjustments, when appropriate, can favorably influence the inspections staff's recommendation. In addition, in those circumstances, the implementation of interim measures to more quickly address issues while longer-term measures are underway may weigh favorably in the inspections staff's recommendation.
Training and Intra-firm Communications Should be Tailored and Responsive
Training programs, intra-firm communications, and guidance materials are appropriate and important elements of a system of quality control, and firms should routinely consider how to focus and improve those efforts in light of the results of PCAOB inspections and other monitoring of the firm's practice. The relevance and likely effectiveness of those improvements to the quality control remediation process under Rule 4009, however, depend upon the particular circumstances. The inspections staff assesses the content and delivery methods and whether or not they represent a meaningful change from those that were in place at the time of the audits in which the deficiencies underlying the criticism were identified. In evaluating the design of the training, the inspections staff also considers (i) whether the training specifically addresses the quality control criticisms, (ii) whether the training and communications have been specifically tailored and provided to the appropriate levels of professionals within the firm who would be expected to perform or review the audit procedures that resulted in the deficiencies, and (iii) the extent to which the firm requires and tracks attendance at training events, tests retention of course materials, and monitors its professionals' execution of audit procedures based on new communications and trainings.
The Inspections Staff Considers Evidence of the Effectiveness of Implemented Remedial Actions
The information available at the time of an evaluation of the firm's remediation efforts may include evidence of the effectiveness of the firm's actions, including results of firm monitoring procedures or external inspections of audits performed by the firm after the firm's remediation efforts were put into place. Where such evidence is available, it is treated as relevant but is not the exclusive or conclusive data point in making an evaluation. Strong remediation efforts, particularly when accompanied by firm monitoring procedures and timely adjustments can result in a favorable remediation determination even if subsequent inspection results indicate recurrences of the same type of deficiency. However, in other cases, adverse subsequent results without such efforts may be a factor contributing to the inspections staff's recommendation that the Board determine that the criticism was not satisfactorily addressed.